A Guide to International Estate Planning for Cross Border Families

For US expat families, US individuals married to non-citizen spouses, non-US individuals investing in the US, and other cross-border families, a well-coordinated investment strategy is crucial. It must align seamlessly with a customized cross-border estate plan. Tailoring this estate plan requires legal and tax expertise, demonstrating an in-depth understanding of the transfer tax laws (estate, succession, gift, and generation-skipping transfer) across relevant countries. These experts should be adept at employing strategies to mitigate the impact of these taxes. This article offers an overview of international estate planning and investment approaches utilized by international and cross-border families. It also covers cross-border complexities in estate planning, including transfer tax rules, treaties, and credits.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified attorney and tax advisor before making any financial decisions.

Cross-Border Issues That Amplify Estate Tax Planning Complexity

U.S. Estate Tax Basics

U.S. taxation: Unique in scope: The US levies taxes on its citizens residing abroad. US transfer taxes apply regardless of a US citizen’s residence, property gifting, or death location. While expat Americans benefit from income tax relief through the Foreign Earned Income Exclusion, there is no equivalent for transfer taxes. Expatriates can expect US estate tax on worldwide assets, including life insurance proceeds, retirement funds, personal property, real estate, and other assets. Estate tax may also apply to certain assets transferred before death or where the decedent retained an interest.

Currently, most Americans, both at home and abroad, have limited concerns about US federal estate taxes due to significant increases in the federal estate and gift tax lifetime exclusion:

$12.06 million personal lifetime exemption (2022).
Unlimited interspousal transfers (gifts and bequests) between spouses (to citizen spouse).
Portability of unused exemption to surviving spouse: The unused exemption of the first-to-die spouse can be preserved for the second-to-die spouse through an election on the estate tax return.

With a $24.12 million-per-couple exemption, estate tax concerns are minimal for many. However, the US federal estate tax regime is subject to change, with potential policy shifts towards complete abolition or reduced exemptions. The recently doubled exemptions are scheduled to revert to pre-2017 levels in 2025. Estate planning is particularly important when a US citizen is married to a non-US citizen. The unlimited marital deduction isn’t available if the surviving spouse is a non-US citizen, increasing the likelihood of estate taxation upon the first spouse’s death. Lifetime transfers to a non-US citizen spouse can reduce the US citizen spouse’s estate, but the annual marital gift tax exclusion is limited to $164,000 (2022). Because the estate tax exclusion, marital deduction, and tax rates are subject to future change, neglecting estate planning based on current thresholds could be costly.

Estate planning challenges for expats and multinational families: Multi-jurisdictional estate planning is common for Americans and their financial advisors. A typical affluent American family might have brokerage accounts, savings accounts, and valuables in New York, a primary residence in Connecticut, a second home in Florida, and a trust in Delaware or Nevada. In addition to federal estate, gift, and generation-skipping transfer (GST) taxes, state transfer tax regimes might also affect wealth distribution to the surviving spouse, children, and future generations. This complex situation requires legal and financial expertise.

Imagine this affluent American family in a global context: a US citizen residing in Germany, married to a French citizen (a “non-US person”), with two children from a previous marriage in the US and one child from the current marriage living with the parents in Germany. They may have real property in various jurisdictions, jointly or separately titled, personal property worldwide, limited partnership interests (e.g., hedge fund, private equity, or structured products), joint brokerage accounts, individual brokerage accounts, pension funds, defined contribution plans, IRAs, Roth IRAs, and college savings accounts for the children. Numerous factors make transfer tax planning far more complex for this global family than for the multi-state family.

Image showing US and international flags, illustrating the international aspect of cross-border estate planning for families.

A Brief Overview of Contrasting International Transfer Tax Regimes

Common law vs. civil law: While US state estate tax laws have critical differences (e.g., community property treatment), these are minor compared to the international landscape. Most states share English common law, while most European, Latin American, and African nations use civil law systems based on Roman law. Civil law statutes are longer and more detailed, leaving less discretion to courts. Common law systems have concise constitutions and statutes, granting more discretion to courts in applying laws.

Planning flexibility in common law: Common law jurisdictions give individuals more discretion to design wealth distribution schemes to heirs. Wills are used to establish instructions for bequeathing wealth through probate. Trusts help bypass probate and defer or avoid estate tax. In common law, the decedent’s estate is taxed before distribution to heirs. Intestacy laws dictate property distribution if the decedent lacks a valid will or trust.

