Death and Taxes Respect No Borders
For multinational families, advanced planning teams look for global solutions.
July 24, 2008
by Lewis Schiff
Let's say you have long-time clients — a Boston-area couple in their early 60s – who plan to retire soon from their respective Fortune 100 executive positions and spend most of their time overseas at their second home in the south of France. They also want to be closer to their children: a son living in Madrid who is married to a citizen of Spain and a grown daughter now residing in London.
You also have new clients — a couple in their late 40s – who have a successful technology company they started in their native Korea and expanded to the U.S. They reside full-time in Southern California, where the husband is also a professor at a major university. They retain their Korean citizenship and maintain a home in Korea for the husband's frequent business trips and for family visits with their two young sons.
As detailed and exacting as the solutions for affluent clients may be, solutions for global affluent clients require even greater analysis of residency, taxation and risk implications when clients own assets outside of the U.S., intend to retire overseas or even have children who have settled abroad. With high-net-worth (HNW) and ultra-high-net-worth (UHNW) global families, it's not unusual for the parents to reside primarily in one country (the U.S., for example) while maintaining citizenship in another (or perhaps maintaining dual-citizenship) with adult children living around the world, some with U.S. citizenship and others becoming naturalized citizens in the country in which they married and settled. At the same the time, the family's assets are dispersed among three or four countries.
For such global families, advanced planning teams look for global solutions that often confront conflicting tax laws, jurisdictional issues and even an analysis of the price of citizenship. Affluent individuals born in the U.S. have also become more global in their outlook by taking advantage of new offshore investment opportunities such as real estate, to attain the right ratio of domestic to foreign investments and to mitigate risk. North American HNW investors have historically held the largest portion of their assets in domestic markets, according to the 2007 World Wealth Report from Merrill Lynch and Capgemini. From just 2005 to 2006, these investors increased their global allocation from 22 percent to 27 percent, as a sign of confidence in the strength of the euro and as a demonstration of interest in emerging markets and their higher returns.
The Many Flavors of Wealth Transfer Taxation
Not surprisingly, every country wants a piece when wealth can be taxed. The location of an asset, the country of domicile for owner and the jurisdiction of wills, trusts and other legal documents are important when it comes to planning for the global family.
In Spain, where the beneficiary pays the inheritance tax, the tax rate applied depends on three factors: the amount transferred, the beneficiary's relationship to the deceased and the pre-existing wealth of the beneficiary. The American-born client living in Miami might set up his estate plan to leave his son, residing in Madrid, and his daughter, living in San Francisco, identical inheritances, but they could net very different amounts.
U.S. Wills and Trusts May Not Apply Elsewhere
Although your client may have a well-designed will and trusts from a U.S. perspective, those documents may not be nearly as solid depending on the client's domicile at the time of death, the location of foreign property and even the country of residence of an heir.
A Double Whammy — Taxation of Non-Resident Aliens
Although it might not be especially comforting to the U.S. citizen whose estate is facing the highest U.S. estate tax rate, a non-resident alien has it much worse — the unified credit is only $13,000, which allows only $60,000 to transfer without the tax.
Many Canadian citizens own property in the United States, especially vacation homes in Florida and other warm locales. At the time of the owner's death, the owner's estate may owe estate tax based on the fair market value of all U.S. assets — even stock in U.S. companies. The credit available depends on the value of U.S. assets compared to total worldwide assets — the greater the percentage of U.S. assets, the higher the tax obligation.
In addition to paying the IRS estate tax, the Canadian citizen who owned U.S. property at the time of death must pay the Canadian Revenue Agency a capital gains tax on the accrued gain in value.
With such complex tax planning, wealth transfer and risk protection needs, the global family needs an advanced planning team to create comprehensive, integrated solutions. Without this team, your clients risk excessive taxation, high legal fees and delayed execution of their wishes.
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