International Estate Planning

Helping global families plan smarter

Why International Estate Planning is Important

International estate planning introduces additional complexities, especially for non-U.S. persons investing in the U.S. or U.S. persons with global assets. The global nature of wealth, differing tax laws, and the potential for double taxation require careful consideration and expert guidance.

Understanding Federal Estate Taxes

Federal estate taxes in the U.S. impact the transfer of assets after death. Proper planning can mitigate these taxes and ensure a smooth transfer of wealth.

Key areas include:

• Estate Tax: A tax imposed on the total value of a deceased person’s assets.
• Gift Tax: Taxes applied to transfers of wealth during an individual’s lifetime.
• Generation-Skipping Transfer Tax: A tax on wealth passed to later generations.

Non-US Persons: Estate Tax Implications

A non-U.S. person is generally someone who is neither a U.S. citizen nor a resident for tax purposes. When such individuals invest in U.S. assets, they may be subject to U.S. estate taxes upon death, even if they don’t live in the United States. Understanding potential liabilities and tax treaties between countries is crucial.

What are U.S. Situs Assets?

These assets may be subject to U.S. estate tax for non-U.S. persons. Proper structuring can potentially reduce or eliminate tax exposure.

U.S. situs assets include:

• Real estate located in the U.S.
• Shares in U.S. corporations
• Tangible personal property within the U.S.

Estate Tax Exemption for Non-U.S. Persons

While U.S. citizens enjoy an estate tax exemption of up to $13 million, non-U.S. persons typically don’t unless a specific treaty between the U.S. and their home country provides for it. Estate planning can identify ways to maximize exemptions and reduce tax liability.

Structuring Investments to Avoid U.S. Estate Tax

One way to potentially avoid U.S. estate tax exposure for non-U.S. persons is through careful structuring. Investment vehicles like LLCs, partnerships, or foreign corporations can offer significant advantages. However, these options need to be carefully assessed with legal and tax professionals to ensure compliance.

Income Tax vs. Estate Tax Rules

The rules for income tax differ from estate tax. Residency for income tax purposes is based on the substantial presence test, whereas estate tax residency is determined differently. Understanding the differences between the two is key for international investors.

Substantial Presence Test for Income Tax Purposes

The substantial presence test determines whether an individual is considered a U.S. resident for tax purposes.

The formula is:

• Total days spent in the U.S. in the current year.
• Add one-third of the days spent in the U.S. in the previous year.
• Add one-sixth of the days from two years prior.
• If the total exceeds 183 days, the individual may be considered a U.S. tax resident.

Worldwide Wealth Taxation for U.S. Persons

U.S. persons (citizens or residents) are taxed on their worldwide wealth, no matter where the assets are located. Estate planning ensures that international assets are structured in a tax-efficient way, reducing exposure to multiple tax jurisdictions.

IRS Enforcement and Technological Advancements

The IRS has increasingly sophisticated methods to track and enforce compliance with tax laws. Their ability to monitor assets and enforce penalties makes it more important than ever to ensure international estate plans are in order and compliant.

Potential Violations of the Substantial Presence Test

Many individuals inadvertently violate the substantial presence test, especially when spending significant time in the U.S. This can lead to unforeseen income tax obligations. Estate planning can help non-U.S. persons navigate this risk and avoid becoming subject to U.S. tax laws unintentionally.