- 1 The Cross Border International Estate Planning Guide for Families
- 2 Citizenship, Residency & Domicile
- 3 Litigation Avoidance
- 4 Estate Tax Treaties
- 5 Income Tax Treaties
- 6 Multiple Wills
- 7 Multiple Trusts
- 8 Offshore Trusts
- 9 Conflict of Rule/Choice of Law
- 10 Are you Already Out of Compliance?
- 11 Late Filing Penalties May be Reduced or Avoided
- 12 Current Year vs Prior Year Non-Compliance
- 13 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 14 Need Help Finding an Experienced Offshore Tax Attorney?
- 15 Golding & Golding: About Our International Tax Law Firm
The Cross Border International Estate Planning Guide for Families
One of the most complicated aspects of being a foreign national relocating to the United States, or a U.S. Person who is moving abroad is that these taxpayers may have already accumulated a significant amount of wealth — which may require additional estate planning to best protect for future generations. Many foreign countries will have very strict rules on how assets located within their borders are taxed when a person dies. In addition, countries may also have very specific rules as to how assets are distributed — and most importantly, who is eligible to receive what percentage of assets, such as spouses and children. Especially for taxpayers who are in a second or third marriage or have assets that they do not want to go to certain family members, it is important to properly plan both in the United States and abroad. Let’s look at ten important facts about international estate planning, private wealth planning, and tax/reporting compliance.
Citizenship, Residency & Domicile
One of the first and most important facts to keep in mind is that being a U.S. person for income tax purposes is not necessarily the same as being a US person for estate tax purposes. Typically, to be considered a US person for estate tax purposes (excluding US citizens), the taxpayer must be considered to be domiciled in the United States. Domicile is a legal term of art that generally refers to the intent a person has to make a country their permanent home, even if they have residence at times in a foreign country.
As provided by the FTB:
“The term “domicile” has a special legal definition that is not the same as residence. While many states consider domicile and residence to be the same, California makes a distinction and views them as two separate concepts, even though they may often overlap.
For instance, you may be domiciled in California but not be a California resident or you may be domiciled in another state but be a California resident for income tax purposes.
Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment.
It is the place where, whenever you are absent, you intend to return. The maintenance of a marital abode in California is a significant factor in establishing domicile in California.”
One of the most important reasons for establishing an estate plan that encompasses assets in the United States and abroad is to try to minimize or reduce any type of litigation that could both be timely and costly. In the ideal situation, this will help so that when a person dies there will be a seamless transition of assets to the next generation.
Estate Tax Treaties
While the United States has entered into nearly 60 double taxation treaties for income tax purposes, there are also about 25 gift and estate tax treaties between the United States and foreign countries. And, based on the verbiage of the estate tax treaties, certain assets may be considered foreign versus domestic and vice versa — which can be very important, especially with the approaching phase-out of the high-exclusion amount (+$12M).
Income Tax Treaties
Income tax treaties are also important when it comes to estate tax planning, because once the assets are transferred if they generate income, then that may become subject to income tax. Depending on who the beneficiaries are and if they are considered US persons for income tax purposes can impact the overall taxation of the estate and future income.
If a person has multiple wills and codicils, they should reference and cross reference both U.S. and foreign assets to ensure that the overall intent of the decedent is established before they pass away.
Likewise, if a person has multiple trusts as well, it is important to determine whether those trusts encompass both US and domestic assets. This can become very complicated because there are different reporting and tax rules for foreign trusts and US trusts, as well as foreign trusts with US property and US trusts with foreign property.
Oftentimes, taxpayers may create offshore trusts in countries such as Nevis to protect assets or if they believe that there are certain creditors who may want to come after assets. Oftentimes, these types of trusts are created on a whim and the taxpayer may all but forget about the existence of the trust once the creditor is no longer a threat, but these trusts can still have a serious financial impact on the beneficiaries of the assets since oftentimes these are irrevocable trusts. Therefore, offshore trusts should be resolved when they are no longer required and not linger for future generations.
Conflict of Rule/Choice of Law
Different countries have different laws when it comes to assets, such as real estate. This is why it is very important that taxpayers properly prepare a multi-jurisdictional estate plan when they have assets in the United States and abroad so that they can determine which law should apply so that the administrators can easily administrate the estate.
Are you Already Out of Compliance?
For taxpayers who may be considered US persons but have assets abroad, they must report the assets properly. And, even when a person dies, the Taxpayer and/or estate may be subject to audit. Depending on the category of assets and the value, there are various international information reporting forms they may have to file such as the FBAR and Form 8938. It is oftentimes better to try to resolve the problem before the person passes away by submitting to one of the offshore amnesty programs, such as the Streamlined Filing Compliance Procedures.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.