As the opportunity for international travel increases and becomes more affordable and corporations become more globalized, families have become more diversified both in terms of their country of origin and their composition. Spouses from different countries can retain their country-of-origin citizenship. Families may split time between two countries so children can learn and immerse themselves in both cultures. People may also choose to move away from their country of birth and even renounce it as they seek a new life in another country.
Diversity of citizenship among family and friends brings many rewards, but it also adds complications when estate planning. Estate planning, an already complex topic, becomes even more so when international legal issues are added to the mix. Families seeking to develop estate plans should seek legal counsel from attorneys who specialize in estate planning for international families.
Naming Noncitizens to Act as Your Representative
It is essential to name legal representatives to handle your personal affairs should you become incapacitated or die. Having a noncitizen spouse, friend, or family member as executor, trustee, or agent under a power of attorney can have unforeseen consequences if you are a U.S. citizen and own accounts and properties in the United States.
Executors and Personal Representatives
There are few restrictions on whom you can name as your executor or personal representative for your will. Therefore you can usually name a noncitizen child or spouse as your executor. As with any executor, a noncitizen executor will need to follow the state’s laws where your will is probated. Some states, such as Florida, do require that the executor of a will for a U.S. citizen be a U.S. citizen. It is important to know the requirements for your state before starting your estate planning documents.
An executor can be a time-consuming role that includes a responsibility to provide day-to-day management of property owned by the estate, collecting, safeguarding, and selling personal items, pets, and businesses. It can be very difficult for a person who lives in another country to handle these affairs. Travel and other expenses could also result in higher administration costs for the estate. It may also be more difficult for beneficiaries to legally compel an executor to fulfill the position’s duties and responsibilities if that person is not a U.S. citizen and fails to execute the estate properly.
A revocable trust is an excellent tool to provide a way to administer an estate while avoiding probate. Its many benefits have led to widespread use. If you name a non-U.S. citizen or a U.S. citizen who resides outside of the U.S. as a successor trustee, there is the potential for the Internal Revenue Service (IRS) to treat the trust as a foreign trust. If this occurs, it could lead to adverse tax consequences for the trust’s beneficiaries. Specific tests may be applied to a trust to determine whether it might qualify as a foreign trust. Drafter’s of estate plans for trusts with non-citizen trustees or successor trustees must be familiar with the sometimes complex tests used when establishing a trust. One way to help mitigate this concern is to name a U.S. citizen who resides in the United States as a co-trustee to serve alongside the noncitizen trustee. Another concern is that naming a trustee who resides outside of the United States may subject the trust to the laws of the trustee’s country and potential taxation by that country.
Hiring a professional trustee such as a U.S. corporation, bank, or accounting firm that routinely provides this service is another possibility. Hiring a professional trustee in the U.S. can help protect your trust beneficiaries from unwanted negative tax and legal consequences. You can anticipate higher fees for a professional trust administrator. As always, weighing costs and benefits, you may find the benefits of a professional trustee, such as their professionalism and efficiency, can result in greater savings to the trust, ultimately benefitting the beneficiaries.
Financial and Healthcare Agents
Some states may have specific requirements for whether a noncitizen can serve as an agent. However, in most cases, you can name any person you trust to serve as your agent under a durable financial power of attorney, healthcare power of attorney, or advance healthcare directive. The most important factor when choosing someone to act on your behalf should you become incapacitated is trust. If the person you trust most is a noncitizen, it may be worth it to name this person regardless of any hassles or inconveniences that may arise due to distance and travel requirements. If possible, a readily available U.S. citizen who has the authority and ability to act quickly because of their proximity to you, your healthcare providers, and your U.S.-based accounts and property, may be a better choice.
Another point to consider is the tax implications of naming a noncitizen or a U.S. citizen who lives in another country as a beneficiary of a U.S.-based trust or estate. An executor or trustee who pays income from an estate or trust to a foreign person as defined by the tax code is typically required to withhold 30 percent of the funds prior to making the distribution, regardless of what the tax liability will ultimately be (see note). The need to withhold this tax has the potential to add increased complexity and administrative costs to the trust while also resulting in smaller distributions to the beneficiary than the creator of the trust intended. Naming a beneficiary who resides in a foreign country may also lead to taxation of the property and accounts by the foreign country.
Finally, you should also consider the implication of having a noncitizen spouse on the unlimited marital deduction for gifts and inheritances passed between spouses when both spouses are U.S. citizens. This benefit is not available when one spouse is a noncitizen. There are complex rules that apply when determining how much wealth can be left to a noncitizen spouse free of estate taxes. Typically, when both spouses are U.S. citizens, there is an assumption that each spouse owns 50 percent of jointly owned property. This may not be the case for a noncitizen spouse. Instead, a noncitizen spouse must be able to trace their financial contribution to the purchase of the property. Failure to do that can result in incurring significant additional tax liability at the death of the citizen spouse.
To further complicate matters there are international tax treaties between the U.S. and foreign countries that may impact the withholding requirements imposed by the I.R.S. For these reasons, it is essential to have legal advice from someone familiar with these laws and your individual circumstances especially if you intend to name a foreign beneficiary in your estate documents.
The benefits of living in a global society may far outweigh these inconveniences for you and your family. Seeking additional help to understand how state, federal, and international laws are applicable to your circumstances may be all that is required.
In most cases, a foreign person is subject to US tax on its US source income. Most types of US source
income received by a foreign person are subject to US tax of 30 percent. A reduced rate, including
exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the
United States. The tax is generally withheld (Chapter 3 withholding) from the payment made to the foreign
person. See I.R.S., Publication 515 (2020), Withholding of Tax on Nonresident Aliens and Foreign
Entities, https://www.irs.gov/publications/p515 (Feb. 14, 2020).