When close family members live in another country, planning for an emergency or a tragedy takes on added importance – and added complexity. It’s not easy to think about, but if something happened to you while you are in the United States, what effect would that have on those you leave behind?
Cross-border family ties, as well as owning assets in multiple countries, can complicate matters in the case of a death or disability. Questions as to who would have custody of your children and who inherits your assets can implicate laws in multiple jurisdictions. This complexity can result in delays, headaches, and increased taxes for your loved ones.
If all of this sounds like a bureaucratic nightmare, it is. But don’t worry. By planning in advance, you can avoid this entire process and make things much easier for your loved ones.
Basic estate planning should provide a legally-documented plan for (1) who will take care of your minor children (2) the transfer of your assets when you pass away; and (2) who will act on your behalf if you become incapacitated.
Guardianship Planning: Who Will Take Care of Your Kids
Many challenges can arise when you’re raising children outside your home country, far from your family. One challenge that you might not have thought about is who would take care of your children if something happened to you here. Without close friends or family to take your kids in, it’s important to have a plan in place for their care. Learn how to protect your children.
You might think a family member could just hop on a plane and take your children back to your home country, then call your bank and have the funds transferred. Unfortunately, that’s not how things work – even assuming that the family member speaks the language and has a valid visa to enter the U.S. Specific legal processes must be followed, and these processes can take time – potentially several years.
In the absence of parents, a child under the age of 18 must be under the care of a guardian, a person who is legally responsible for taking care of the child’s needs and making decisions about their activities and medical care. Upon the death of a child’s parents, a guardian must be appointed by the court.
The guardian appointed by the court is usually the individual named in the parents’ last wills and testaments. While this is generally a quick process when the named individual is a U.S. resident, it becomes much more complicated when the individual resides outside the U.S. In this case, the process can take six months at a minimum, and possibly more than one year.
If no U.S. guardian volunteers to serve as the child’s guardian during that time, your child could end up in state custody – and sent to the home of a complete stranger.
That is why it is critical to have a backup plan for your child’s care in the U.S., pending the appointment of the foreign guardian. Because so much is at stake, we are committed to ensuring that our clients have a comprehensive plan in place for their children and that the children will always be in the care of a trusted adult.
If you’d like to put a plan in place to ensure the safety of your child if something happened to you, schedule a call to see how we can help.
Ensuring Assets Will Be Available for Your Family
You might think that your family would have immediate access to your assets if something happened to you. Unfortunately, in the United States, that’s often not the case. Funds can be tied up for years before they’re available to family members, leaving your loved ones financially stressed at the worst possible time.
In the U.S., before assets are available to a deceased person’s heirs, the assets must go through a court process called probate. While this process can be fraught even in the simplest circumstances, it can be especially challenging when cross-border issues are involved.
In many cases, assets are tied up for years, leaving loved ones without needed financial resources and a small fortune in legal bills. Moreover, a person who is not a U.S. resident or citizen may be precluded by law from managing the process.
To avoid this scenario, we often recommend putting in place a Revocable Living Trust, an estate planning tool that allows your assets to bypass the probate process and go directly to your loved ones. The Revocable Living Trust also allows a foreign person to manage the assets.
To protect your loved ones from court hassles and delays, contact us to schedule a consultation.
Protecting Assets Inherited by Minor Children
Beyond probate, assets inherited by minor children can be subject to supervision by a U.S. court until the child turns 18 – at which point the child receives unrestricted access to funds. The assets under supervision may not be available to your child’s guardian – or even to their other parent.
Rather than leave assets to children directly, the assets should be left to a trust for your children’s benefit. The trust avoids intrusive court supervision and provides your chosen trustee with flexibility in the management and distribution of the assets.
At Global Village Law, we work with you to make sure assets would be available for your children’s care without court involvement. When you work with us, you’ll feel secure that your assets would be preserved and that your loved ones would be taken care of in the event of a death or severe illness.
If you’d like to protect your loved ones while you’re living in the U.S., schedule a consultation to get started.
Incapacity Planning: Protecting You and Your Family in the Event of Severe Illness
If you were hospitalized and unable to manage your own finances, who would step in to pay important bills for you and your family? And who would make healthcare decisions for you if you weren’t able to make those decisions yourself?
If you haven’t legally documented who would take care of these things, your wishes might not be respected and important bills like your mortgage and insurance premiums could go unpaid.
To make sure things are taken care of if you become severely ill, it’s critically important to have the right legal documents in place. A document called a Healthcare Proxy authorizes someone to make healthcare decisions for you if you were incapable of making those decisions yourself.
A document called a Power of Attorney authorizes someone to manage your finances and make legal decisions for you. If you become incapacitated and do not have a power of attorney in place, your family may have to file proceedings with a U.S. court in order to be able to manage your finances and make legal decisions on your behalf. This process can be lengthy, expensive, and burdensome for your loved ones. A power of attorney is a simple way to authorize someone to act on your behalf without court involvement.
U.S. gift and estate taxes for U.S. residents and U.S. citizens apply only to individuals with substantial assets. These taxes can be imposed at both the federal and state levels.
For U.S. residents, a transfer tax is imposed in the form of a 40% gift and estate tax. The gift and estate tax functions as a coordinated tax that applies to assets that you give away to another person either during your life (gift tax) or upon your death (estate tax).
