Thinking about Retiring Abroad? Existing Estate Plans May Not Travel Well
(This article was provided by Thun Financial Advisors, specializing in financial advice and portfolio management for Americans living overseas).
Retirement abroad has never been as popular as it is now. Longer, more active retirement years have been one reason American seniors are increasingly being enticed to retire abroad. Financial considerations have also become a compelling incentive for Americans to look overseas.
By taking up a long-term residence in a new retirement “home,” an estate plan is now likely to be subject to a whole new set of laws that were not considered or contemplated when wills were drafted, properties were titled, trusts were created, etc.
Below we highlight certain nuances involved in cross-border estate planning, when considering retiring abroad.
Coordinating International Estate Planning: One or More Wills?
A key first step when considering moving abroad for retirement is to identify a well-qualified estate planning attorney in the target retirement country before you move, preferably one year or more in advance. Your estate planning attorney in the new home country should be conversant in domestic estate and inheritance law issues but also knowledgeable about cross-border and expatriate estate planning complexities, especially for Americans. This does not mean abandoning your U.S. based estate planning legal counsel before you go. It means coordinating your legal advice between the two (or more) countries where there may be estate tax and inheritance claims of jurisdiction over assets and beneficiaries. Each of your attorneys should review the “Wills” drafted, to make sure there are no unexpected surprises, when planning how to pass on assets to loved ones or charitable causes, once abroad.
Some overseas estate planners suggest multiple “situs” Wills, with each Will governing the distribution of property in the country for which the Will is designed. There seems to be some risk in a strategy of multiple Wills, as the traditional rule holds that the legal execution of a Will extinguishes the validity of any prior Will.
For Americans retiring in the Eurozone, Americans may be able to take advantage of a recent development (EU Directive 650/2012) that champions the one Will policy and further allows cross-border families to select which laws will govern their probate/succession (court proceedings ordering the distribution of your property after death): either the EU country of residence OR the country of citizenship.
When Your Loved Ones Include a Non-U.S.-Citizen Spouse.
Many Americans are part of a growing global citizenry and are now, or later become, married to non-Americans. Unfortunately, the tax complications and challenges facing American expats amplify when marrying a non-U.S. citizen. Like the case of estate planning and will drafting, substantial legal expertise in the retirement country of residence and within the U.S. may be needed to help the mixed-nationality couple make certain decisions in terms of how they share property (or keep assets separated) and how their assets will transfer to the surviving spouse (or to others) upon death.
It is important that these mixed-nationality couples understand the unique U.S. tax rules that will apply to their situation and the implications of those rules on these important decisions regarding how they own and, ultimately, transfer (gift, bequest, etc.) their wealth. For example, when a non-U.S. person accumulates U.S. based assets, such as stocks, real estate, or collectibles, she is creating a U.S. estate, for tax purposes. And while a U.S. citizen can pass a whopping $11.18M (2018) in assets to his or her surviving spouse, without triggering U.S. estate taxes and transfer liabilities, a non-U.S. citizen can only pass $60,000 of assets to her surviving spouse, without exposing her estate to a 40% tax liability and additional IRS reporting requirements. So, what if the mixed-nationality couple opts not to wait until they die to transfer assets to each other? A similar quandary occurs. While U.S. citizen spouses enjoy the privilege of gifting an unlimited amount of assets to each other during their lifetimes, the monetary limit for gifting assets to a non-citizen spouse, according to U.S. tax codes, is $152,000 (2018).
Gift Giving for the Kids & Grandkids
Section 529 college savings plans have grown more and more popular over recent years, as parents and grandparents begin to realize the tremendous long-term advantages to saving larger amounts for education in earlier years for children and grandchildren. Lifetime gifting strategies are a common method for reducing a taxable estate in the United States and can be especially effective for American retirees abroad with family still in the United States.
For example, 529 college savings accounts allow substantial deposits via accelerated gifting (as much as $150,000 in a one-time gift from joint filers covering a five-year period) and provide Roth IRA-style tax-free growth of the investment account, as long as the 529 plan assets are ultimately withdrawn for qualified educational expenses. And, the person receiving the benefit of the 529 plan gift, while most often a relative, does not have to be a related family member. It should be noted, however, that while U.S. expats are free to open and fund 529 college savings accounts, they must be aware of the local country rules in their country of residence regarding the gains that will eventually accumulate within these accounts.
Local gift tax rules and rates may apply, triggering unintended consequences and local tax liabilities for either or both the gift giver and/or the gift recipient. Alternative college savings or generational gifting strategies (including having U.S. based relatives open the 529 account) may prove far more productive for certain expats, depending on the local country of residence rules that apply.
Don’t Trust the Trust When Moving Overseas
If a current estate plan includes trusts, it is particularly dangerous to move overseas with the existing domestic estate plan – the trust may not operate as intended when the tax and probate laws of a new country become applicable. While trusts are recognized under U.S. law, it is not uncommon to encounter in some civil law jurisdictions with forced heirship regimes that distributions and passing of assets to intended beneficiaries through such a trust will not be recognized or respected, contrary to the decedent’s wishes explicitly stated in her trust documents. This is because the beneficiary is receiving the property from the trust, rather than from a lineal relative (parent, grandparent, etc.), which is inconsistent with the forced heirship regime/civil law concepts of the new host country.
There have been recent reforms in several civil law jurisdictions designed to better accommodate immigrants’ trusts, but uncertainties and complications remain. These dangers and pitfalls involved in use of trust structures are not limited to the expat who relocates to a civil law jurisdiction.
In Canada, a special capital gains tax may be periodically assessed on trusts holding Canadian real property. In the U.K., if our American retiree has assets in an existing living trust (a very common U.S. estate planning tool), she will often find out (after the fact) that this trust triggered income tax in the U.K. that would not have applied had the assets been held directly by the expat retiree (if the retiree claimed remittance-based taxation). Later, should she decide to leave the U.K. or terminate the trust, even unrealized gains may be taxed upon her departure or trust termination.
Conversely, expats retiring abroad should be even more cautious about setting up trusts abroad. The IRS has a very broad definition of what constitutes a “trust”; and, it is entirely possible that a foreign business arrangement, partnership, joint venture, etc. may fall into their liberal interpretation. This may have extremely punitive reporting and taxation consequences, for both the American grantors of the trust and/or for their heir beneficiaries who receive distributions from the foreign trusts.
As with all matters germane to cross-border taxation and estate planning, such arrangements should be reviewed by competent U.S. and local tax and legal professionals at the earliest stage possible.
We hope that by getting more familiar with these common pitfalls for Americans living or retiring abroad, you, as an expat family member, will appreciate the importance of not relying solely upon the estate planning that was done before leaving the United States.
It is generally advisable to review an existing estate plan (and the broader financial plan) when major events (divorce, remarriage, etc.) have resulted in changed circumstances. The importance of doing so is particularly acute when retiring overseas or moving from one foreign country to another. U.S. expats need to be aware that standard U.S. estate planning techniques will likely fail to protect wealth in cross-border situations and may even produce unintended, counter-productive results.
Thun Financial Advisors Research is a leading provider of financial planning research for cross-border and American expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been featured in the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth Management among other publications.