INTERNATIONAL ESTATE PLANNING: TRAPS AND TIPS FOR THE DOMESTIC ESTATE PLANNER
By Rebecca L. Van Loon, Esq.*
The world is becoming smaller and families are naturally becoming more diverse and global. It is not uncommon for estate planners to encounter U.S. clients with international connections, such as ownership interests in foreign assets, beneficial interests in foreign trusts, non-citizen spouses, or children living in foreign countries. In addition, foreign clients may seek advice regarding their exposure to U.S. gift and estate taxes when making gifts or investments in the U.S. This article is intended to provide domestic estate planners with an understanding of the general framework of estate and gift taxes in an international context and to help identify potential cross-border issues and planning opportunities.
I. CITIZENSHIP AND RESIDENCY CONSIDERATIONS AND TAXATION
In addressing potential cross-border issues, the first step is to identify your client’s citizenship and residency. An individual’s citizenship and residency will determine the applicable tax regimes. This initial step may seem simple, but individuals may be dual citizens, treaties can override domestic rules, and residency is not always apparent or straightforward. In addition, clients may inaccurately characterize their own citizenship and residency. There may be instances in which an individual is considered a United States resident for income tax purposes, but a nonresident alien for estate and gift tax purposes, or vice versa. Residency determinations may also change over time depending on a client’s travel habits, business relationships, and family dynamics. It is therefore imperative that the domestic estate planner carefully analyze a client’s situation before that client enters into transactions, such as gifts, sales and purchases of assets, formation of trusts or entities, changes of citizenship, residency or immigration status, or receipt of gifts or inheritances. In addition to determining an individual’s residency, the client may establish, or have an interest in, a trust or estate, and the residency of such trust or estate must also be determined. As discussed below, because there is no distinction between U.S. residents and citizens for income tax purposes or for gift and estate tax purposes, this article refers to both as "U.S. persons." An individual who is neither a citizen nor a resident will be referred to in this article by the official Internal Revenue Service ("IRS") designation, "nonresident alien."