Latest / The Practical Planner / International Estate Planning Strategies
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- speaker-0: The F bar fin Sen form is fileable when you have interest in bank accounts with more than $10,000 in them at any point in the calendar year. So a reasonably low threshold. No tax associated with filing the form, but if you fail to file the form, ⁓ the penalties can be as much as fifty percent of the value of the account. So half a million dollars in a French bank, it earns interest, you pay taxes on the interest because you file the interest. speaker-1: ⁓ Count. speaker-2: All right, what is up and welcome back, everyone, to another episode of the Practical Planner Podcast. I'm your co-host, Thomas Kopelman. Here with me is Lisa Weigel. And then we have Chris Nason today. Chris, thanks for joining us, man. Really appreciate it. I know you're a busy person, but really appreciate you finding time and making time to chat with us. You know, when we were in the background really thinking about like podcast episodes, one episode that we've really wanted to talk about is really on all things like international tax and estate planning. And speaker-0: Great to be here. speaker-2: That's obviously a really big episode. Like I I remember, you know, I have a bunch of clients who from different countries live in the US and you just learning about what happens if you leave, if you have a green card versus not, if you're a long term resident versus not, you know, is a really big thing. But then I also have other clients who are, you know, one spouse is US resident, one is not. They own properties in different state or different countries. And, you know, I think people will say estate planning is is complex just in the US. And tax planning is, let alone we have to bring in all these other countries. So I I couldn't think of anybody better ⁓ to have on than you. Before we dive into it, will you kind of just give everybody a quick overview of kind of who you are, what you do, and then we'll go into the topic. speaker-0: Sure. So ⁓ I'm the head of private wealth here at wealth dot com. ⁓ it's a job that I've had for about three months now and and before that was ⁓ partner at McDermott Will and Schulte, specializing in international estate planning. I was a managing editor on the Lexus and Exis treatise on international estate planning. And I also continue to teach the ⁓ estate planning classes at Stanford. speaker-1: Yeah. Law school. speaker-2: I love that. And obviously glad to have you at Wealth. I mean, Lisa's new. We got you. I mean, Wealth is just kind of bringing in all these awesome people that just kind of show the company's very serious. It's not just a tech company, but you know, we're building things with understanding tax and understanding estate planning. We're gonna kind of go back to your roots of helping people on this whole international side of things. You know, for you, what were the main things that people were really coming in and and needing help on? And where were like some of the complexities or or pitfalls? speaker-0: Sure, so I think people were coming in with maybe three different questions, right? The first is, I have an international issue. I didn't know I had that issue. You know, how can you help me? ⁓ the second was, you know, I'm thinking about leaving the US. I'd like, you know, either to get a second passport or to expatriate. How do I get out? And then the third was, you know, I'm I'm happy here now, but I'm worried about the future or I'm thinking about diversifying. How do I put assets as a safety net in speaker-1: Issue fix it. abroad to service in the event that I ever need them. speaker-2: Okay, those all probably could be their own episodes, but we're gonna find a way to hit on all three of those today. Let's start with the first one. What are those main things? speaker-0: Sure. So I think a lot of people don't realize that in even if you're a US person and in the US, you might have international issues. And that arises when, you know, if your spouse isn't a US citizen, right? You might think that having a spouse with a green card counts but doesn't, and you're subject to, you know, different transfer rules when you transfer to the US spouse. ⁓ or you might have all US citizens in your tr in your family. But one of your children has decided to move to a foreign country for a while and that child is the beneficiary. I think in the last year I've had situations where a child moved to either Japan or France or Israel and suddenly the trust was potentially subject to huge amounts of local income tax. And then the third is, you know, ownership of in ownership of assets abroad. People have assets in, you know, Swiss bank accounts or in foreign countries and often don't realize or don't have accountants who tell them. speaker-1: Trust. speaker-0: that these assets are subject to a special reporting regime. speaker-2: Okay. Those are all interesting things. I don't know if I knew every single one of them. Let's let's talk about each one a little bit more. So talk about the spouse. Well help me understand that better. speaker-0: Sure. So everyone knows about the marital deduction, right? An unlimited ⁓ gift and estate tax exemption when you transfer assets to your spouse. But that really only applies to a US citizen spouse. If your spouse isn't a US citizen, then there is no lifetime gift exemption to the spouse. And at death, you need to use a special kind of trust, a Q dot, a qualified domestic trust, instead of a Q tip. speaker-1: Which has speaker-0: A certain other restrictions to ensure that you get that marital deduction. And it's