Marta and Don have been married for almost thirty years. Marta was born in Canada and immigrated to the U.S. with her family when she was a teenager. She has maintained dual citizenship and owns property in both Canada and the U.S. Any U.S. citizen who has dual citizenship should be aware of the complex legal issues that may surface with estate planning. The issues are compounded if a U.S. citizen with dual citizenship owns property in both countries.
The law varies in countries around the world
The United States, Canada (but not necessarily Quebec), and the United Kingdom all share a common legal heritage based on English common law. Common law allows for more flexibility when determining how assets and property will be passed on to heirs and beneficiaries. In common law countries such as these, an individual can draft a Last Will and Testament or, better because of privacy, incapacity planning, and probate avoidance reasons, a Revocable Living Trust, that specifies who will receive their property and accounts and in what proportions. The individual can usually name an executor or trustee responsible for distributing these assets following state laws and directions from the probate court (or by avoiding the probate court entirely when planning with a Revocable Living Trust).
In central and South America and many European countries, inheritance laws are based on civil law instead of English common law. Civil law, which is often referred to as Napoleonic law or Roman law, can be very rigid, longer, and more detailed. The legal principles are very different when applied to determine who can inherit property, and the degree of freedom an individual has to alter inheritance rules. Middle Eastern countries usually follow Muslim inheritance laws. African and Asian countries may have a mix of local customary laws, civil law, and even English common law elements depending on the country’s origin.
Even though Canada and the U.S. share their legal heritage, there are differences between the countries. If Don and Marta developed their estate plans following U.S. state law, their heirs and beneficiaries might find that the estate will not be distributed as Marta and Don intended as the laws for heirs and beneficiaries may differ between the two countries. Marta and Don will need to seek estate planning advice and legal counsel in both the U.S. and Canada when developing their estate plan. They are likely to find that tax laws and the benefits and drawbacks of establishing trusts are different between the two countries. Designing an estate plan that follows the laws of one country can be outdated or ineffective in another.
Marta and Don live in the U.S. and travel to Canada periodically. Marta’s property in Canada comprises a small home on several hundred acres of undeveloped land. A family member lives in the house and cares for the property. Marta and Don must be familiar with both U.S. property tax laws and Canadian laws. In the U.S., there is an objective test for determining whether a person is considered a U.S. resident for income tax purposes. It is based on the number of days of the tax year the citizen is physically in the U.S. Marta and Don will also need to know how Canadian law applies.
Transfer tax implications for a U.S. citizen with dual citizenship may be influenced by the physical location of the property, the type and character of the property, the availability of tax credits between the two countries, and the existence of transfer tax (estate and gift tax) treaties that may exist between the U.S. and another country. Currently, the U.S. has estate or gift tax treaties with sixteen sovereign nations. These treaties can help determine the transfer tax consequences of holding assets in two countries and may reduce the likelihood of paying inheritance taxes on a single property in both countries. These treaties can safeguard U.S. citizens from double taxation or discriminatory tax treatment. These treaties can also make the process more orderly and fair. In countries where transfer tax treaties have not been established, there is much less certainty about how a dual citizen’s property will be taxed for inheritance tax purposes. The U.S. and Canada have a bilateral tax treaty. This treaty and its protection will be an important factor when Marta and Don develop their estate plans.
A Living Trust
Property put into a living trust for tax purposes in the U.S. may not be effective when planning for inheritance purposes in other countries. Trusts rarely translate well between countries. Holding property in a trust may actually lead to greater taxation in another country simply by being owned by a living trust. Suppose Marta and Don move to the U.K. with property held in an existing U.S. trust. In that case, the U.K. government may not recognize the trust structure. Even worse, the U.K.’s taxing authorities may actually assess capital gains taxes immediately upon the assets within the trust that have increased in value. A special capital gains tax will also be periodically assessed on Marta and Don’s trust if her Canadian property is held within the trust.
Suppose you or your spouse have dual citizenship and own significant property that could be subject to estate taxes. In that case, legal counsel can help you determine the best strategies to minimize the potentially substantial tax liabilities that may be imposed on your estate by both countries upon your death. If you have dual citizenship and need assistance with estate planning, please contact us to set up a strategy session.
Thun Financial Advisors. (2019). A Guide to International Estate Planning for Cross-Border Families, at https://thunfinancial.com/PDF/2019-Guide-to-International-Estate-Planning-for-Cross-Border-Families.pdf.