Uncle Sam and the Case for Inheriting Foreign Assets
In 2011, I got a call from a client in Moscow. Here is what happened. The client’s uncle (let’s name him Sam) died in NY in 2009 and left a substantial inheritance to his nephew in Russia – a house worth $750,000 and a bank account of $250,000. Sam was a financially affluent, childless and unmarried man, and had no other relatives. The question posed by a client was, “How can I get it?”
Why a Will Does Little to Simplify the Process
The client’s situation was tricky, since the uncle only left a will. If there is just a will, foreign-based relatives must hire a US attorney to probate (validate) the will. According to US laws, each will has to go through probate to become valid, even if no one is objecting to its validity. The probate court’s location must be in the county of uncle’s death. While under probate, all of the uncle’s assets are frozen by the court; thus, the Russian nephew cannot use the uncle’s house or bank account. In addition, it could take up to a year and a half for the process to be completed. The contestants (if any) may question the will on many grounds – was it indeed the last and final will of the decedent, was the decedent in sound mind while executing the will etc,… Again, I want to emphasize that the will is not valid unless it passes through probate – a process by which the court has to validate it. This process is expensive (and includes court and attorney’s fees) and is impossible to complete without a lawyer.
What is the importance of a trust?
Contrary to the actual events in the story, if the uncle had left a trust, then the nephew would have been in luck. If the nephew is a beneficiary of the revocable or irrevocable trust, created by an uncle, then the nephew can get an inheritance without any legal problems. It would be disbursed to the nephew by the trustee (or trustees) of the trust, according to his uncle’s wishes, and right away, because trusts would never go to probate. The greatest thing about trusts is that it does not matter if the beneficiary is a US or a foreign national – the assets are transferred to him no matter what.
What are some issues with cross-border asset transferring?
Many people today own assets such as homes, bank accounts, and investments in a different country than the one they are currently living in. This makes it difficult for executors to transfer the assets after an individual’s death because of the taxes and inheritance issues that executors and lawyers will face. One issue is when the foreign property is not mentioned in the will. If the testator does not update the will after purchasing the property, then intestacy laws will apply, which its results may not end up in the favor of the testator.
Another common issue that may occur is when property is transferred to another country, it could be subjected to double taxation where both the U.S. estate tax and the foreign country’s estate tax will apply. The United States currently has estate tax treaties with some countries, which allows the country to tax estate and personal property located there. These countries include Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Switzerland, and the United Kingdom. Tax rates in USA alone can go up to 40 percent if assets are valued over $5.6 million as of 2017. It is best that you plan effectively so that the designated beneficiaries do not lose asset values to taxes.
What should you do if you have cross-border assets?
The process varies depending on where you live, the location of the assets, and the type of asset being transferred. There are many ways to avoid the issue of taxation on your estates. If you file a Form 3520, you can transfer your assets as gifts across countries. Transferring your assets as a gift will prevent the asset from being taxed. However, if you do not declare your assets, you may end up paying fines.
A great way to prevent situations like uncle Sam’s if you own property in a foreign country is to draft an international will. An international will is specifically created to facilitate estate planning for property across nations. However, in order to create an international will, there are certain requirements. The will must only be made by one individual. It does not need to be written by the testator, and can be in any language, but it must be signed at the end of the will by the testator, two other witnesses, and an attorney; the testator must sign each page if the will is longer than a page. If the testator is unable to sign the will, then there should be an explanation on the will. Lastly, a certificate claiming that the requirements have been satisfied must signed by an attorney and attached to the end of the will. Amid all of these requirements, there are great benefits to drafting an international will. Even if the will was drafted only in the USA, it is also valid in any region that have signed the Uniform International Wills Act. These countries include Belgium, Bosnia-Herzegovina, Canada, Cyprus, Ecuador, France, Italy, Libya, Niger, Portugal, Slovenia: the Holy See, Iran, Laos, the Russian Federation, Sierra Leone, and the United Kingdom.
If you do not want to use a will, there are other alternatives. To reiterate, a trust is one way to transfer your assets after death. It is similar to a will, but a trust differs in that it does not have to go through probate so you can safely transfer property without any legal problems even if your assets are in another country. In countries where trusts are not part of the legal system, such as Continental Europe, foundations are used to carry out the same function as a trust. Foundation allows you to transfer your assets into an entity which holds your assets and follows the proceedings that you choose after your death.
Why am I spending so much time talking about this issue?
If you want to leave your assets to somebody abroad, the best way to provide smooth transfer is to go to a reputable attorney, create a trust, and designate your relatives abroad as trust beneficiaries. This way, after your death, your relative would avoid wasting time and money on legal fees and will get everything you want to leave him without any issues. A reputable attorney, such as Inna Fershteyn, can advise you on your estate planning, including cross-border assets, so that you could avoid taxes and other legal issues.