Succession and forced heirship in civil law: Civil law countries often follow a succession regime based on the Napoleonic code, known as hereditary reserve (or forced heirship), similar to common law intestacy rules. In civil law, a decedent may have limited control over wealth distribution. Civil law succession regimes often tax inheritance (i.e., upon the heirs) at distribution rather than taxing the estate before distribution. Trusts may have limited legal validity in a civil law context.

Given these fundamental legal differences in distribution and taxation, a family’s existing estate plan (designed for one legal system) can become outdated, ineffective, and even counterproductive upon relocation overseas.

Concepts of Citizenship, Residency, and Domicile

Citizenship, residency, and domicile significantly determine exposure to a country’s transfer tax regime. Expats should understand these definitions under the laws of their country of residence, work, or property ownership. The deterioration of an American’s estate plan depends on the relocation destination, integration of wealth into the new country, and the duration of stay. For example, the UK has three residence statuses with varying rules: resident, domiciliary, and deemed domiciliary.

In the US, an objective “substantial presence” test determines residency for income tax purposes. US citizens are always considered US residents for income tax purposes. Green card holders are considered US residents unless they elect non-resident status via treaty.

Transfer taxes are tied to domicile, acquired by living in a jurisdiction without intent to leave. Residency without intent to remain doesn’t create domicile, but established domicile requires an actual move outside the country to sever it. Immigrants attain US estate tax residency by moving to the US without intending to leave. Permanent resident (green card) status typically establishes domicile. There is no clear test for non-citizens to establish domicile. US courts consider various factors in determining a decedent’s domicile.

Image depicts a family analyzing a world map, representing the decision making involved in international estate planning.

Transfer Tax Situs Rules, Tax Treaties, and Foreign Tax Credits

Tax Planning Strategies: Cross-Border Pitfalls and Considerations

Transfer tax implications for expats or non-US persons depend on:

Asset nature
Asset location
Estate tax treaty between the US and the country of residence, domicile, or citizenship
Availability of tax credits in relevant jurisdictions with overlapping taxes

Understanding the Role of Situs in International Transfer Taxation

What is “Situs”?

“Situs,” Latin for “position” or “site,” refers to property location for legal purposes.

While US citizens and residents are subject to federal estate tax on worldwide assets, non-resident aliens are subject to federal estate tax only on US situs assets, making “situs” crucial in estate planning for cross-border families.

Situs generally: Tangible assets physically in the US are subject to federal estate tax, but intangible property situs rules are complex. An asset can be non-US situs for gift tax but US situs for estate tax. General situs guidelines for non-resident aliens and US estate tax exposure:

Real Property: Land, structures, fixtures in the US are US situs.
Tangible Personal Property: Property physically in the US is US situs, including physical currency.
Intangible Personal Property: US situs depends on investment character:
- Business Investment Funds: Funds used in a US trade or business and held in bank or brokerage (including domestic branches of foreign banks) are US situs.
- Personal Investment Funds:
  - Checking or Savings: Demand deposits in US banks are non-US situs, while money market funds or cash in a brokerage account are US situs.
  - Qualified Retirement Plans: Funded through US employment are US situs.
  - Stock: Issued by a US corporation is US situs, even if stock certificates are held abroad. Stock/ADRs in non-US corporations are non-US situs assets, even if purchased or held in the US.
  - Bonds: Publicly traded bonds, including treasuries, are not considered US situs due to the 1989 “portfolio exemption.” Privately offered debt instruments issued by US organizations may still be considered US situs.
  - Life Insurance and Annuities: Issued by a US licensed insurance company are considered US situs assets. Policies issued by foreign-licensed insurance companies abroad are not US situs assets.

The US situs rules are instructive for expat families with non-US persons (e.g., an American abroad married to a foreign spouse) or non-US persons with US investments. While each sovereign has its own situs rules, the US regime offers some guidance. Many jurisdictions use similar situs rules.

Tax Treaties and Foreign Tax Credits on Cross-Border Estates

The US has estate and/or gift tax treaties with fifteen countries. As of 2022, the US has Estate & Gift Tax Treaties with: Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom and Estate Tax (only) Treaties with: Canada, Finland, Greece, Ireland, Italy, the Netherlands, South Africa, and Switzerland. These treaties reduce estate taxes by mitigating double taxation and discriminatory tax treatment while allowing reciprocal administration.

The treaty determines which country can assess transfer taxes by:

Determining the decedent/donor’s domicile for transfer tax purposes.
Determining the property’s location.

