Can Dual Citizenship Affect Your Estate Plan?
A couple of well-known actors, Tom Hanks and Rita Wilson, became honorary citizens of Greece at the beginning of 2020. As a result of their kind efforts following the fire that swept through Athens in 2018, the president of Greece awarded them this honor. Hanks and Wilson spend a lot of time in Greece as it’s one of their favorite spot for vacation, so accepting this honor was an easy decision for them. Neither of them said goodbye to their US citizenship, but estate planning will still be a concern for them.
If you’re a US citizen with the honor of dual citizenship, prepare yourself to deal with complicated legal issues when planning for death. It is especially true when a dual citizen owns property in one or both countries.
Passing Property to Others
The most important thing a dual citizen needs to understand about owning properties in different countries is that laws governing the distribution of a deceased individual’s property can vary widely and lead to different results than expected. In countries like the United Kingdom, United States, and Canada, the legal tradition is rooted in English common law. It means that individuals are far freer to decide who will receive their property at death. In common law countries, individuals can draft a document called a last will and testament that specifies who will receive property and in what proportions. Individuals can also list the name of a person who will be responsible for their final affairs.
The remaining parts of the Western world use a different set of testamentary laws. These legal principles limit eligibility to inherit property and the amount of freedom an individual has to alter the country’s default rules. Inheritance laws in many European and South American countries are rooted in Roman law. It can be very rigid and detailed when it comes to property transfers. Roman law is sometimes known as civil law or Napoleonic law.
Most Middle Eastern countries, like Iran and Iraq, tend to follow Muslim inheritance law. However, African and Asian countries follow a wide variety of approaches to inheritance law that may include Roman law, local customary law, and English common law elements.
Thus, if US citizens (e.g., Hanks and Wilson) acquire a decent amount of property in Greece and depend upon the estate planning completed under California law, then their heirs could face many difficulties while claiming their property in Greece. If a provision of their estate plan reflects that they want to leave their Greek property to a family member, then that provision might be against Greek law. As a result, their property could end up in the hands of a relative whom they had every intention of disinheriting.
It’s important for a US citizen who obtains the honor of dual citizenship to seek competent legal counsel in each country where they have citizenship. Local counsel can help clients understand the inheritance laws specific to each country and help to coordinate those laws effectively to most closely reflect their testamentary intent, referencing appropriate legal texts like statutes, international treaties, and directives.
Property And Inheritance Tax Issues
When a US citizen works, lives, or owns property in another country, whether that person is a citizen of that country or not, it’s imperative for that citizen to become familiar with the laws that govern the taxation of that property. A US citizen who holds dual citizenship in another country has to face transfer tax implications that depend upon many factors. Those factors include the property’s physicals location, type of property, tax credit possibilities between the two countries, and the presence of tax treaties between the United States and the other country.
Generally speaking, A US citizen has to pay estate taxes on the property they own, whether the property resides within the United States or in another country. However, it depends upon the country where your property resides, whether a treaty that grants a tax credit for estate taxes is available or not. For now, only fifteen countries have estate or gift tax treaties with the United States. These tax treaties play a vital role in protecting a US citizen from double taxation or discriminatory tax treatment. Another importance of treaties is that it provides valuable provisions for administering the deceased individual’s estate to create an orderly and fair process. In contrast, outside of these 15 countries with such treaties, there is much less certainty about how inheritance tax will apply to any dual citizen’s property.
In the Case Of Living Trust, What Happens?
Americans mistakenly believe that if they transfer their property into a revocable living trust as part of their estate planning, their planning will also work for inheritance purposes in other countries. This planning might work for US citizens moving within the United States. However, this is not usually the case for international purposes. Unfortunately, it’s rare for the living trusts drafted in the United States to be effective in overseas estate planning. It is even possible to suffer significant adverse tax consequences for holding property in a living trust just by virtue of being owned by a living trust. For example, a US citizen with assets held in a US trust when relocates to the United Kingdom, the taxing authorities of the United Kingdom can immediately impose capital gain taxes upon the assets held in the trust. Similarly, If a US citizen moves to Canada with a US trust in tow, you could realize capital gains on trust assets.
Conclusion
The bottom line is that any person with dual citizenship who owns substantial property that is vulnerable to the assessment of estate taxes should consult competent legal counsel. Such advice will help them determine appropriate strategies for minimizing the possible tax burden that both countries may impose on the property upon death. As a dual citizen, you might need assistance in determining the best strategy to handle your estate planning needs, then get in touch with us. We’re available for physical and virtual consultations.
Estate & Gift Tax Treaties (International),
https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international
A Guide to International Estate Planning (Thun Financial Advisor),
https://thunfinancial.com/PDF/2019-Guide-to-International-Estate-Planning-for-Cross-Border-Families.pdf
