US expats face numerous financial cross-border challenges, including international estate planning. The first step to mitigating this challenge should be understanding the rules relating to domicile and residency, taxation, and asset distribution in both the US and your country of residence, and how they interact.
Failing to address these multijurisdictional considerations can lead to headaches for your heirs such as incorrect asset distribution and double taxation.
In this article, we look at the main considerations to help you avoid these pitfalls and create a comprehensive international estate planning strategy to protect your assets and heirs from unwelcome surprises.
- What is international estate planning?
- Understanding US estate tax
- Nationality, residency, domicile, and situs rules
- Navigating decedent and asset jurisdictions
- Understanding US estate tax treaties
- Creating an international estate plan
What is international estate planning?
Estate planning involves ensuring your chosen heirs receive your assets in the manner you intended once you are no longer around, and in the most tax efficient manner possible. As an international individual, estate planning is more complex, and you first need to understand the rules in the US and in the country where you live.
Understanding US estate tax
The United States imposes a global estate tax based on citizenship, while most other countries have an inheritance tax based on residence. An estate tax is imposed on the estate of the deceased, while an inheritance tax is imposed on the heirs. The maximum estate tax rate in the US is 40%, although there is a generous $13.61 million exemption for US citizens and residents in 2024. The exemption is currently due to halve in 2025 though, unless renewed by law. There is also an unlimited marital deduction available for transfers to US citizen spouses.
Nonresident aliens (i.e. non-US citizens/Green Card holders who live overseas) with assets in the US may also face US estate tax on ‘US situs assets’ such as US property or investments in US companies. For these individuals the US estate exemption is only $60,000.
Nationality, residency, domicile, and situs rules
As a US expat navigating estate planning across different countries, it’s important to grasp the concepts of nationality, residency, domicile, and situs rules. These factors greatly influence how your assets will be taxed and distributed upon your passing.
While all American citizens face an estate tax on their worldwide assets, other countries tax residents or domiciled individuals, and each country has its own criteria for determining residency and domicile, often based on the number of days spent within the country in a year.
Additionally, situs rules govern how property is treated for legal purposes. Understanding these regulations is important as they impact the handling and transfer of assets across different jurisdictions.
Navigating these complexities requires careful planning. As a US expat, you must ensure your estate plan aligns with the laws of both your home country and your country of residence. By staying informed and seeking professional guidance, you can protect your assets and ensure your wishes are carried out as seamlessly as possible across borders.
Different rules in different jurisdictions
The United States offers generous estate tax exemptions for its citizens, but other countries may have lower thresholds and different tax requirements.
Many countries impose inheritance tax rather than estate tax, shifting the tax burden to the recipient of assets. For US citizens abroad, this means strategizing on how to pass on inheritances efficiently.
Succession laws also vary worldwide, particularly in civil law countries, which often enforce forced heirship (so you may have to leave a set percentage of your assets to each of your children, for example). Understanding these laws and planning accordingly is essential for Americans living abroad.
Understanding US estate tax treaties
US estate tax treaties can play an important role in clarifying international transfer taxes. These bilateral agreements, signed with 15 foreign countries, modify the rules regarding estate and gift taxes between nations.
Each treaty differs in content and protections afforded, but they all seek to establish guidelines for determining a decedent’s domicile, property situs, and the application of tax credits to prevent double taxation.
Utilizing offshore entities and implementing advanced tax planning strategies can help minimize tax liabilities significantly.
Another way to mitigate double taxation is to claim the Foreign Death Tax Credit, which allows Americans to claim US tax credits to the value of foreign taxes paid to reduce their US tax bill.
Creating an international estate plan
Once you understand the laws in both countries and how they will affect your estate planning, your next step should be to discuss your plans and wishes with an expat specialist financial advisor. They will advise you on the best strategy to achieve your estate planning aims. To enact the strategy, you will often need to employ an attorney both in the US and in your country of residence (assuming you have assets in both countries) who are used to working with expats and liaising internationally, to create parallel wills that satisfy the laws in both jurisdictions. A plan in or tailored to a single country may lead to unintended and unwanted consequences when executed elsewhere.
Consulting with an experienced international financial advisor is invaluable in navigating these complexities. They will also review any existing trusts, as trust treatment, while useful in the US, varies widely in other countries and may not provide the same protections and guarantees.
Ultimately, planning for the inevitable and seeking expert guidance provides peace of mind amidst the excitement and challenges of living abroad. By proactively addressing estate planning considerations, you can confidently embark on your new journey knowing that your affairs are in order and your loved ones are protected.
If you have any questions about financial planning as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.