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Estate Tax Planning Strategies: Cross-Border Pitfalls and Considerations

Most of these tools are very familiar and frequently utilized by domestic financial planners and estate planning attorneys to assist single and multistate U.S. families. The utilization of offshore PICs is generally no longer utilized for U.S. clients, because Passive Foreign Investment Company (PFIC) rules and the Foreign Account Tax Compliance Act prior will. Other experts suggest one “geographic will,” which would incorporate the laws of the relevant jurisdictions involved in the distribution of the testator’s assets. The propriety or effectiveness of the geographic will is likely to depend on the particular laws of the relevant jurisdictions and the particular expertise of the legal advice that went into the design and execution of the will.

Caution when moving overseas with trust structures: If your estate plan includes trusts, it is particularly dangerous to move overseas with your old domestic estate plan in tow as it may not travel well at all. For example, consider a U.S. citizen who established a revocable grantor trust in favor of his children and grandchildren, but who thereafter moves to live and work overseas. There may be extremely negative consequences (e.g., the trust may be separately taxed upon the grantor obtaining residency in the new country), and those consequences will vary depending on where the expat relocates and how long the expat and his or her family remain in their new country of residence.

In civil law/forced heirship regimes, a fundamental problem exists when examining distributions to heirs through such a trust: the beneficiary is receiving the property from the trust, rather than a lineal relative (parent, grandparent, etc.). Accordingly, if the expat grantor moves to Germany with her family, the children-beneficiaries will be German residents and the intended consequences of the grantor trust will conflict with German gift and inheritance tax laws. This exposes distributions from the trust to potentially higher German transfer taxes. The magnitude of unintended tax consequences might intensify over time. If the grantor and his beneficiaries remain in Germany over ten years, the tax relief offered by the U.S.-Germany Estate and Gift Tax Treaty phases out and distributions from the trust could be exposed to the highest German transfer tax rate of fifty percent. Similar results may occur in France, which has a relatively new tax regime applicable to any trust with French situs assets or a French domiciled settlor or beneficiary. There have been recent reforms in several civil law jurisdictions designed to better accommodate immigrants’ trusts, but uncertainties and complications remain.

The dangers are not limited to the expat who relocates to a civil law jurisdiction. If a U.S. citizen arrives in the U.K. (a common law jurisdiction) with an existing U.S. trust, the government may not recognize this trust structure, or, worse, consider the trust a UK resident and subject the trust assets to immediate income taxation on the unrealized gains within the trust. Moreover, If the trust provides for a successor U.S. trustee, then a settlement (triggering UK capital gains taxes) could also be declared on the death of the UK resident trustee (the grantor). Additionally, in Canada, which shares the British common law heritage, a special capital gains tax will be periodically assessed on trusts holding Canadian real property.