Inheritance is a tricky situation. Family aside, there is complicated tax procedures when planning for inheritance and as an expat, things get even more muddy. As a U.S. citizen, there are at-home taxes to consider in addition to international taxes. This article goes over the 8 things to consider when planning inheritance as an expat.
1. Overseas Country Requirements
As a U.S. expat, there are many countries you could be living in. When it comes down to it, inheritance tax requirements vary on a country to country basis. Understanding your country specific tax requirements is the first step to making the most of your inheritance.
2. U.S. Federal Taxes on Inheritance
As mentioned previously, it is best to understand your country specific taxes on inheritance. In addition to understanding your country’s specific rules on inheritance tax, there is also a domestic U.S. federal tax on inheritance. Understanding how U.S. federal tax coincides with your country’s is an important step in understanding your bottom line.
3. U.S. State Taxes on Inheritance
Aside from country specific tax rules and U.S. federal tax, you must also take into account U.S. state tax law on inheritance. As an expat, there is a 3-way tax rule you must understand. Finding out how each of these coincide with each other is the best way to get the most out of inheritance. Speak with your financial advisor to find out how to best navigate this interaction.
4. Making 2 Separate Wills
U.S. law says that the jurisdiction where an asset is located determines who inherits it. Personal property falls under the laws where domiciled. Expats living in English speaking countries which follow common law such as the United States, Canada, the UK, and Australia are advised to make two separate wills– one for their home country and one for the country they live in. Countries which follow civil law, which are European countries like France, Italy, the Netherlands and various Latin American countries may insist that assets are divided up equally between children. Still, having a local will in this country will allow some discretion on how to allocate assets.
5. Avoid Estate Tax Double Taxation
The U.S. estate tax covers worldwide income and assets. Meaning you may be taxed on inheritance as a U.S. citizen even if you live abroad. Some countries do not have an estate tax. In this case, proceed as if you were just living in the United States. However, there are some countries that have their own respective estate taxes. As an expat living in these countries, you may be subject to additional estate tax. However, the U.S. has tax treaties with many countries. Check with your financial advisor to see if your country has tax treaties that will assist in your estate tax planning.
6. Foreign Life Insurance
As an expat, you probably have life insurance in the U.S. and some form of life insurance in your foreign country as well. It’s best to check with your policyholder what it means that you are living abroad as an expat as well as how your domestic life insurance policy interacts with your foreign one. In addition, some foreign life insurance plans may or may not translate over to insurance rules in the U.S. For inheritance tax purposes, it’s best to speak with your policyholder(s), your financial advisor or your attorney on how these enrollments interact with each other.
7. The “Gift” Tax
In addition to an estate tax upon death, an estate is subject to the U.S. gift tax as well. Internationally, however, gift taxes vary. For example, Australia, Canada, and China do not impose state taxes. New Zealand has a gift tax but no estate tax. And some countries may permit tax-free transfer of assets between spouses. It’s important to understand estate and gift taxes vary from border to border and where you live has an effect on your estate.
8. Stick to the Basics
As an expat, it’s important to understand your country’s effect on estate planning. However, this does not mean you should deviate from the basics. Aside from adhering to international guidelines, there are basic rules to follow when planning an estate.
- To take inventory of your assets, investments, retirement savings, insurance policies, real estate and business interests, collectibles and sentimental items;
- naming an executor who will be in charge of distributing property, filing tax returns, and processing claims from creditors assigning a power of attorney;
- assign a healthcare power of attorney;
- keeping in contact with heirs, and
- deciding if you need a trust.
Whether you are an expat or a living at home in the U.S., wills can be tricky. Set up an appointment with your financial advisor today to get things going and on a smooth path for your loved ones.
Written by Chris Gitre