Estate planning in the case of international persons or assets is extremely complex. The following is an attempt to provide a very brief overview of the complexities involved. It is for information purposes only and should not be considered legal advice. Feel free to contact us for a consultation in your particular situation.
THE LAWS OF WHICH JURISDICTION APPLY TO MY ESTATE?
From the US point of view, it is possible for assets in different countries (even in different US states) to pass according to different laws. For example, for a person domiciled in Virginia the winter home in Florida passes according to Florida law, whereas the house in Southern France might pass according to French law.
This splitting is not the law in the European Union. EU residents may select in their will the law that should govern their entire estate, regardless of where the assets are located. They may choose either the law of the country of their citizenship or the law of the country of their domicile. This applies also to US citizens who live in the European Union.
HOW SHOULD I INCLUDE MY NON-US ASSETS IN MY ESTATE PLAN?
Assets in civil-law countries (continental Europe, South America, etc.) should not be placed in US trusts. In many cases it is best to set up a local will. That will should be drafted very carefully in order not to undermine the US estate plan.
THE ELEMENTS OF A US ESTATE PLAN
Estate planning in the United States involves a lot more than setting up a will (testament). For a typical person who owns real estate, vehicles and financial accounts, the vast majority of the assets can actually be transferred without a court-administered probate process. These alternative ways of asset transfer are the following:
- Beneficiary designations
- Joint titles with right of survivorship
Beneficiary designations are part of the contract between the asset holder and the financial institutions. The asset holder designates one or more beneficiaries to whom the financial institution will pay out or transfer the assets after the death.
Beneficiary designations can be added to bank accounts, brokerage accounts, life insurance policies and retirement accounts.
In certain states it is even possible to designate a person to whom real estate and vehicles should be transferred upon death.
In all of the above cases the asset owner may change his or her decision at any time.
Transferring assets through beneficiary designations is a convenient and cost-efficient transfer. It is recommended in simple situations, for example, when the asset is supposed to be transferred to one or two adult children.
Designating non-US residents as beneficiaries leads to complex tax reporting requirements to the IRS. If no tax treaty applies, the financial institutions will have to withhold a so-called source tax from distributions to foreign beneficiaries.
JOINT TITLES WITH RIGHT OF SURVIVORSHIP
Assets such as real estate, vehicles, and some financial accounts can be owned together with another person in a way that the entire ownership of the asset passes to the surviving co-owner. The transfer of the entire interest to the surviving co-owner takes place by operation of law, without the involvement of a court.
While “putting someone on the title” may sound like a simple and straightforward method of estate planning, it can have devastating tax consequences. Giving another person an interest in an asset as joint owner with right of survivorship may trigger gift taxes. The same share of the asset may be subject to estate tax upon the death of a co-owner. Extra care needs to be exercised if one of the co-owners is a non-US person.
Trusts are defined as a legal relationship between the trust grantor, the trustee and the beneficiaries. The trust grantor gives up his interest in the assets. The trustee takes legal title to the assets and administers them for the benefit of the beneficiaries. The same person can have several roles in this triangle.
There are many myths that surround trusts. Trusts have been recommended as a way to:
- save estate taxes and
- avoid probate.
Please note that only a small minority of trust types achieves the objective of saving estate taxes. Those types of irrevocable trusts necessarily entail giving up ownership of the assets. The result is that at death they are not part of the estate. On the other hand, funding the trust with assets during the lifetime of the grantor may trigger gift taxes.
Trusts make probate unnecessary only if all assets of the decedent had been previously placed in the trust(s) or pass by virtue of joint titles or beneficiary designations.
Probate means the court-administered public transfer of assets based on a will or the rule of intestate succession. Anybody can see what assets are in the estate. This information can be kept private if the assets had been titled over to a trustee during lifetime.
Simple cases do not warrant the hassle of setting up and administering trusts.
In cases of a foreseeable long illness or frailty it is advisable to place assets in a trust, so that the assets can be managed by a trustee (a competent relative, friend, or an institutional trustee such as an attorney or a trust company). The alternative would be to try to manage all assets with a power of attorney given to another person. This can prove difficult, as not all financial institutions are willing to work with representatives instead of the account holders themselves.
The trust documents may provide for:
- Specific guidance for the management of financial matters in case of incapacity
- Marital trust for the benefit of the surviving spouse, and family trusts for the benefit of children and/or other descendants, where applicable
- Designation of an investment manager to handle the investment of trust assets in coordination with the trustee
- Appointment of a trust protector to remove and replace the trustee and exercise other special administrative powers
These are some of the available trust types:
- Irrevocable Life Insurance Trust (ILIT)
- Irrevocable Spousal Lifetime Access Trust (SLAT)/Dynasty Trust as receptacle for lifetime gifting
- Education Trust for Children
- Retirement Trust
- Special Needs Trust
- Pet Trust
- Grantor-Retained Annuity Trust (GRAT)
- Installment Sale to Grantor Trust (ISGT)
- Charitable Remainder Trust (CRT)
- Charitable Lead Trust (CLT)
We provide assistance with the retitling of assets and the funding of trusts.
We also advise on charitable gifting, including donor-advised funds and private foundations.
The document called “Last Will and Testament” is still the cornerstone of an estate plan. It has to be set up even for those who think that all of their assets are placed in a trust or will be transferred by joint titling or beneficiary designation. There may be overlooked or newly acquired assets that have not been placed in the trust. If there is no will that disposes of these assets, they will pass according to the laws of the intestate succession prescribed by the state where the decedent was a domiciliary at the time of death.
In case the goal is to have all assets placed in a trust, the testament will be a so-called “pour-over will”: it directs the personal representative of the estate to convey all assets to the trustee.
A will is indispensable in the following situations:
a. If there are minor children: in the will the parents have the opportunity to designate a guardian of the children and a custodian of their assets.
b. If there are assets outside the United States, especially in civil-law jurisdictions. Many civil-law countries, such as those on the continental Europe, do not recognize trusts. To avoid complications, these assets need to be disposed of either in a US will or a will set up according to the laws of the foreign country where the assets are located.