a a trap for the inwary if speaker-1: You don't realize that. speaker-2: And I in the when you first brought up, did you mention that like a green card holder would be different than you a citizen? speaker-0: Yeah, d the the marital deduction is only for US citizen spouses, right? The the policy reason is that, you know, I can leave everything to my US citizen spouse because when I die, you know, she's gonna be subject to US estate taxes and all of those assets. And so it's but the fit gets paid. The government is worried about is that I'll leave everything to a non citizen, that person will go back to her home country when when I pass away. And then when she dies, the US won't be subject to a state tax. speaker-1: For all the disks, don't get speaker-2: Interesting. Would would that so in this situation, that spouse, if they're a long term resident though, they would have an exit tax when they leave? speaker-0: If they're a green card holder and they've held the green card in more than eight calendar years, then they would have an exit tax if they meet the other requirements. These days it's not a great ⁓ policy reason. Those rules are, you know, newer but speaker-1: Yes. speaker-2: Okay, that's makes sense 'cause I was like, I may I s remember learning all about this and how the exit tax only applies to those like long term residents, long term green card card holders. So it almost seems like that's conflicting in the way that like, well, if they're leaving, they're paying you this large tax anyways. speaker-0: Right. And you could have a spouse who only had the green card for six years and they could still escape without any taxation later on. speaker-2: Yeah. Okay. So that makes sense. Let's talk about the kids now, because I think that's an interesting one that I don't think people think about, but it's actually more more common today of people taking jobs internationally or just, you know, wanting to be out of the US. speaker-0: Sure. So I mean every jurisdiction has their own tax rules and every jurisdiction deals with trusts in different ways. And, you know, depending on where you end up, that country may tax trusts in a way that's unexpected. Japan, for example. speaker-1: ⁓ and Right. speaker-0: The beneficial's proportionate interest in the trust. So you have a trust set up for two kids. One kid moves to Japan and becomes a resident. ⁓ the Japanese government is going to say there's two beneficiaries, therefore, your interest in the trust is 50%, therefore, you're taxable on 50% of the trust's income. And that's even if for US purposes it's a grantor trust, you're really getting quicksiled. You're having the grantor pay the taxes and the beneficiary pay the tax, even absent distributions. speaker-1: Yeah. speaker-0: Yeah, there's a similar rule in Israel. If one beneficiary of a trust moves to Israel and you meet certain other criteria, the entire trust income can be taxable to that benefit, can be taxable, excuse me. You can end up with some really ugly tax consequences. And so if someone's planning to move, ideally you make changes to the instrument in advance of that move. speaker-1: And so ⁓ speaker-2: There's some of those changes like potentially splitting the truss into two. speaker-0: Potentially splitting the trust, potentially making it so that it can't distribute directly to the beneficiary, but can only distribute to other trusts for that beneficiary's benefit. And so they have an indirect interest in the trust, but they don't. And again, a lot of this is very country specific, of course, but requires consultation with local council in that jurisdiction. speaker-2: Yeah. That's always the hardest part, I think, about the international size. Like one, you need to find a good attorney here that knows international. But two, then they need to find a different one. And like some of my clients is like, okay, you've you have one here in the US and then this other one's in Japan or, you know, China. And now you have like fourteen hour time differences, clients and a three hour time difference than you. You need to make sure they're qualified, but also can speak the same language. And then there's like term differences where things get like really difficult on the international side of things. speaker-0: Yeah, things get difficult fast. It's for a practitioner, it's a lot of early mornings and late nights to try to make the time zones work. But generally people who practice in the area are pretty well plugged in and can find somebody, you know, in any other jurisdiction. And if you're, you know, dealing with someone who can't find somebody, maybe that's the first red flag. speaker-2: That's fair. Yeah. A lot of the big firms, they have like kind of partner offices almost in at least the other really big popular countries that people deal with. At least that's what I found. speaker-0: Yeah, or yeah, exactly. Or they have a network of people where they can say, you know, do you know someone in Azerbaijan and you know, friend of a friend will put work with somebody there. speaker-2: Yeah. ⁓ okay. And then the third one you talked about was reporting issues. So let let's go into that because I think that's probably one that an advisor could help at least understand and like point to a client of like, hey, you know, you've moved here, you still own, you know, a condo, an ex country. Like, let's make sure this all is reported correctly. speaker-0: Sure. Yeah. So the US has a very complicated reporting system. And so, you know, obviously everyone knows you have to pay taxes on your income every year. But even if you've paid those taxes, if you hold interest in certain types of assets