Global Wealth, Local Laws: What 8 International Estate Planning Issues Should High-Net-Worth Individuals Consider?

Navigating International Estate Planning

Today, more and more people own property in more than one country, and that requires particular consideration when planning their estate.  Traveling has become so easy that many people don’t think about how different laws can be in other countries, particularly when it comes to property ownership and estate planning.  The international traveler needs to be aware of how those laws may impact their plans.

1. International Laws and Jurisdictions

Each country has jurisdiction over assets within its borders, and each country has its laws regarding inheritance, taxation, and property rights.  Additionally, just like there are different States in the U.S. that may have different laws, some countries may also have regional differences.

Fundamentally, there are three main legal systems in the world: (1) the Common Law that we have in the U.S. and that is prevalent in the countries of the former British Empire, like Australia and Canada, (2) Civil Law, which is used in all other European and South American countries, and (3) Religious law, particularly Islamic law in north Africa and the middle east (although there are still regional differences).  Many countries, particularly in China, India, and most of Africa, supplement customary laws and traditions, or may use a combination of different legal systems.

It is important to ensure that any estate plan takes into account the different requirements, restrictions, and procedures in the different jurisdictions where someone has assets.

2. Validity of Wills and Trusts

There is an international convention on Wills, which has been ratified by 13 countries and signed by another 7, including the U.S.  However, in the U.S., the validity of a Will is a matter of State law and not federal law.  Each state has different requirements as to the validity of a Will – for example, some states accept handwritten Wills and some do not.  Most States will accept a Will that’s valid in the jurisdiction where it was created if it’s in writing and signed by the Decedent.  Many other countries will likewise accept a Will that was validly executed in the U.S.

Many attorneys side-step the issue by advising on separate Wills for each country, such that the U.S. Will only covers U.S. assets, and the Will in the foreign country only covers the assets in that country.  Care must be taken to ensure that one Will does not accidentally invalidate or override another Will, as it is standard practice for a Will to invalidate all other Wills.

Trusts are becoming more and more popular as an estate planning tool, and most common law jurisdictions have dedicated trust laws.  Additionally, more and more other jurisdictions, while not having their own dedicated trust laws, have statutes that govern trusts that were created in other countries.  For example, a Trust cannot be validly created under the laws of Switzerland, but Swiss law recognizes and regulates Trusts that are created in another country.

3. Succession Laws

Even in the U.S. regional differences can ruin an estate plan, such as Florida’s strict homestead law, or Community Property rights in California and Texas.  Those same issues are amplified internationally, especially in jurisdictions with forced heirship rules, such as many South American countries, or the ordained shares in many Islamic countries.

While in the U.S. most people believe that we can leave our assets to whoever we want, that isn’t entirely true, as State laws generally have provisions for minor children and a surviving spouse may be entitled to an elective share. Most other countries are more restrictive, dictating how part (or all) of your assets must be distributed.  In many South American countries half your assets are spoken for and under Islamic law 2/3^rd of your assets must be distributed according to specific shares.

In jurisdictions that recognize Trusts, it may be possible to sidestep any forced heirship laws by having the Trust own property, and in jurisdictions that do not recognize Trusts sometimes a corporate structure can help.

4. Real Property

Depending on the situation, there may be a difference between financial accounts, moveable property, and real estate, and particularly restrictions on ownership of real estate. Most countries in Southeast Asia do not allow any foreigners to own real estate, Australia essentially limits foreigners to new construction only, and in many parts of Switzerland, there’s a limit to the number of foreigners who can buy property.  Some countries allow for temporary ownership, such as a 50-year bank trust in Mexico’s restrictive zone, or a 99-year lease in Egypt. 

While such workarounds may work for the buyer, anyone who owns property in a country that restricts property rights should find out what the implications are for any heirs.  

Note that this doesn’t only apply to foreign countries but may also apply to tribal lands within the U.S. there are approximately 100 land-lease buildings in New York City.

5. Asset Protection and/or Liability

Assets held abroad may be safer than assets held at home, or they may be at greater risk. 

Some countries are known for their friendly asset protection laws which are used to safeguard assets from potential risks.  Jurisdictions like Belize, the Cook Islands, Lichtenstein, and Nevis are often used to safeguard assets that might otherwise be at risk, thanks to friendly laws relating to bankruptcy protection, foreign judgments, fraudulent transfers, and more.

However, some countries are particularly corrupt, and you may lose your assets to criminals, local officials, or the government itself.

U.S. citizens and permanent residents need to file tax forms with the IRS to notify the government of any assets held abroad, including assets held in trusts.

6. Tax Planning

Nobody wants to pay more taxes than is absolutely necessary.  Yet without proper planning people with assets in multiple countries may find themselves with unexpected tax bills.  U.S. income and estate taxes apply to any citizen’s income & assets held anywhere in the world, while most other countries only tax income and assets held within their borders.  While the U.S. has treaties to avoid double taxation with most countries, there can be significant differences in how some assets and transactions are treated, which can lead to unexpected results.  For example, while the U.S. has a relatively high estate tax rate, there’s also a high exemption, whereas a lower estate tax rate may be applied to more assets in another country.  Or a country could have higher income tax and lower capital gains tax rates.

7. Dual Citizenship, Nonresident Aliens, and Lawful Residents

In addition to all the above, countries may have different laws that apply to citizens, nonresident aliens, and lawful residents.  The U.S. tax code certainly makes that distinction.  Anyone who is a dual citizen, resides in another country, or has assets in another country, needs to be mindful of what rights and obligations they have.

8. Federal Estate Tax

When a U.S. citizen or resident alien passes away, the Federal government requires that estate taxes are paid on the estate.  There is a lifetime exemption, so that the first $13.61 million (in 2024) is not taxed, and only the excess is taxed.  Furthermore, assets passing to a citizen spouse receive a marital deduction, so that no assets passing to a citizen-spouse are taxed.  However, this does not apply to a spouse who is not a citizen, even if they are a permanent resident.

While assets passing to a non-citizen are not exempt from the estate tax, the tax can be deferred, by setting up a Qualified Domestic Trust (QDOT).  Essentially, no estate tax is paid on assets transferred into a QDOT, but the estate tax is payable when the assets are distributed from the QDOT.