With more than 45 million foreign-born individuals within its borders, the United States has more immigrants than any other nation in the world. While many of these individuals have obtained citizenship, a large number are non-citizen residents who may not intend to stay in the country permanently.
Regardless of their differences, every foreign-born person within the U.S. could benefit from an estate plan. This article is designed to address the unique challenges that can come with a cross-border estate plan.
The Complexities Of Cross-Border Estate Issues
There are numerous conflicting laws from one country to another. These conflicting laws frequently occur in the tax code and the transfer of property as well. The more property is spread across different countries, the more potential headaches could occur when it comes time to probate an estate.
Common Law Vs. Civil Law Jurisdictions
The legal system for most countries falls into one of two categories: common law and civil law jurisdictions. This distinction is important, as a person’s right to inherit and their available estate planning options can vary depending on what type of system their home country follows.
Common law systems are primarily found in the United Kingdom and the U.S. Under common law, much of the law is crafted through judicial decisions from a variety of courts. Other countries, like Germany or France, follow a civil law system. Under a civil law system, the law is primarily written into statute. Unlike with common law countries, these statutes are typically longer and more specific, leaving little room for judicial interpretation.
There are also important distinctions between these two systems that impact the estate planning process. While most common law systems will allow individuals to form legal trusts to hold their assets, many civil law countries will not. This can reduce the options available to foreign citizens and complicate their non-citizen estate planning process if they hold assets across borders.
Dealing With Wills And Trusts Internationally
For many non-citizens, estate planning will involve the same tools used by U.S. citizens. But there are some important considerations when determining whether to draft a will or trust, particularly for someone who might return to their home country at some point. Because of the differences between civil and common law systems, not all estate plans drafted in the United States will be portable to other countries.
The biggest hurdle for citizens of countries with a civil law system is that these countries often do not recognize trusts. An estate plan that relies on trusts could be thrown into chaos if the documentation attempts to include property situated in a civil law country.
A major challenge during estate planning is that a will drafted in America might not be valid in another country. One way to overcome this is by drafting more than one will. Great care should be taken during this process to ensure that one will does not inadvertently revoke another or contain conflicting terms.
Another option for foreign residents is to draft an international will. This type of will is only available for residents of the United States who hold additional assets and/or property in a country that has enacted the Uniform International Will Act. This act can allow for a single will to apply across multiple countries so long as they are signatories on the Uniform International Will Act.
Tax Considerations
Tax issues are one of the primary challenges that non-resident aliens face during the estate planning process. Non-resident aliens encounter harsh gift and estate tax requirements on top of any income taxes they owe. The good news is that careful planning can reduce the negative effects non-resident aliens might face.
Limits On Estate Tax Exemptions
One of the most important considerations for foreign nationals with investments or property within the United States is the limited exemptions they receive from the estate tax. While many non-citizens might be keenly aware of the income tax implications of living abroad, not everyone is familiar with the U.S. estate tax and applicable exemptions. This should come as no surprise, as most citizens will not deal with estate tax issues in their lifetime due to the robust exemption that excludes the vast majority of estates. For 2021, this exemption is $11.7 million. In other words, estates worth less than $11.7 million will not trigger any transfer tax upon a person’s death.
These exemptions are not so robust for non-resident aliens who only enjoy a maximum estate tax exemption of $60,000. This means that the bulk of a foreign national’s investments in the United States will be taxed upon transfer at the time of their death. These transfer taxes could have devastating effects on any heirs, especially if these investments involve real property.
The good news for some foreign residents is that relief could be available depending on their country of origin. Currently, the United States has treaties with more than a dozen countries, including Canada, Switzerland, and the United Kingdom, that protect their citizens from this steep tax level.
Gifting Strategies
One of the primary ways for a non-resident alien to avoid the harsh estate tax is through careful gifting strategies. By gifting assets, it is possible to reduce the estate below the $60,000 threshold. However, it should be noted that non-resident aliens also face substantially lower gift tax exemption thresholds compared to residents and citizens.
That does not mean that a gifting strategy will be unsuccessful. While a non-resident alien only enjoys a $15,000 gift tax exemption each year, that exemption applies to every gift recipient. For example, four gifts of $14,000 each would not trigger the gift tax in a single year.
There are other ways of using gifting rules to reduce the value of an estate. For example, the IRS does not count the payment of tuition or medical bills as a gift for taxation purposes. The same is true for gifts to certain charities.
Non-Financial Challenges
While many people focus on the financial aspect of estate planning, there are important non-financial issues to address as well. In many cases, these issues can be complex for non-citizens living in the United States.
Guardians Of Minor Children
One of the most important decisions during the estate planning process involves caring for minor children should a parent pass away or become incapacitated. For many foreign residents, the desire would naturally be for a family member in their home country to take custody of a minor child under these circumstances. This is especially true for those individuals that do not have family members in the United States to rely on.
Some issues can arise with nominating a foreign citizen as a guardian, however. For starters, traveling to the United States could be challenging for that person—especially on short notice. During the time in which that person is traveling from overseas, the child could be displaced or find themselves in the custody of the state. If there are long immigration delays, this arrangement could last for weeks or months.
One way to alleviate these issues is by nominating a temporary guardian who could care for the child until the permanent foreign guardian arrives in the country. A temporary guardian that lives nearby could take the child immediately without the need for any displacement of the child.
Advanced Health Care Directives And Incapacity
One aspect of the international estate planning process that does not always get the attention it deserves is the special requirements a foreign national might have for their advanced health care directives. An advanced directive is a legal document that sets forth how a person would like to be cared for should they fall ill or otherwise become incapacitated. These documents could include living wills, which list a series of decisions a person wishes to occur should they become incapacitated. It could also involve a power-of-attorney which gives a specific person the right to make medical decisions on that person’s behalf.
One of the common complications arising with foreign residents is the option to be returned to their native country upon incapacitation. Without specific language in an advanced directive, the odds are good that the medical providers will be unlikely to agree to move a person internationally. Any foreign resident who would prefer to return to their country for family reasons or even due to medical insurance coverage issues should spell out that desire in their advanced directive.