or you've received gifts from abroad, those need to be reported. ⁓ and the penalties for not doing so are pretty draconian. You know, for instance, the the F bar, FinCEN form. speaker-1: Okay. speaker-0: Is fileable when you have interest in bank accounts with more than $10,000 in them at any point in the calendar year. So a reasonably low threshold. No tax associated with filing the form, but if you fail to file the form, ⁓ the penalties can be as much as 50% of the value of the account. So half a million dollars in a French bank, it earns interest. You pay taxes on the interest because you file the interest on your 1040. But then you don't file the FinCEN report reporting that account, suddenly you have a potential, you know, quarter million dollar penalty. And that's every single year. speaker-2: Does that apply for so let's say like I'm from the UK and now I moved over here with my spouse to work in the US for a job? Is that like first tax year reporting? That's a part of it. Any of your accounts left? speaker-0: Yeah, once once you become subject to the US tax system, you're reporting your your foreign assets. And so it's your your foreign accounts, it's interest in foreign corporations, interest in foreign partnerships. Those have separate separate taxes. It's also gifts. So, you know, my grandma in the UK writes me a hundred thousand dollar check. I say, Thank you, grandma. That's wonderful. And my advisor tells me, Well, it's a gift, no taxes due. And the advisor's right, but there's a Forum 3520 that you need to file. to again report the gift from grandma. speaker-2: I think another time that this probably comes up is, you know, obviously it's a big thing today is people to advise other companies. And like, you know, I have a bunch of clients who they, you know, will get equity in different companies and sometimes those are overseas companies that that reporting would also become a reality and something that can't be missed. speaker-0: Exactly. And so if you have, I mean, if you meet certain thresholds and the company becomes a C a controlled foreign corporation, a CFC or a a pat a PFIC, ⁓ you need to talk to to an advisor. And so the the theme here is really anytime you have any contacts abroad, you know, talk to an advisor, talk to an accountant who know these rules so that you don't fall in pit. You know, the the IRS is surprisingly lenient about this. Like the the penalties are draconian, the rules are complicated. speaker-1: to the speaker-0: But there are a number of d voluntary disclosure programs that exist where if you go to the IRS before they come to you, you can sort of come clean and say, I failed to do this, and you can often mitigate penalties entirely or just pay, you know, a tiny fraction of what speaker-1: They otherwise would be. speaker-2: Well, at least that we know they're nice about some things. Okay. So one of the other things that you talked about early on is like for people who are, you know, one of the reasons people come to you is they're thinking about eventually leaving the country. You know, what what are some of the big planning things that that they need to know about, think about, and us advisors can kind of help coach those clients through? speaker-0: Yeah, exactly. There I mean there there's two aspects to that, right? And the first is finding another place to go. ⁓ you know, if you happen to have a second passport from birth, that's wonderful. You know, a lot of times if you have ⁓ family members, you know, Israel, Canada, other countries will give you passports based on based on lineage. And then if you don't, you either need to get, you know, a job and someone in that country to sponsor you, or you need to go by investment. speaker-1: ⁓ Right. And so speaker-0: In Portugal, you can make charitable donation of, you know, two hundred thousand euros to a charity in a dis economically disadvantaged part of the country, and you can get, you know, a Portuguese residency permit. And a lot of countries have, including the US, have similar similar regimes. So figuring out where you want to go and how you're going to stay there is is the first. The second is leaving the US. And you know there's two ways to do that. First is move to that country, retain your citizenship. speaker-1: First just speaker-0: At that point, you're still subject to US income taxes, US estate taxes, and your worldwide assets. ⁓ there's a foreign tax credit available to alleviate some of the double taxation. There's treaties with another number of countries as well. But if you don't want to do that, if you want to fully break, then you're talking about expatriating. And ⁓ when you expatriate, you're either sort of a regular expatriate, which is easy, or you're a covered expatriate. And a covered expatriate is sort of a technical way of saying a rich person is giving up their the process is pretty easy. You know, you you go to the embassy, they have an interview with you, they make sure you understand what you're doing. Then you go back actually formally means that you know, when you want to come back to the US you have to speaker-1: And then you relinquish your passport. It means that Get normal visas. speaker-0: The same way any other non-US person would. This the residency or the citizenship of the country where you've landed becomes really if it's, you know, European country, it's easier to get back in. If it's other countries, it's much more difficult. When thinking about that that sort of rich person expatriation, there's three tests to determine whether or not you're a covered expatriator. ⁓ the first is whether you have a net worth of more than two million dollars. speaker-1: