09 Nov Can I Include Foreign Property in My California Estate Plan?
Many assume that property owned outside of the U.S. can be treated the same as property held in California in a Will or trust. Is there a risk to simply including foreign property in a California estate plan? Or is it preferable to omit the foreign property in the California estate plan and include it in a separate Will or trust drawn in the country where the property is located? Given the mobility and diversity of people in Southern California, we are assisting an increasing number of clients who own homes or businesses outside of the United States. Careful estate planning means assisting our clients understand how foreign ownership and inheritance laws impact both the disposition and taxation of their estate here and abroad.
Who Gets What is Not the Same Throughout the World
In the United States, if we properly draft a Will or Trust outlining who receives property, our wishes are honored. Sometimes these wishes may be affected by rules related to community property or children born after we execute an estate plan. And even if we forget to draft a Will or trust in California, the rules are clear – our estate will be divided between our spouse and children, and if we have no spouse or children, our estate will go to our parents or siblings. In many countries, there are limitations on how property can be distributed. In Germany, France, and Italy, for example, spouses and children are given compulsory distributions. In these countries, a Will may not be needed – property vests in heirs immediately on the decedent’s death. There is no need for an executor or trustee to hold and transfer title.
Not All Countries Use Trusts in Estate Planning
The creation of a trust is an important tool for estate planning in the United States. We use trusts to avoid court supervised probate administration, to plan for incapacity, and for tax planning. However, the use of a Trust is well established in countries with a common law legal system derived from England, but are not used in the rest of the world. Even in countries that have trusts by statute, such as Japan or South Africa, there is no transfer of ownership to the trust which is an essential element of a trust in the United States. Additionally, while most common law jurisdictions recognize a transfer of property to a trust, frequently the transfer is viewed as a transfer to an unrelated “person” which is taxed at a much higher rate than an inheritance transfer to a spouse, son, or daughter.
What about Estate and Gift Taxes for Foreign Property?
Taxes related to estates and gifts can be very different outside of the United States. While some countries have no estate taxes such as Mexico, Canada, Sweden, Israel and China, a gift may be subject to income tax. Other countries have an estate tax, but no gift tax. For example, in the U.K. there is an inheritance tax but any gift given more than seven years before the death of the donor is tax free. However, if the donor dies before seven years have lapsed, the entire gift is brought back into the estate for tax purposes. Additionally, many countries, such as Germany, base gift taxes on the relationship of the beneficiary to the donor – gifts to close relatives are taxed at a lower rate than to more remote relatives or strangers. In these countries, any gift to a trust is deemed a gift to a stranger and is taxed at the highest rate.
Any property including real property or an interest in a business held outside of the United States by an American citizen is subject to U.S. estate and gift tax upon death. The foreign country may have their own estate taxes so an American decedent’s estate may be subject to double taxation. There are tax treaties between the United States and many other countries that may provide some relief from double taxation, but the rules are complicated. In creating an estate plan that both recognizes and plans for estate tax consequences here and abroad, it is essential that details of the relevant treaties are understood and applied.
Should I Simply Create a Separate Estate Plan for My Foreign Property?
Since the rules regarding estate planning including taxation may be vastly different regarding a foreign property, it may make sense to draft a separate estate plan specifically for the foreign property. The foreign estate plan can be tailored to local rules and laws. Additionally, if there is a dispute regarding the property, that dispute Will be adjudicated in the country where the property is located subject to the terms of the foreign estate plan. The foreign estate plan should be drafted by an attorney licensed in the country where the property is located.
Is a U.S. Trust or Will Valid Overseas?
Since not all countries recognize the use of a Trust in an estate plan, can a U.S. Will be deemed valid overseas. Rules regarding how a Will is drafted or executed vary across the globe. Consequently, in 1961, many countries have adopted the “Hague Convention Relating to the Form of Testamentary Disposition,” and, in 1998, the “Washington Convention” which consists of a series of laws governing how a Will is drafted and executed. The necessary elements of an “International Will” are carefully proscribed, and generally provides some certainty that a Will so drafted Will be recognized abroad. However, it will be the local jurisdiction or foreign country that will deal with any dispute over the content of the Will. Consequently, even with an International Will drafted in the U.S., a conflict over property out of the country might be heard in the country where the property is located.
Finally, the use of a “pour-over Will” whereby property outside of a trust is transferred to a decedent’s trust after death is not widely used outside of the U.S. Even in Canada, these pour-over Wills are not necessarily recognized because after death additions to a trust are generally deemed invalid.
Final Thoughts Regarding Estate Planning for Foreign Property
We have all taken that vacation overseas where we contemplated having a “small place” where we return each year. It’s not so expensive, and besides, it can be rented when we are not there. Or perhaps our extended family is out of the country, and it would be nice to have a home or small business nearby. Having property overseas is a wonderful reality for many families in Southern California. While there are numerous pitfalls to including foreign property in a U.S. estate plan, it is easily doable with the assistance of a knowledgeable estate planning attorney. At Brown White & Osborn LLP, we can provide the assistance to ensure foreign investments and property are properly included in your estate plan.