Today, moving across the world is far more common than it used to be. More college-age students leave their home countries to pursue educational experiences abroad, and many often remain in the country in which they choose to study. Others leave their home country for a job opportunity or to start a new family of their own. Whatever the reason for leaving, many residents of the United States born in other countries that still have strong, close familial ties in those foreign countries may be at risk of losing portions of the inheritance their family members in other countries may wish to give them.
Tax Consequences
Not every country has a version of the estate tax, though the United States estate tax is not the highest estate taxing country out there according to Tax Foundation. As a result, residents of many other countries may not have to contend with an estate tax in planning to distribute their estate. Leaving an inheritance to their children outright is likely commonplace and causes little disruption to the inheritance process in many places. However, when a citizen of a foreign country wants to leave an inheritance to their child that may be a U.S. citizen, there can be estate tax complications. With the United States estate tax rate of 40 percent, this can have a significant impact on a U.S. child’s foreign inheritance.
Utilizing a Trust
For families that find themselves in this situation, utilizing a trust might be one of the best ways to avoid unintended estate tax consequences. A trust that has been structured appropriately can help avoid estate taxes that come with outright distribution to an heir, and such trusts can be incorporated by foreign parents in their own estate planning. A recent article from The Legal Intelligencer points out that there are several options for trusts that can work in this type of situation, including:
- Dynasty Trusts – A so-called “dynasty trust” is a trust established in the United States to which assets pass and an heir is typically allowed to become the trustee and make distributions to themselves;
- Foreign Grantor Trust – This type of trust is established during the parents’ lifetime in the foreign country where the parents reside and parents are responsible for their own taxes on the assets placed into the trust during their lifetime;
- Foreign Non-Grantor Trust – This type of trust has different, more complicated tax requirements that could impact an individual’s decision to structure a trust in this way.
Foreign grantor trusts will typically transform into a non-grantor trust upon the death of the parent that created it, at which point U.S. heirs will likely move the trust to the United States pursuant to provisions in the trust dealing with changing its location.
Regardless of whether you choose one of these options or another, it is important to work with an experienced estate planning attorney in the United States as well as potentially in your home country to determine if laws in your home country will allow you to create these or other types of trusts, or make other arrangements, in order to consider U.S. children in estate planning. If you are creating a trust in a foreign country, it is important that you use language in the creation of the trust that will satisfy the laws of both the foreign country as well as the United States. With careful planning, foreign parents can consider their U.S. children in responsible estate planning.