So the back to the US. speaker-0: And that's sort of a non-indexed for inflation number. It's always two million dollars. The second is that you have an average US income tax liability for the previous five years. ⁓ it's this year it's two hundred and eleven thousand dollars. So meaning you've paid an average two hundred and eleven thousand dollars every year in taxes the last years. And that number is indexed for inflation. So and then the third is you can't certify that you've been in compliance with all of your US income tax. speaker-1: Over the last five years. Goes up a bit. speaker-0: So if you have those unreported foreign accounts, you need to get that clear. speaker-1: In advance. speaker-2: Okay. And and what happens if you hit any of those tests? speaker-0: Sure. So if you hit any of those tests, you're a covered expatriate. ⁓ and two reasonably unpleasant things happen. ⁓ the first is there's an exit tax when you leave. You're deemed to have sold all of your assets on the day before you expatriate. And so because you're still a US person on that day before you expatriate, you owe income taxes and all that unrealized gain. The second thing is if you make gifts or bequests to US people. The recipients of those gifts or bequests are subject to a forty percent tax on receipt, which attempts to approximate the the US gift in a state tax. speaker-2: You have a really low lifetime gifting exemption, right? Like if you're not speaker-0: At that point it's sixty thousand dollars. ⁓ so so one of the things you know you think about doing before you leave is if you can reduce your net worth to below two million dollars by giving away a lot of money, do that. And if you can't, you still fund a lot of trusts with you know your fifteen million dollars of exemption while you still have it. speaker-1: Money. speaker-2: If if you are a full time citizen or speaker-0: Green card full time citizen, right. And and and this we hinted at this earlier, but this test applies to people who are US citizens and people who've held green cards in more than eight calendar years. And so ⁓ that could be as short as six years and two days, right? If you ha if you got it on December thirty first of one year and then relinquish on January first of another year. speaker-2: Do people in this position, because they're basically be seen as unrealized gains, do they just sell and actually get the gain and raise that basis for when they're leaving so they don't bring over lower basis? Or does that does it essentially do that? speaker-0: So it if if you have a deem sale, you do get the new basis. Okay. You don't necessarily have the liquidity to pay for it. So this is really the reason why a lot of people don't do it. So you often would have to sell a lot of your assets just to have the cash. speaker-1: Yeah. speaker-2: Yeah. Do you see from from my experience, it doesn't seem like people really give up the citizenship. Like it's obviously one of the hardest things to get is citizenship or green card in the US. So most people then kind of just end up living abroad but still paying US taxes and being US citizens. speaker-0: I think that's right. ⁓ the there's a list in the federal register that's published ⁓ quarterly of all the people who've ⁓ expatriated. And I think it's around five thousand a year. I mean it's not a huge it's you know trending upwards. speaker-1: Yeah. speaker-2: Sure. So what about for the people that are like they're here on work visas and they're eventually gonna leave? Like what does that process look like for them? speaker-0: So the leaving process is really easy. You just leave. There's no expatriation at all. No tax. You're just, you're just out that year. ⁓ for the people who are here on work visas and sort of not sure if they're gonna stay, but also not sure if they're gonna leave, ⁓ there's a premium on very flexible estate planning. Right. So, you know, obviously have your core documents here. So if you get hit by a bus while you're working in the US, will and you're revocable trust and you're speaker-2: There's no tack. speaker-1: You're speaker-0: Powers of attorneys still function. But if you're starting to get to the place where you think, ⁓ I need to do planning for federal estate taxes, set up trust structures that can be unwound. Right. So that if you do go back to your country, you can unwind it and set up something better, or at least make sure there's a lot of modification provisions in there so that you can tailor it to the jurisdiction where you end up. speaker-2: How do you think about like so financial planning for these people is a little interesting, right? Well, if you know what country you're going to, I think you have like a little bit ⁓ you know, a little bit more ability. So, like for the person's like, okay, I I'm from India, I live in the US, I'm a green card holder, I might go back to India. You know, certain things like Roth accounts, they don't recognize Roth accounts. But how do you think advisors should think about planning for people who are like, I I plan to retire somewhere different, but I don't know where? Do you take like really Do you or you try to be like really cautious and be like, okay, do we avoid things like tax advantage accounts besides like a four or one K match? Do we use them and hope that we end up in the right country or tax law changes? I know that's one thing a lot of advisors think a lot about. speaker-0: Yeah, and the uncertainty is really difficult. I think if someone says, I'm definitely not going to be in the US, then of course a Roth account doesn't make a lot of sense. I think if you know someone's timing, right, like generally it's