Gone are the days when families might rely on the confidentiality or secrecy of their assets and estates. The U.S., Europe, and most Asian and South American Countries have joined the disclosure "bandwagon" with laws requiring annual and full reporting of international assets, with draconian penalties for non-compliance. In the U.S., the infamous FBAR and IRS Form 8938 require annual disclosure of foreign held accounts and assets, including even contracts with foreigners, (with very limited exceptions). A steadily increasing number of Countries and financial institutions (over 87,000 last count) have signed on to the Foreign Account Tax Compliance Act (FATCA), usually with reciprocal reporting among tax authorities to ensure that beneficial ownership of assets is reported by one Country to another. The OECD has adopted a standard for automatic exchange of financial account information in tax matters.

For the person or family with transnational assets, tax issues are critical but just as important is the wish to ensure that testamentary objectives are respected.

Following is a brief description of just some of the important issues which must be considered, both by U.S. taxpayers with foreign assets, foreigners with U.S, assets, and by those with no U.S. connections. There may be tax planning opportunities for each of these:

1.  "Forced Heirship": Many civil law Countries require that specified family members receive most if not all an estate, including France, Germany, Japan, and South Korea. In the Middle East, there may be religious rules governing heirship. China generally gives "supported" family members a priority claim. Some Countries impose large and perhaps confiscatory transfer taxes on assets transferred or directed to other than direct family members. 
 

Canada, Ireland Australia, the UK and some other Countries, under very specific circumstances, may allow a Will to be "reformed" to ensure that immediate family members who demonstrate "need" are not disinherited. 
 

2.  Citizenship, Residency, or Domicile: one or another of these attributes may determine how and what assets are subject to estate, transfer and/or inheritance tax. U.S. Citizens and U.S. residents (Green Card holders and others) are subject to estate tax on world-wide assets, some of which may also be taxed by the Country in which the asset is located. The U.S. has very few estate tax treaties which afford some relief. Most Countries tax the estate of decedents who were "domiciled" there before death, and some focus on mere residency (the U.S., Argentina, Brazil, Switzerland, and France). The U.S. does not grant an automatic credit for transfer taxes paid to another Country, and the issue of tax credits is complicated but an important planning issue.

3.  Community or Separate Property: The character of asset ownership must be determined, and it can be complicated, certainly in U.S. for both domestic and foreign assets. The character of assets and related laws may determine if and how much of an asset one has the right to transfer.

4.  Conflicts of Laws, Situs Rules: The relevant laws must be determined, and even then, there is often a potential conflict over which law should govern. The issues of "domicile" and "residency" can be problematic as each Country has its own definitions. In France, for example, owning or even renting a residence can, with other factors, cause one to be "resident" there for tax purposes. The "situs" rules also differ County by Country, and these determine which asset classes are subject to estate and/or local tax. U.S. situs rules are relatively clear but with peculiar variations; for example, stock in a U.S. corporation is a U.S. sited asset for estate tax purposes, but not for gift tax purposes.

5.  Estate Tax or Inheritance Tax: A Country may tax an estate directly, or instead impose an inheritance tax, usually on beneficiaries. Some levy an income or capital gains tax on testamentary transfers of property (such as Canada, the UK, Germany, Italy, and Chile). It is of course imperative to determine what taxes and what tax credits will apply before determining an appropriate estate and tax plan.

6.  Multiple taxing of assets:   The U.S. assets of a non-resident alien could be subject to U.S, estate tax, and with no tax credit allowed for foreign transfer or inheritance taxes on the same property. As for U.S. Citizens with foreign assets, the U.S. has only a few estate tax treaties which can afford some relief from double taxation. The application of tax credits is complex and must be considered.

7.  Probate or Direct Inheritance: States in the U.S. generally have probate procedures to transfer assets from an estate. Many Countries have "direct" inheritance rules, without a probate procedure. The relevant rules are an important consideration in an estate Plan. (See Asset Protection below).

8. Trusts: Estate planning in the U.S. usually involves the use of revocable and irrevocable Trusts, and the use of Trusts may be appropriate to hold title to foreign assets,   possibly to avoid forced heirship and/or tax exposures, for asset protection, and perhaps for anonymity. The "tax haven" trust might be of interest, although it must be fully reported and has no income tax benefits for U.S. grantors. Foreigners should consider holding U.S. assets in a Trust, perhaps a U.S. trust. Foreigners with no U.S. connection or assets might also consider the use of Trusts. However, many civil law Countries do not recognize Trusts. The use of Trusts is certainly a planning tool in many situations.

9.  The Holding Company: For the U.S. taxpayer, the use of a "holding company", such as a Trust, LLC or corporation to hold title to foreign assets may, for example, minimize or avoid foreign transfer taxes, forced heirship, and to provide a level of anonymity and asset protection. A potential advantage to a holding company regime is that heirs might be able to assume direct ownership of that entity; this of course requires a Country by Country analysis. The foreigner with U.S, assets should consider holding assets through an entity, perhaps a U.S. Trust, for any number of reasons, including the avoidance of estate tax, liability protection, and a level of anonymity. The U.S. does not allow non-Citizens the estate tax exemption, regardless of how long they have been here; the current estate tax exemption for non-citizens is $60,000, although a restrictive "Qualified Domestic Trust" can be established to take advantage of the spousal exemption, but this is not generally available for assets not going to other the surviving spouse.

10.  Asset Protection: Protecting assets from judgment creditors, unanticipated claimants for a share of the estate, and from multiple forms of taxation are common objectives. The Holding Company regime for both U.S. and non-resident aliens can, if properly structured, provide a high level of asset protection. Asset protection planning should be integrated with an estate plan.

In Countries such as Japan, Switzerland, and some European Countries, the "automatic" transfer of an estate to heirs may make them liable to the decedent's creditors, although an election may be available to limit that liability; in Switzerland, for example, the election must be made within one month. Advance planning may well solve most if not all these exposures.

The details of a tax and estate plan for those with international assets will of course be determined by the specific facts and on a Country by Country analysis. Advance planning as always can help avoid unpleasant and nasty consequences.

This article is a general overview of the complex issues discussed. This article is not a definitive discussion of the issues and subject matter and it is not intended to be legal advice.