Introduction
If you ask an attorney about how to handle foreign property as part of your estate, the attorney will probably direct you to consult a lawyer from that country who understands that country’s estate and tax law. Before you contact a foreign attorney, it helps to understand what to expect, and what your options are in regard to dispositioning the foreign property.
Understanding Estate Taxes
For starters, you need to understand how estate taxes work in the United States. If you’re an American citizen and your primary residence is in the US, your estate will be eligible for an estate tax. Fortunately, the bar for the estate tax is fairly high—it’s actually high enough that only about 0.2% of people have enough assets to qualify for estate taxes. Only individual estates worth more than $5.49 million and joint estates worth more than $11 million are subject to estate taxes in the US. While most people aren’t affected by this, those with large estates that qualify can get hit with tax rates as high as 40%. Most foreign countries have estate taxes, too, and their tax brackets can vary significantly.
Double Taxation
Estate, gift, and transfer taxes (all synonymous) are perhaps the greatest challenge for American citizens who own foreign property outside the United States. Unfortunately, the prospect of double taxation; in some countries, it’s all but guaranteed.
To simplify the issue, the United States has a treaty with 15 countries to avoid double taxation for its citizens. Countries with a treaty arrangement include the United Kingdom, Switzerland, South Africa, Norway, the Netherlands, Japan, Italy, Ireland, Greece, Germany, France, Finland, Denmark, Austria, and Australia. In these countries, as long as the property owner is an American citizen and the property in question is not the primary domicile, the property will initially be subject to the foreign country’s estate tax (if the property is worth enough to qualify for estate taxes).
Once the foreign estate taxes have been satisfied, the property will then be subject to the United States’ estate tax. If the US estate tax is higher than the foreign estate tax, the decedent’s estate will be issued a credit by the IRS equal to the foreign tax, and the estate will then pay the difference to the IRS. If the foreign tax is higher than the US estate tax, the estate will not be taxed by the IRS at all. To put it simply, foreign property in these 15 countries will pay the higher of the two countries’ estate taxes.
Additionally, the treaties with these countries exempt personal possessions held on the foreign property from foreign taxes. While the United States lets these countries tax the property, the owner’s possessions (such as vehicles, art, jewelry, and collectibles) can only be taxed by the United States as part of the citizen’s estate.
Unfortunately, foreign property owned in a country without a treaty agreement is almost certainly subject to double taxation. In these cases, consulting with an attorney from that country is critical to assess if there are any strategies you can adopt to minimize your exposure to the country’s estate taxes.
Disposition of Property by Multiple Wills
Unless the property in question is owned by a trust or held in joint tenancy, foreign property will need to be transferred through probate according to the directions in your will. Some countries recognize American wills, but most attorneys recommend using multiple wills to address foreign property. For example, if you are an American citizen who owns property in France, you would want your primary will drafted in the United States, and you’d want a secondary foreign will in France to disposition the foreign property. For this step, it’s even more important to work with an attorney from the foreign country. If your American attorney and your foreign attorney don’t work together to carefully craft each will and ensure there isn’t any contradictory language, one will could invalidate the other and lead to massive problems in probate court.
Disposition of Property by a Supplementary Codicil
Depending on the location of your foreign property, you may be able to draft a foreign codicil to a domestic will instead of drafting two wills. This route may decrease the risk of invalidating your wills, but it still requires careful coordination between attorneys from both countries. If your foreign will or codicil becomes invalid, the foreign property will have to pass to your heir through probate court according to that country’s intestacy laws.
Disposition of Foreign Property by an International Will
A third and final option worth considering is to use an international will. Under the Uniform International Wills Act (also known as the Washington Convention), a number of countries including the United States agreed to recognize international wills that meet the following criteria:
- The will can only be for one person (no joint wills)
- The will can be handwritten or typed, in any language, and doesn’t necessarily need to be written by the grantor
- The will needs to be signed in the presence of two uninterested witnesses (not beneficiaries to your will), and in the presence of an authorized person, such as an attorney
- The two witnesses must also sign the will in the presence of an authorized person
- All signatures must be at the end of the will
- If the will consists of multiple pages, all page need to be numbered, and the grantor needs to sign each page
- The will needs to include a certificate from an authorized person, attesting that the will was drafted properly according to agreed-upon international procedures.
Unlike a supplementary will or a foreign codicil, an international will can replace a domestic will, thereby eliminating the risk of contradictory wording that may invalidate a domestic or foreign will. Therefore, if you have an international will, you may need to cancel your domestic will to ensure there is no confusion when you die.
The following countries have agreed to the Washington Convention and recognize international wills according to the Uniform International Wills Act: Belgium, Bosnia, Canada, Cyprus, Ecuador, France, Iran, Italy, Laos, Libya, Niger, Portugal, Russia, Sierra Leone, Slovenia, the United States, and the Vatican. Due to the federal system in the US, each state is required to ratify the treaty, but only 23 states have done so.
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