Estate planning is a complicated but necessary part of any financial plan and a noble undertaking for the benefit of people you care about. For non-U.S. citizens who reside permanently in the United States, estate planning becomes an even more complex and nuanced operation. This guide will demystify some of that complexity.
Common Terminology
Before you hire an experienced estate planning lawyer to begin the estate-establishing process, it helps to be familiar with some of the legalese you’re likely to encounter. The following are terms with which to familiarize yourself.
Situs
The location of assets or property to be devised by will or placed in trust. The situs of an asset will determine what court, tax codes, and inheritance laws apply to the asset.
Domicile
The location where a person permanently resides. This is dependent upon factors such as how long they have lived in the U.S., how often they travel and for how long they are away, and how much of their future they see spent in the U.S. and the location to which they intend ultimately to return.
Testator:
The person who establishes the estate.
Taxes and Treaties and Trusts
Any legal resident of the U.S., citizen or not, has the right to establish an estate to protect their assets from over-taxation and legal expenditure. The benefits of an estate are many: It can lessen the costs of probate and legal expenses for heirs, it allows for the charitable allocation of assets, and most importantly, it protects the financial well-being of your heirs and gives you peace of mind.
The two major financial hurdles to consider are any Federal or state estate and gift tax.
Estate Tax
A tax of 40% levied onto an estate upon its transfer to heirs. With the exemption currently set to $11.18 million, only larger estates will have to prepare for this tax. For permanent residents with assets outside the U.S., the estate tax applies to all assets, including those located in the country of citizenship.
Gift Tax
$15,000 annual exemption and an $11.18 million lifetime exemption. The gift tax exists to prevent tax evasion through gifting away assets.
Your estate’s tax obligations depend on many factors, one of which is the tax treaties the U.S. has with your country of citizenship. The goal of tax treaties between countries is to limit the possibility of double taxation, where both the U.S. and country of citizenship assert the right to tax your estate. Though your country of citizenship sharing a tax treaty with the U.S. helps save and simplify the process, it still exists in a very sensitive and legally dense arena and requires expert navigation.
Depending on your particular circumstance and estate size, a trust will likely be the route your lawyer or financial advisor decides to go, and for good reason. Trusts have protections built into them. Take for example the Qualified Domestic Trust (QDOT), which allows a non-citizen spouse to take advantage of the marital deduction, which means they pay no taxes on assets by deferring the estate tax on those assets until their death. There are many different types of Trusts to consider, but only you and a legal professional can determine the best course of action.
Problems with Non-Residential Beneficiaries or Trustors
Inheritors that live outside of the U.S. can have tremendous difficulty extracting money or assets inside the U.S. if proper planning is not undertaken before the testator dies. In the worst-case scenario, the assets of the deceased are taxed by both countries (of origin and residence), leaving little if anything of the estate to the beneficiaries.
Naming a non-citizen as a trustee of an estate is problematic as it might result in the trust being deemed a foreign trust, subjecting it to extra taxation.
Although estate planning is monumental undertaking which you will never personally experience the benefit of, proper preparation and implementation of an estate make the lives of your loved ones lighter and simpler at a time when they’ll need that simplicity the most.