Estate planning law is incredibly complex. And when you have loved ones living abroad who you’d like to include in your estate planning, it only increases that complexity.
Our modern world is becoming increasingly mobile, and international travel is more affordable and easily accessible than ever before. It’s not uncommon for spouses from different countries to keep their citizenship in their native countries. Many couples split their time between the United States and another country to be near their families and also enjoying that type of lifestyle. Additionally, it’s common for a couple’s children or other loved ones to move abroad, or even renounce their home country citizenship.
Because of the complexities of estate planning when it comes to international law, it’s crucial that you seek competent legal advice. We’ve written this article to simply bring to your attention some of the complexities that you’ll probably encounter when engaging in this type of estate planning.
Naming Noncitizens to Handle Your Legal Affairs
One of the hardest parts of estate planning is making the decision about who will handle your affairs if you become incapacitated or die. Assuming you’re a U.S. citizen, there could be consequences if you name a noncitizen spouse, friend, or family member as executor, trustee, or agent under a power of attorney.
Executors and Personal Representatives
Many states have few restrictions on whom you can name your executor or personal representative under your will. So if you trust your noncitizen spouse or child above anyone else to handle your affairs after your death, you can name that person. As long as they follow the law, your designated person can carry out their duties as executor or personal representative without a problem. There are some states, however, that still require the executor of your estate be a U.S. citizen. Make sure you’re aware of your specific state’s laws before executing your estate planning documents.
But just because your state will allow you to name a noncitizen executor or personal representative under a will, it doesn’t necessarily mean it’s a good idea. Asking someone who lives in a foreign country to handle the practical, day-to-day affairs of managing an estate could be a heavy burden to bear. It could also make it hard for your beneficiaries to make sure your executor is doing their job properly.
Trustees
A trust is a fantastic estate-planning tool. It has many benefits, including the ability to avoid probate and ease of administration for the trustee. But be careful naming a noncitizen as the successor trustee. If the trustee is a noncitizen or even a U.S. citizen residing outside of the United States, the IRS might consider it a foreign trust. This would lead to unfavorable tax consequences for the trust’s beneficiaries. For example, the IRS could impose mandatory withholding requirements on the trustee, or recognize capital gains tax on appreciated assets such as stock, even before the property’s sale. Highly technical tests need to be applied to a trust to determine whether it qualifies as a foreign trust. The drafter of the estate plan documents must take great care when creating a trust that will have a noncitizen trustee or successor trustee.
Choosing to name a noncitizen as a trustee may also raise challenges for an executor of personal representative. Because of the potential risks and complications, consider naming a U.S. citizen who resides in the United States as a co-trustee to serve alongside the noncitizen trustee. Naming a trustee who resides outside the United States may also subject the trust’s assets to the laws of a foreign country and expose the trust to potential taxation by that country.
If you don’t have anyone in your life that you trust to carry out this important responsibility, consider hiring a professional trustee. This can protect your named beneficiaries from unintended negative tax and legal consequences. Of course, it might be a bit more expensive to go this route, but the value that a professional trustee’s professionalism and efficiency will generate usually has more pros than cons. You might find that you have greater savings to the trust and its beneficiaries if you choose to work with a professional, rather than by choosing a family member or friend to be trustee.
Financial and Healthcare Agents
Most of the time, you can name a noncitizen to be your agent under a durable financial power of attorney, healthcare power of attorney, or advance healthcare directive. However, some states have specific requirements for a noncitizen serving as an agent.
It’s critical that you choose someone you trust to make decisions for you if you’re incapacitated. But you’ll still want to consider the practical challenges that can come from this decision. Will this person be able to act quickly considering the distance and travel requirements? This an especially important question as many borders are closed due to COVID-19. Even though you trust this person, it might be better to name a resident U.S. citizen to act as your agent in order to avoid any concern about their ability to act quickly considering their proximity to you, your doctors, and your accounts and property.
Naming a Foreign Person as a Beneficiary of Your Estate or Trust
A similar problem arises when a beneficiary of a U.S.-based trust or estate is a noncitizen, or a U.S. citizen who lives in another country. An executor or trustee that pays income from a trust or estate to a foreign person typically has to withhold 30% of the funds prior to making such distributions, regardless of what the ultimate tax liability will be. These withholdings can create additional complexity and administrative costs, resulting in smaller distributions for the beneficiary than what the creator of the trust wanted. Naming a foreign beneficiary might also allow their country to tax the property and accounts of the trust.
Anther thing to consider is that if you have a noncitizen spouse, the unlimited marital deduction for gifts and inheritances passed between spouses is not available to you. Certain complex rules apply when determining what you can leave to your noncitizen spouse free of estate taxes. Additionally, your noncitizen spouse isn’t subject to the presumption that each spouse owns 50% of jointly owned property. Instead, they must be able to trace the amount of their own money or earnings contributed to the purchase of the joint property. Failure to do so could result in significant tax liability when you die.
Some international tax treaties between the United States and other countries may impact the withholding requirements imposed by these IRS rules. Therefore, it’s important to seek out competent legal advice if you want to name a foreign beneficiary in your estate documents.
It’s not our intention to scare you with this information. Don’t let the fact that you have loved ones who live abroad or who have citizenships in other countries keep you from planning for your estate. Let this be the nudge you needed to seek help to understand how state, federal, and international law will apply to the decisions you make. It’s worth the effort.
We’re here to help you along the way. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton, the Tri-Valley and Bay Area at (925) 831-4840.