The gift and estate tax applies to any assets you own, regardless of whether they are located in the U.S. or in another country. This extended reach of U.S. tax laws differs from most other countries, and it can be surprising to foreign nationals.
The value of your estate for estate tax purposes equals the value of your worldwide assets, minus the amount of any debt that you owe, plus the proceeds of any life insurance policy you own. While the calculation of the value of your estate is broad, there is a large exemption that eliminates the tax for most people.
The Lifetime Exemption for Gift & Estate Taxes
The substantial exemption from the U.S. gift and estate tax is sometimes referred to as a Lifetime Exemption. The Lifetime Exemption for 2022 is $12.06 million per person; however, the amount of the exemption is expected to be reduced to about $6 million in 2026.
You might think of the Lifetime Exemption as a bucket that holds $12.06 million. Each U.S. resident has a bucket for their life, and every time they make a gift, it fills up the bucket and reduces the amount of the exemption that is left. Any amount that goes into the bucket after it fills up either during your life or at your death is subject to a 40% tax.
For example, if you gave away $2 million as a gift to your kids during your life, your remaining Lifetime Exemption would be $10.06 million. Upon your death, the amount of your estate exceeding $10.06 million would be subject to a 40% estate tax. Likewise, if you gifted $14 million in 2022, you would have to pay a 40% gift tax on $1.94 million.
Marital Deduction Rules for Non-Citizen Spouses
While foreign nationals who are U.S. residents are generally treated the same as U.S. citizens for estate tax purposes, there are a few exceptions. The one that most commonly arises is the lack of marital deduction for gifts and bequests to non-citizen spouses.
The marital deduction allows an individual to gift or bequest an unlimited amount of assets to his or her U.S. citizen spouse without triggering any tax or counting against the transferor’s Lifetime Exemption. If the spouse is not a U.S. citizen, then this unlimited exemption doesn’t apply to assets transferred to him or her.
Because assets left to a non-citizen spouse are still covered by the regular Lifetime Exemption, the limitation on the marital deduction will only affect individuals whose assets exceed that amount. For example, if you die with an estate of less than the (current) $12.06 million Lifetime Exemption (and you haven’t given away any assets during your life), the limitation on the marital deduction would have no effect on your family.
Estate Tax Planning for Non-Citizen Spouses
Married couples in which one spouse is not a U.S. citizen should plan to minimize the effect of the non-citizen spouse rules. Couples in this situation should be careful about co-mingling their assets, since it can result in a reduction in the lifetime exemption of the citizen spouse.
One strategy for addressing the lack of a marital deduction for bequests to non-citizen spouses is the Qualified Domestic Trust, or QDOT. A QDOT is a special type of trust that allows one spouse to leave assets to a surviving non-citizen spouse without triggering immediate estate taxes. A QDOT is only used in the event that the deceased spouse’s estate exceeds his or her Lifetime Exemption.
A QDOT is generally used only after a couple has exhausted other estate tax strategies. A QDOT does not eliminate estate taxes; it only defers them until the death of the non-citizen spouse. QDOTs are also subject to extensive restrictions, and the surviving spouse cannot receive distributions of principal without triggering estate taxes. A QDOT can be particularly beneficial where the surviving spouse plans to become a U.S. citizen. If the surviving spouse becomes a U.S. citizen, then any distributions can be made to him or her without estate taxes. The amount left in the trust at the surviving spouse’s death is included in his or her estate.
Other Strategies for Minimizing Estate Taxes
In many instances, estate taxes can be reduced or even eliminated with advance legal planning. If you think you may be subject to gift or estate taxes now or in the future, be sure to work with an attorney who is familiar with international estate tax planning. The earlier your plan, the more options you’ll have for reducing your estate tax bill. Contact us to get started.
If you are a permanent U.S. resident, or are in the process of applying for permanent residency, your primary estate plan should be created in the U.S. If you have assets outside the U.S., you need a plan for what will happen to those assets as well.
While most U.S. residents need only one will, if you own assets in more than one country, you may want to have a will for each of those countries. You should also have a power of attorney specific to each country so that someone could manage the assets in the event of a medical condition that renders you incapable of managing them yourself.
When it comes to cross-border planning, it’s important to coordinate the planning in various countries. Problems can arise if the lawyer in one country doesn’t know what’s in place in the other country. It’s also critical to work with an attorney who is experienced in international matters.
There are generally no U.S. tax consequences for a U.S. person who inherits money from abroad. However, you must file IRS Form 3520 for any gift or inheritance from a foreign person that exceeds $100,000. Failure to file a Form 3520 can result in a penalty of 5% of the gift or bequest for each month it is late, up to 25%. This same Form 3520 must also be filed when a U.S. resident receives a distribution from a foreign trust.
While there is no estate tax on assets inherited from a foreign person, a substantial inheritance could affect your own estate tax situation as a U.S. resident. If you expect that the inheritance, together with your own assets, may at some point result in an estate valued at more than $6 million, you may want to engage in planning to prevent the inheritance from being included in your estate. This can be accomplished if your relatives leave the assets to a trust for your benefit instead of leaving them to you directly. If the trust is drafted with maximum flexibility, you can have substantial control over the assets in the trust, even though you don’t own them directly.