If you have loved ones who live outside the United States, international estate planning presents a unique (and often frustrating!) challenge. Whether you’re a US citizen hoping to leave assets to a sibling abroad or a green card holder with family in your home country, the legal and tax implications can be far more complex than a typical domestic estate plan.
Why?
Because US tax law isn’t just concerned with who inherits your money, but where that money ends up. In short, it’s about the destination: the US government has a vested interest in keeping wealth (and the taxes that come with it) within its borders.
As a result, the laws surrounding cross-border inheritance are filled with restrictions, reporting requirements, and potential tax traps that you have to know how to get around. Below, we’re going to examine some of those frustrations you may run into, as well as how to minimize their impact.
Ways the US Makes It Hard for You to Include Foreign Beneficiaries
At the heart of international estate planning is a simple tension: the US does not want wealth leaving the country untaxed or outside its regulatory reach. That means the IRS closely monitors when and how assets are transferred to non-US persons.
Here are a few ways the US discourages or complicates inheritance to foreign beneficiaries:
Foreign Spouses Don’t Qualify for Unlimited Marital Deduction. Simply put, if you’re married to a non-citizen, the unlimited marital deduction doesn’t apply. This means transferring assets to your spouse at death can immediately trigger estate tax liability unless you use a Qualified Domestic Trust (QDOT).
Heavier Gift and Estate Taxes. Gifts to non-resident aliens are not always covered by the same exclusions and deductions available for US citizens. And if a foreign beneficiary inherits US-situs property (like real estate or stocks) they may be subject to significant US estate tax.
Form 3520 & Reporting Obligations. US taxpayers must report large gifts or bequests from foreign individuals or estates using IRS Form 3520. Likewise, certain transfers to foreign trusts or non-US individuals can trigger hefty penalties if not reported properly.
What Strategies Can You Use for Cross-Border Beneficiaries to Minimize Problems?
Thankfully, there are legal and effective ways to plan for foreign relatives in your estate and avoid these hurdles.
A few key strategies and tools include:
Qualified Domestic Trusts (QDOT). If your spouse is not a US citizen, a QDOT can defer estate tax until the time of distribution. This is designed to help in avoiding immediate tax consequences at your death.
Foreign Trusts. Establishing a foreign trust for your non-US beneficiaries can allow for more control over the flow of funds and potentially reduce US estate tax exposure. Keep in mind, though, that these must be structured carefully to comply with reporting laws and avoid unintended tax consequences!
Bequests in the Form of US-Tax-Neutral Assets. Leaving foreign heirs assets that are not considered US-situs, such as foreign real estate or certain offshore investment accounts, may help minimize US estate tax liabilities.
Lifetime Gifts. In some cases, gifting assets to foreign relatives during your lifetime (below reporting thresholds) may be more efficient than bequeathing them at death.
The Main International Estate Planning Takeaway? This Is Not a DIY Matter!
While we never recommend engaging in DIY planning, international estate planning is an area where “doing it yourself” can lead to even more truly significant mistakes. Simply put, the tax laws are dense, the penalties for missteps are steep, and every situation is different.
Bottom line? If your estate plan involves foreign relatives, work with an experienced estate planning attorney who understands cross-border issues and compliance. Want to chat about your situation? Get in touch for a free consultation.