Cross-border Estates and Probate
Estate and Probate for Crossborder Estates (U.S. Citizens Residing Abroad or Non U.S. Citizens with U.S. Assets).
Laws of succession, inheritance, and estate administration are inherently complex in the United States because many of the laws require a thorough understanding, application, and interplay between local, state, and federal law. Additionally, where foreign assets or foreign owners or decedents are involved, the implication of international treaties, processes, and procedures can be very difficult to navigate without professional counsel. Further, the United States is known for its increasingly complicated tax laws and the recent tax law changes have created further hurdles with achieving the tax reduction, asset transfer, and probate administration goals while remaining in compliance with all the laws, some of which may even seem contradictory.
Intestate succession is significantly more difficult in the United States because there is no will to guide the intent or factor in tax-saving and asset protection strategies that would be accomplished with proper estate planning. Some tax planning can even be accomplished post-mortem, such as establishing trusts for non-citizen spouse (Qualified Domestic Protection Trust) to enable a surviving spouse to maintain a standard of living without being subject to exorbitant estate taxes (at the federal and/or the state levels) immediately upon the spouse’s death. Although the United States provides a $10 million (adjusted for inflation and reduced to $5 million after 2025) exclusion for estate and gift tax purposes at the federal level, this exclusion amount is significantly reduced to a mere $60,000 for non-citizen or non-resident decedents. The estate tax rate is 40%. Therefore, a non-US citizen decedent domiciled abroad, with U.S. assets resulting in a net taxable estate of $1 million could be subject to taxes as high as $400,000.
Additionally, for U.S. citizens residing abroad, the implications are worse. U.S. citizens, regardless of domicile, are taxed on assets located anywhere in the world. Thus, a U.S. Citizen decedent domiciled abroad with no assets in the United States but $20 million in assets abroad could be subject to estate taxes as high as $4 million even with the $10 million (adjusted for inflation) exclusion. This situation is especially exasperated where the assets are illiquid, as stakeholder in business enterprises, or the value is in family owned land or property. Family legacies, heritages, and businesses built through decades or even generations may need to be liquidated, in part or whole to cover these taxes. A well-versed estate tax attorney can plan to reduce or even eliminate these tax implications through a series of complex trust structures, ownership distribution structuring, and lifetime gifting among other strategies. Even post-mortem, various strategies, such as maximizing the use of disclaimers, coordinating post-mortem planning with estate planning at the beneficiary level to reduce and eliminate negative tax implications can be critical in the administration of the estate.
Very often, individuals secure multiple wills or estate plans which are too simple and only address domestic assets in each jurisdiction. Most do not address tax implications and there are multiple levels of tax implications if there is any connection to the United States. Income, estate, gift, inheritance, and other taxes may be implicated. The United States is also very particular and imposes significant penalties on failure to report foreign assets or ownerships. These require an advanced level of knowledge with navigating estates with non U.S. based assets, assets owned in the United States by nonresident noncitizens, and foreign assets owned by U.S. citizens. The failure to engage attorneys who understand complexities of U.S. law, international law and the interplay between the domestic and international law can be extremely detrimental. Additionally, ability of the estate attorney to have and collaborate effectively with the counsel in other jurisdictions, especially outside of the United States is essential.
The counsel of a U.S. attorney in conjunction with counsel (Spain, for example, where Spanish residency or assets are involved) on cross border succession will save significant time, resources, and enable effective succession while preserving intergenerational wealth and family structures as intended.
While the tax issues are complex standing alone, at a more fundamental level, the probate process, that is, the administrative process of transferring assets held in the United States or by a U.S. citizen are a series of convoluted, state-specific rules that are very difficult to navigate without proper counsel.
First, where there is a U.S. will, it must be admitted to probate by way of a Petition listing all deemed assets subject to this process and valuation to the Register of Wills (or the equivalent) in the state in which the decedent was domiciled and in every state where real property assets or assets subject to state transfer laws are present. Each state has a different system of succession, applicable laws, fees and taxes and an attorney familiar and admitted to practice in multiple jurisdictions with close liaisons with counsel abroad can facilitate this process tremendously. Each of the supporting documents for the petitions, such as a certified copy of the death certificate, and even certified appraisals of value (where the value of the asset is difficult to determine or exceeds a certain threshold as determined by the particular jurisdiction), can be difficult to secure, especially where the decedent’s assets or residency lies abroad.
Next, the probate process requires filing inventories and accountancy. This process requires careful determination, search and assessments of each and every asset or every type, tangible and intangible, domestic and foreign and timely reporting to prevent penalties and additional assessments. Additionally, for estates subject to estate or inheritance tax, the due date for the tax return is nine months from the date of death. The complexities of these tax returns, the proofs required, the valuation reports, financial records, bank statements, etc. take many months to procure, evaluate, organize, and report. Most of the same documents are also required in the inventory and accounting process for probate.
The appointed personal representative of the estate, once the Petition is filed, must then open estate bank accounts and manage all the assets, including liabilities, publish notices to creditors, beneficiaries, manage and file all tax returns, including the decedent’s final income tax returns, generate and follow a distribution schedule to distribute assets to the beneficiary. There may also be tax waivers or proof of tax filings and payments required before any assets can be distributed. The estate account enables the estate representative to access funds or accounts in the estate to pay expenses, accountant fees, attorney fees, filing fees, costs, and taxes, before being allowed to distribute the balance to the beneficiaries.
In cases where there is no will, the probate process can be further complicated. The laws of succession or probate rules vary from state to state and if the asset is subject to the laws of one jurisdiction over another, without a will, the default laws of succession of the applicable jurisdiction would apply. This may result in unintended partial distributions to beneficiaries and loss of a home or business due to limitations on transfers to a surviving spouse.
Real estate in the U.S. may not generally be sold by the estate representative unless it is permitted under the Will. Without a will or a properly drafted estate plan, real property with liabilities may result in being transferred in partial interests to multiple beneficiaries, some of whom may not even be in a position to manage the real estate. Along with inheritance of this sort, the liability for property taxes and costs would also be transferred.
In the United States, a person with domicile, for example, in Pennsylvania, even if the death is abroad, for example U.K. or Spain, would be subject to estate taxes in the U.S. as well as having inheritance taxes imposed on all the property located within the state. Additionally, the probate process would have to begin in Pennsylvania with, ancillary probate opened in every jurisdiction, be it state or country, outside of the state. The documentation, valuation, legal knowledge, planning, accounting, financial management, and distribution protocols on even the smallest estates of decedents with a U.S. connection, whether by nationality, residency, asset ownership, or beneficiary residency, would be nearly impossible to navigate and complete in an efficient, effective, and tax favorable manner without proper counsel.
Founded by a former IRS estate tax attorney who audited estates exceeding $1 billion and of decedents residing and with assets both domestic and foreign, we are especially well-versed in navigating all the complexities of U.S. law and also collaborating with counsel abroad to navigate the foreign complexities in the estate administration and planning process. We have developed close professional relationships and work effectively with attorneys in multiple jurisdictions, including the United Kingdom, Spain, France, Canada, the Middle East, and India. We guide our clients every step of the way and take an active role in the administering of the estate so that our clients can focus on their families, business, and other matters, of great concern while we handle the legal implications to ensure a smooth and effective transition of a decedent’s assets.
©Royal Law Firm PLLC