International Estate Planning

Estate decisions about cross-border transfer of assets and other tax-related matters involving beneficiaries require knowledge of international estate laws. International estate planners use investment techniques exclusively for cross-border transfers. Estate planning knowledge required for formation and execution of international estate activities is required. International estates often begin with an international will. Domestic tax rules and international tax treaties applying to international estate planning include rules of domicile, succession, generation-skipping transfer, transfer tax situs, domestic and foreign credits, and gift tax laws, and asset transfers from abroad.

Domestic Tax Rules

U.S. federal Internal Revenue Service (“IRS”) tax law reforms in 2022, have modified estate and gift tax lifetime exclusion amounts for:

  • Individuals: $12.06 million personal lifetime exemption;
  • Couples: $24.12 million-per-couple lifetime exemption;
  • Interspousal transfers: unlimited tax-exemption for gifts and bequests transferred between spouses lifetime(s) and at time of death;
  • Surviving spouse portability: first-to-die spouse’s exemption amount transfers to the second-to-die spouse.

Rules of Domicile

The rule of domicile is basis for jurisdictional determination of tax treatment under U.S. federal law and state laws of estate and trust transfer. The same goes for most interpretations of residency tax obligations in international tax treaties. Transfer tax implications for expatriate’s (or non-U.S. person’s) domicile, depend on where the filer is residing, and the applicability of an existing estate tax treaty between the foreign country of domicile, residence, and/or citizenship and the United States. The availability of tax credits for domicile may be relevant in some jurisdictions where estate income reporting is required.

Rules of Situs

The IRS and international tax treaties consider situs (site) of cross-border estate assets and transfer tax applicable rule for reporting. Rules for the reporting of situs held assets differ depending on jurisdiction and category of filer. For example, assets may be categorized as non-U.S. situs for purposes of reporting gifts but considered situs asset for estate tax purposes.

General situs guidelines for estate returns, cover U.S. situs assets from business investment funds, money market funds, brokerage cash accounts, real property, tangible property, stocks issued by a U.S. corporation (including those certificates held abroad), qualified retirement plans funded by a U.S. employer, privately offered bond debt instruments, and life Insurance and annuities. Intangible property transfers may be subject to rules of tax portability if convertible to a tax-exempt vehicle.

Estate Tax Treaties and Foreign Tax Credits

At present, the United States is signatory of bi-lateral estate or gift tax treaties foreign countries. The treaties serve to determine transfer tax on assets owned by cross-border estates. Prohibition of discriminatory tax treatment and double taxation is a significant element of those treaties rule reciprocity. Where no treaty exists, foreign transfer tax credits may still protect an estate from double taxation (26 U.S. Code § 2014 Credit for foreign death taxes).

Rules of Succession

Rules of succession guiding heirship in the foreign civil law jurisdictions of Latin America and continental Europe, are considered analogous to U.S. federal common law rules of intestate succession, where estates are concerned. Intestate succession guides distribution of a decedent’s wealth to beneficiaries and heirs at time of death. Distinct from IRS rules of tax-exemption transfers applying to heirs and beneficiaries, civil law succession regimes generally impose an inheritance tax on distributions upfront. Planned giving specialists interested in learning more about gift transfers from an international estate in support of a nonprofit charitable giving strategy, will want to learn more about the tax related topic of intestate succession.

Review international estate rules for transfer tax, situs rules, domestic and foreign credits, and treaties applying to trust formation, administration, and proceed distribution.

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