Certain estate tax treaties increase the marital deduction for non-resident surviving spouses. Where both countries assess taxes, a tax credit regime may eliminate or reduce double taxation.

The estate planning team must evaluate the interplay of transfer tax regimes and treaties, considering the nature and location of property, citizenship, and domicile on net tax outcomes. Any specific benefit under the treaty must be specified in tax filings.

The United States does not negate the treaty based on citizenship of the decedent or heir.

Estate tax treaty “tiebreakers” and situs rules: Tax treaties establish tiebreaker rules. Operation depends on whether the treaty follows newer or older situs rules.

Recently ratified US estate tax treaties (Austria, Denmark, France, Germany, the Netherlands, and the United Kingdom) follow the “new” rules based on a domicile-based approach. Taxation priority is based on the decedent’s domicile. The domiciliary country taxes all transfers of property, while the non-domiciliary country taxes real property and business property with situs in that country. The domiciliary country provides foreign transfer tax credits for taxes paid to the non-domiciliary country.

Older treaties (Australia, Finland, Greece, Ireland, Italy, Japan, South Africa, and Switzerland) follow the elaborate nature/character situs rules for non-resident alien property in the United States. The situs rules of the foreign jurisdiction apply to the US person’s estate deemed to have situs in that foreign jurisdiction. These treaties vary in effectiveness in eliminating double taxation. Generally, they provide primary and secondary credits to reduce double taxation: the non-situs country grants a credit against the tax imposed by the country where the property is located. Countries may provide secondary credits where both impose tax because their individual situs laws determine that the property has situs in both or neither country.

Foreign Tax Credits in Absence of Treaty

Without a treaty, double taxation increases, but foreign transfer tax credits may provide relief. Availability hinges on:

Property being situated in the foreign country.
Property being subjected to transfer/death taxes.
Property being properly included in the gross estate.

See 26 U.S. Code § 2014 (Credit for foreign death taxes).

A foreign transfer tax credit may be unavailable due to a Presidential proclamation based on the foreign country’s failure to provide a reciprocal tax credit to U.S. citizens.

Estate Planning Strategies: Cross-Border Pitfalls and Considerations

Traditional Estate Planning Tools

Estate planning and wealth management solutions include:

Wills (US will, or US will coupled with a “situs will” for property in another country)
Trusts (living or testamentary, grantor or non-grantor, revocable or irrevocable, QDOT)
Life Insurance (Whole, Universal, Second-to-die, ILIT – irrevocable life insurance trust; for business planning, retirement, estate preservation)
Gifting Strategies (charitable, inter-spousal, and trans-generational gifting)
College Savings Plans (529s can be an effective estate tax planning tool)
Personal Investment Companies (PICs)
Cross-portfolio investment optimization

Domestic financial planners and estate planning attorneys frequently use these tools for single and multi-state US families. Offshore PICs should no longer be used for US clients due to Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC) rules, which create income tax problems that outweigh estate planning benefits. PICs may be instrumental in the financial plan of a non-US person investing in the United States.

Image featuring an open US passport, symbolizing travel, international investing and wealth management

Examples of Estate Planning Tools That May Not Travel Well

Relying on pre-departure estate planning can be risky for expat families. It is advisable to review existing estate and financial plans after major life events or relocation overseas. Standard US estate planning techniques may fail to protect wealth in cross-border situations and can be counterproductive.

Issues extend beyond this guide’s scope, but certain examples illustrate the nuances of cross-border estate planning. Tax implications and solutions change with the global family’s citizenship, domicile, residency, marital history, and assets.

Utilizing Wills in International Estate Planning

A will directs asset distribution upon death. While states have specific legal requirements for execution, the general requirements are:

Testator must be legally competent and not under undue influence.
The will must describe the property to be distributed.
The will must be witnessed by the requisite number of witnesses.

Living wills and powers of attorney direct decision-making during incapacity. Individuals with estates approaching levels that trigger transfer taxes or wanting to ensure their wishes are followed should seek legal counsel regarding will drafting and execution.

In a cross-border context, individuals should seek legal counsel specializing in estate planning in relevant jurisdictions. Some experts suggest multiple “situs” wills, each governing property distribution in the country for which it is executed. Multiple wills carry the risk of invalidating prior wills. Coordination of multiple wills is critical.

Other experts suggest one “geographic will” incorporating the laws of relevant jurisdictions. The propriety of a geographic will depends on the laws of the relevant jurisdictions and the expertise of the legal advisors.

