Estate planning tips for U.S. citizens abroad
This week's column is the second of a two-part series on U.S. estate and gift taxes, courtesy of Abi Greef from the Andersen Brussels office.
Last time we looked at the estate and gift tax law before and after the new Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The question now is, what one can do about planning for some of the effects of EGTRRA.
One provision of EGTRRA that may be important for U.S. persons living overseas is that, after 2009, transfers at death by U.S. persons to nonresidents who are not U.S. citizens are to be treated as a sale or exchange. This provision is presumably an attempt to stop assets passing outside the U.S. tax net free of tax, and may well catch the unwary. It may be particularly relevant in countries where there are "forced heirdom" rules, meaning that certain people spouse, children etc. have a claim to inherit a percentage of the assets, even if the deceased's will appointed other beneficiaries. Poland does have such forced heirdom rules, so U.S. taxpayers who are Polish citizens or permanent residents will need to take the local laws into account in their planning. They should also consider explaining any planning to beneficiaries who might otherwise feel cut out and be tempted to pursue action under the forced heirdom laws.
That being said, the forced heirdom rules should not prevent U.S. taxpayers from having an up-to-date will. A will is one of the primary tools in estate planning; without it, the intestacy laws may result in a completely different allocation of assets than the deceased would have intended, and some unwanted tax consequences as a result. It is also very important for non-tax considerations, such as appointing guardians for minors.
Other relatively simple estate planning techniques include a lifetime gifting plan. U.S. citizens and residents have an annual gift tax exemption of $10,000 per person. As previously mentioned, the annual exemption is increased to $109,000 for gifts to nonresident alien spouses. The U.S. person should look to gift appreciating assets if possible, so that the value of that asset continues to increase outside their estate. Of course, to have a lifetime gifting plan, the U.S. person needs to be able to survive comfortably without those assets. When gifting assets to a non-U.S. spouse, it is particularly important to examine whether your marital contract provides for separation of assets or community property there may be no advantage to giving away an asset if you are still deemed to own half of it under community property laws and to make sure there is proof (a paper trail) of the gift, in case it is ever questioned.
Life insurance can be a very useful tool in estate planning. Proceeds of life insurance on the deceased that are irrevocably assigned to another person (e.g., the spouse) are not included in the deceased's estate. The life insurance payout can therefore be a cash injection to help cover costs immediately after death (when assets of the deceased may be frozen) and ensure liquidity to pay estate tax bills without having to sell off estate assets. This can be particularly important if there are assets such as a family business or home, which the deceased wants to pass intact to future generations.
Trusts are a popular way of passing assets in the U.S. They do not have to go through probate, and are useful if providing for minors or to preserve assets. An "off-the-shelf" trust may not be suitable for those with foreign tax considerations, particularly in countries with a civil law system that does not recognize the (Anglo-Saxon) concept of trusts. However, the use of trusts should not be discounted completely in one's estate planning; one must simply be aware how the foreign jurisdiction will view and tax the trust before proceeding.
Finally, what if you want to leave your money to good causes? Unlike for income tax purposes, the U.S. does allow estates to take a deduction for donations to foreign charities, but the type of charity should be reviewed in advance as there are some requirements to be met to ensure that a deduction can be taken, particularly where private foundations are concerned. At worst, it may mean applying for charitable status to be recognized in the U.S., which could be a relatively costly process.
In view of all the above, U.S. citizens, particularly those with intended non-citizen beneficiaries, must still consider the following questions:
To whom do I want my assets to pass when I die?
Do I know that my assets will pass to those beneficiaries with the way my affairs are structured right now?
Do I know what taxes might be levied on those assets?
Do I know how those taxes will be funded?
If one cannot answer these questions, it is time to consider estate planning. It is entirely possible that future acts of Congress could further delay or even prevent the repeal of estate tax in 2010, so planning to stay alive beyond that date is not necessarily the solution. The bell may be tolling for the U.S. estate tax, but it can not yet be consigned to history; thanks to the vagaries of U.S. lawmaking, it is still possible that EGTRRA will expire before the estate tax does.
Abi Greef is a senior tax manager in the Brussels office of Andersen.
