Compliments of Our Law Firm,
Written By: The American Academy of Estate Planning Attorneys
Despite living in one of the largest countries in the world, Americans often yearn for the opportunity to own property outside of their homeland. According to the U.S. Department of Commerce’s Bureau of Economic Analysis, American investment abroad reached almost $5 trillion in 2015. If you own property abroad extra care must be taken in the manner in which that property is handled upon your death. Both inheritance laws and estate tax rules with which you may be familiar may not apply to foreign assets.
Many other countries do not handle property distribution after death the same way we do. A significant number of countries, for example, have what are essentially “forced inheritance” laws that dictate what happens to property upon the property owner’s death. For Americans accustomed to deciding for themselves what happens to their assets when they die, the idea that the law has already made that decision may be difficult to accept. If you own property in such a country, however, it is crucial to understand any applicable forced inheritance laws and how they will affect your estate plan.
For most people, a Last Will and Testament serves as the foundation for their estate plan. Your existing Last Will and Testament may be insufficient, however, to cover property owned outside the United States because your will may not be recognized by the country in which the property is located. It may be necessary to have another estate plan in the country of the property’s location.
Trusts are another common addition to a comprehensive estate plan in the United States. Many foreign countries do not utilize trusts, which can create significant estate planning challenges. Since trusts are not recognized in many countries, giving a gift of property to a trust may trigger tax liabilities if the foreign country considers it to be a gift to a non-family member. In addition, attempting to transfer property into a trust in one of these countries may unintentionally run afoul of forced inheritance laws.
Next, the issue of taxation. As a United States citizen or permanent resident, your estate is subject to federal gift and estate taxes when you die. Your estate consists of all property, both real and personal, owned by you anywhere in the world at the time of your death.
Estate planning clearly takes on a heightened importance when you own property in a foreign country. Failing to understand the legal system, inheritance rights, and tax system in the country where you chose to purchase property and incorporating that knowledge into your estate plan can have far reaching negative consequences. For example, property could be heavily taxed or lost altogether as a consequence of not understanding the laws of the country of the property’s location. Your estate itself could also spend a considerable amount of money during probate trying to preserve the property. Every dollar spent on taxes or probate expense is a dollar unavailable to provide for your loved ones after you are gone – which is just another strong incentive to work with an experienced estate planning attorney by working with counterparts in the other country. They can ensure that your estate plan properly addresses any property you own in another country.