Caution When Moving Overseas with Trust Structures

Moving overseas with an existing domestic estate plan, particularly trusts, can be problematic. A US citizen who establishes a revocable grantor trust for children and grandchildren and then moves overseas may face negative consequences, such as the trust being separately taxed upon the grantor obtaining residency in the new country. Consequences vary depending on the relocation destination and the duration of stay.

In civil law/forced heirship regimes, distributions to heirs through a trust are problematic because the beneficiary receives property from the trust, not a lineal relative (parent, grandparent, etc.).

If the expat grantor moves to Germany, the children-beneficiaries become German residents, conflicting with German gift and inheritance tax laws, exposing trust distributions to potentially higher German transfer taxes. The magnitude of unintended tax consequences might intensify over time. If the grantor and beneficiaries remain in Germany for over ten years, the tax relief offered by the US-Germany Estate and Gift Tax Treaty phases out, and trust distributions could be exposed to the highest German transfer tax rate of 50%.

Similar results may occur in France, which has a complex reporting and tax regime for trusts with French situs assets or a French domiciled settlor or beneficiary. Recent reforms in civil law jurisdictions have accommodated immigrants’ trusts, but uncertainties remain.

The dangers extend to expats relocating to common law jurisdictions. If a US citizen arrives in the UK with a US trust, UK authorities may not recognize the trust structure or consider it a UK resident and subject the trust assets to immediate income taxation on the gains within the trust. If the trust provides for a successor US trustee, a settlement (triggering UK inheritance gains taxes) could be declared on the death of the UK resident trustee (the grantor).

In Canada, a special capital gains tax is periodically assessed on trusts holding Canadian real property.

Gifting Strategies (e.g. 529s) to Reduce Your Taxable Estate

Lifetime gifting strategies are a method for reducing a taxable estate in the United States. Section 529 college savings plans have grown in popularity due to the advantages of saving early for college. These accounts allow substantial deposits (up to $160,000 in a one-time gift from joint filers covering a five-year period) and provide Roth IRA-style tax-free growth, provided the assets are used for qualified educational expenses. Grandparents and great-grandparents can use 529 plans to shrink the taxable estate and pass on wealth to grandchildren and great-grandchildren (avoiding generation-skipping transfer (GST) taxes). Section 529 accounts provide income and transfer tax-advantaged gifting opportunities for multigenerational wealth transfer, while also giving the donor control over the use of the gifted proceeds and flexibility regarding the designation of account beneficiaries.

While US expats can open and fund 529 college savings accounts, they must be aware of local country rules regarding gains. There are no treaties between the US and any foreign jurisdiction recognizing the tax-free growth of 529 accounts (or Coverdell ESAs). Therefore, gifting through a 529 plan could create detrimental tax consequences, as the donor may incur tax liability on investment gains. Alternative college savings or generational gifting strategies (including having US-based relatives open the 529 account) may be better for expats.

Estate Planning for Families That Include a Non-U.S. Citizen Spouse

Americans living abroad may marry foreigners. Even if an expat’s spouse obtains US permanent resident status, gifts and bequests to the non-citizen spouse are not eligible for the unlimited marital deduction. However, the $12.06 million (2022) lifetime exclusion applies to bequests to anyone, including a non-citizen spouse.

For estates larger than the lifetime exclusion limit, alternative estate planning strategies may be required.

Lifetime gifting to the non-citizen spouse: While a citizen can give unlimited assets to a fellow citizen spouse during their lifetime, there is a special limit of $164,000 annually (2022) for tax-free gifts to non-citizen spouses. A gifting strategy can shift non-US situs assets from the citizen spouse to the non-citizen spouse over time, reducing the citizen spouse’s taxable estate. The nature, timing, and documentation of gifts should be done with the assistance of a professional.

Qualified domestic trust (QDOT): A QDOT allows the surviving spouse to claim use of and income from the decedent spouse’s estate during their lifetime, with the QDOT assets passing to the original decedent’s heirs upon the death of the surviving spouse. With a QDOT, only distributions from principal during the surviving spouse’s life and at the surviving spouse’s death are subject to estate tax (insofar as they exceed the original decedent spouse’s exclusion). The QDOT can defer estate tax until distribution to eventual US citizen heirs when the surviving spouse is a non-US citizen.

The QDOT can be created by the will of the decedent or elected within 27 months after the decedent’s death by the surviving spouse or the executor. If the QDOT is created after death, the surviving spouse is treated as the grantor for income and transfer tax purposes. Certain transfer tax treaties provide spousal relief that may lessen the need for a QDOT.

