The long-time clients--a Boston-area couple in their early sixties--plan to retire soon from their respective Fortune 100 executive positions and spend most of their time overseas at their second home in the south of France. They also want to be closer to their children: a son living in Madrid who is married to a citizen of Spain, and a grown daughter now residing in London.
The new clients--a couple in their later forties--have a successful technology company they started in their native Korea and expanded to the U.S. They reside full-time in Southern California, where the husband is also a professor at a major university. They retain their Korean citizenship and maintain a home in Korea for the husband's frequent business trips and for family visits with their two young sons.
As detailed and exacting the solutions for affluent clients may be, solutions for global affluent clients require even greater analysis of residency, taxation, and risk implications when clients own assets outside of the U.S., intend to retire overseas, or even have children who have settled abroad. With high-net-worth and ultra-high-net-worth global families, it's not unusual to have the parents primarily residing in one country (the U.S., for example) while maintaining citizenship in another (or perhaps maintaining dual-citizenship) with adult children living around the world, some with U.S. citizenship and others becoming naturalized citizens in the country where they married and settled. At the same the time, the family's assets are dispersed among three or four countries.
For such global families, advanced planning teams look for global solutions that often confront conflicting tax laws, jurisdictional issues, and even an analysis of the price of citizenship.
Affluent individuals born in the U.S. have also become more global in their outlook by taking advantage of new offshore investment opportunities such as real estate, to attain the right ratio of domestic to foreign investments, and to mitigate risk. North American high-net-worth investors have historically held the largest portion of their assets in domestic markets, according to the 2007 World Wealth Report from Merrill Lynch and Capgemini. From just 2005 to 2006, these investors increased their global allocation from 22% to 27%, as a sign of confidence in the strength of the euro and as a demonstration of interest in emerging markets and their higher returns.
The many flavors of wealth transfer taxation
Not surprisingly, when wealth can be taxed, every country wants a piece. The location of an asset, the country of domicile for owner, and the jurisdiction of wills, trusts, and other legal documents are important when it comes to planning for the global family.
Estate tax. Some countries besides the U.S. levy an estate tax at the time of an owner's death. In England, for example, the current rate of the inheritance tax is 40% for estates above ?300,000 (about $590,836 at $1.97/British pound). For an English couple living in the U.S. but holding British passports, proving U.S. domicile could be helpful for estate and/or gift-tax purposes, to take advantage of the larger exclusion ($2 million in 2008).
Annual wealth tax. Some countries, such as France, Switzerland, Spain, and Greece, impose an annual wealth tax based on the net value of an individual's assets. Trust income may also need to be included in the calculation of this tax. The client's son who married a French citizen and settled into a comfortable Parisian life could see his global assets taxed every year on the net value above ?770,000 (about $1,139,600 using $1.48/euro). The tax starts at 0.55% and goes up to 1.8%. In a city where an upscale three-bedroom apartment in a good, but not top, area can easily cost more that twice that threshold, the annual wealth tax can be a significant haircut. If the global assets only totaled double the threshold (about $2.3 million), the annual wealth tax would be about $63,000.
Annual inheritance tax. In some countries, such as Germany, Japan, Spain, the beneficiary who receives a gift or bequest--not the deceased's estate--is taxed on its value.
Citizenship, residency, and domicile. Each factor can determine which tax is owed in which country. With the UK inheritance tax, for example, even if a client left London to take up permanent residence in Los Angeles, but made the change within the last three years, Her Majesty's Revenue & Customs Office will consider England the country of domicile.
Relationship to the deceased. The tax laws of certain countries consider the relationship between the deceased and the recipient. A child receives a high reduction in inheritance taxes owed. By contrast, a trust or a loyal employee would be subject to the least favorable tax rate.
In Spain where the beneficiary pays the inheritance tax, the tax rate applied depends on three factors: the amount transferred, the beneficiary's relationship to the deceased, and the pre-existing wealth of the beneficiary. The American-born client living in Miami might set up his estate plan to leave his son residing in Madrid and his daughter living in San Francisco identical inheritances, but they could net very different amounts.
U.S. Wills and Trusts May Not Apply Elsewhere
Although your client may have a well-designed will and trusts from a U.S. perspective, those documents may not be nearly as solid depending on the client's domicile at the time of death, the location of foreign property, and even the country of residence of an heir.
Problems with trusts. While a trust is an indispensable tool for protecting assets and transferring wealth in the U.S., United Kingdom, and most former British colonies, they're not automatically recognized elsewhere. In places such as Germany, Italy, Spain, France, Japan, South Korea, and many countries in South America, a creditor could potentially make a claim against trust assets, such as a client's vacation home.
Heirs you don't choose. In Islamic countries and those same countries where trusts can be at risk, dependents may have the right to automatically share in the distribution of an estate. The justification for the intentional disinheritance of a son, for example, would need to be proven in court.
A Double Whammy--Taxation of Non-Resident Aliens
Although it might not be especially comforting to the U.S. citizen whose estate is facing the highest U.S. estate tax rate, a non-resident alien has it much worse--the unified credit is only $13,000, which allows only $60,000 to transfer without the tax.
Many Canadian citizens own property in the United States, especially vacation homes in Florida and other warm locales. At the time of the owner's death, his estate may owe estate tax based on the fair market value of all U.S. assets--even stock in U.S. companies. The credit available depends on the value of U.S. assets compared to total worldwide assets--the greater the percentage of U.S. assets, the higher the tax obligation.
In addition to paying the IRS estate tax, the Canadian citizen who owned U.S. property at the time of death must pay the Canadian Revenue Agency a capital gains tax on the accrued gain in value.
With such complex tax planning, wealth transfer, and risk protection needs, the global family needs an advanced planning team to create comprehensive, integrated solutions. Without them, clients risk excessive taxation, high legal fees, and delayed execution of their wishes.