While the QDOT trust can be useful, the tax and maintenance consequences may outweigh the benefits. Alternative solutions for providing for heirs and the maintenance of the non-citizen spouse may be more practical or tax-efficient (such as a lifetime gifting strategy). The personal and financial merits of the QDOT and alternative planning tools must be analyzed case-by-case.

Gifts/Inheritances from Foreigners

Gifts and inheritances in the US are not taxed to the beneficiary because the transfer tax system taxes transfers at the source of transfer. For transfers on death, the beneficiary receives a “step-up in basis” to the fair market value of the asset on the date of death (or the alternative valuation date, 6 months after the date of death).

For gifts, the recipient takes the donor’s original cost basis.

For American taxpayers inheriting or receiving a gift from a foreign person, the rule still applies: no income or transfer tax is due, and the beneficiary receives the donor’s basis in a gift or a full step-up in basis in a bequest. However, special disclosure rules apply to gifts or bequests received from foreign persons or entities. If the American taxpayer receives annual aggregate gifts above $17,339 (2022) from a foreign corporation or partnership, or aggregate gifts or bequests from a non-resident alien or foreign estate exceeding $100,000, the taxpayer must report the amounts and sources on IRS Form 3520, filed with their income tax return. This disclosure requirement helps the IRS flag income that may have been mischaracterized for further investigation.

Non-U.S. Persons Investing in the United States

Even modest foreign investments in the US may raise transfer tax issues: When non-US persons own US situs assets, including real estate, US corporation stocks, and tangible personal property in the US, they are generating a US estate with a smaller exemption of only $60,000. Investors residing in estate tax treaty countries may have treaty-based relief.

Non-Americans are more likely to trigger federal transfer tax liability than US citizens. While foreign investors are aware of federal and state income tax regimes, they should learn about federal and state estate and inheritance tax regimes. Sophisticated estate planning tools become necessary at more modest estate levels.

Nonresident Foreign (NRA) Investors in U.S. Real Estate

The United States provides a market for investing in marketable securities. Investments in US publicly traded fixed income (bonds) do not subject foreign investors to estate or income taxes. However, the United States has not extended the investor-friendly income and estate tax rules to foreign investment in US real estate. Foreign direct ownership of US real estate subjects the non-resident’s estate to US estate tax. It may make sense for foreign non-resident investors to own U.S. Real Estate through an offshore corporate or trust structure (U.S. persons should avoid offshore corporate or trust structures) to avoid U.S. estate tax, and possibly reduce U.S. income tax as well.

From an income tax perspective, direct ownership subjects the foreign non-resident investor to preparing the annual federal income tax (U.S. 1040-NR) and state income tax return. More concerning, it will also subject the foreign, nonresident to a more complicated tax regime – the Foreign Investment in Real Property Tax Act (FIRPTA) – which creates tax complexities. Competent financial planning and investment management must recognize and design an investment plan that considers cross-border tax issues.

Cross-Portfolio Investment Optimization

While non-US investors and non-citizen spouses present obstacles for common estate planning tools, knowledge of US situs rules can construct family portfolios that are US income tax and US estate tax efficient. Cross-portfolio investment optimization is seldom discussed or implemented effectively.

A holistic approach involving all accounts available to cross-border investors (brokerage, IRA, etc.) can also help with transfer taxes. For example, for a US citizen, French spouse, and child living in Germany, with two US children from the US citizen’s prior marriage living in the US, the tax-conscious financial plan can go beyond the routine suggestion of a QDOT and design investment portfolios to minimize potential income and transfer taxes in a comprehensive wealth management strategy. The US citizen’s portfolios might be over-weighted in US stocks or ETFs, while their spouse’s portfolio might be overweight bonds, international equities, or non-US ETFs.

This approach allows for superior after-tax returns to achieve goals and greater wealth transfer to heirs. Solutions can be modified with ownership structuring (e.g., the non-citizen spouse might own securities through a trust or offshore company), designed with legal and tax advice from competent consultants in the relevant jurisdictions. Indirect ownership can be a means for non-US persons to own US real property.

Cross-border families and multinational asset portfolios add complexity to financial planning. Citizenship, domicile, residency, location, and character of investments, tax treaties, foreign tax credits, and the estate plan are critical variables. A savvy expat or multinational family needs to understand that the standard US estate plan may not protect wealth as intended. A team of expert advisors with cross-border legal, tax, and financial planning expertise is required to tailor a comprehensive financial plan with an estate plan and investment strategy suitable for the multijurisdictional taxation regimes.