better to invest in offshore entities and offshore funds if you're not in the US. And so don't put somebody into a long term domestic US fund if they're thinking about leaving the US in a reasonably soon peri sh short period of time. speaker-2: Would the one caveat be? So let's use an example. Let's say from India, live in the US, very, very, very wealthy. You plan to go back to India, but your kids have raised their whole life in the US. So you think they'll be here? Would the one argument be like, do Roth because you're gonna have more money than you're ever gonna need? You can leave those accounts in the US and your kids will probably inherit them, will probably live in the US. speaker-0: Possibly. I think it depends a lot on the financial picture, right? I mean Roth Roth accounts are not a great thing to give your kids generally. And so if you have other assets and you're planning on supporting them in different makes sense to big dynasty trust or something. Use your IRAs while you're alive and then pass them to charity if you're at all charitably inclined. But with an idea, I mean, to your point, you look at the client situation, this is what you do always, but with an idea with an eye to the future and an idea for flexibility to make sure that, you know, you can adjust speaker-1: And Adapt as circumstances change. speaker-2: Yeah, that's fair. The only reason I thought Roth is just like the lifetime tax free compounding, then 10 years to get it out tax free after, that it could still be worth it hoping that they stay there. But if they don't, obviously you you pay a lot of gains. speaker-0: Right. And India's a different situation. But if you go to Singapore, say, ⁓ you can distribute everything to yourself. ⁓ you know, there's no gifts when you set up a trust from abroad. And so if you create a trust, it's it's automatically it's also completely GST exempt. So you can take those funds, set up a GST trust for your kids. There's ways to set it up so that you would get a step up a basis on your death anyway. speaker-1: And you just ⁓ Please. speaker-2: Even with the trust. ⁓ that's super good. ⁓ okay. What else do we need to hit on? Obviously there's a million things, but like for today's episode, what else do we need to hit on with, you know, international tax estate planning? speaker-0: Even with the trust, yeah. So I think the only other thing we haven't talked about is ownership of real property. You know, you have a a beach house in Mexico or you have a second place in Greece, and the question is, how do you deal with it? Right? Like a lot of people are put everything into a revocable trust in the US where they use a US will to transfer property into the trust. Some jurisdictions don't recognize trust. All are, you know, a little bit uncomfortable with US will. So again speaker-1: broad, right? ⁓ And you know, Mm s'immersi. speaker-0: Even if you have other property, it makes sense to consult with local on how to deal. ⁓ and oftentimes the best result is a like I have a US will that deals with everything in the world except for my property in Mexico. Mexican will that deals with my Mexican house transfers that according to my wishes. And they need to be really carefully coordinated, right? Like the standard boilerplate in every US will is speaker-1: local experts that deal with this. ⁓ Second will right. My map. And speaker-0: I revoke all of my other w wills and codicles that I've ever written, but you would want to make sure to say, except for you know, the will that I wrote to deal with the specific property also. speaker-1: Or speaker-2: That is really interesting. I actually have client who is has a spouse who's has Mexican citizenship and they're thinking about buying a second house that they might live most of the year at in Mexico City. So that is really interesting. speaker-0: The other thing people do is ⁓ in a lot of countries, ⁓ non residents or non-citizens aren't allowed to buy houses, right? This is true in Greece. And so you'll buy it through a corporation. And the corporation owns the asset, you own the corporation, and everything is fine. But coming back to that discussion we had a little bit earlier about reporting obligations and tax obligations, now you want a foreign corporation. And so what you do is you file a check the box election. speaker-1: And ⁓ speaker-2: You own that. speaker-0: To make the corporation transparent for US income tax purposes. It has no result and no impact on the local tax consequences. But then from the US, it's a nothing. You own the property directly and don't have to file those reporting obligations, don't have, you know, corporate tax to pay if you sell that house. But then from the foreign perspective, it's still a corporation owning the home. speaker-1: Thanks. ⁓ speaker-2: Hm, super interesting. Obviously like year over year you're living in it. So it's not like you're really gonna have income either. speaker-1: Yeah, unless you're, you know, of selling in. speaker-2: Super interesting. Okay. Anything any other topics you think important for today? speaker-0: Very high level, right? I like you said this could probably be its own series of podcasts. But I think we've yeah hit on the major things. And the the themes are, you know, when you have a client, just query them. You know, what's your citizenship? What's the citizenship of everyone you love about love? Where do your beneficiaries live? ⁓ and I guess the other thing I should mention is where do your decision makers, the office holders in your trusts live? Because if you have someone speaker-1: Yeah. speaker-0: you know, a trustee or an appointer or remover or protector in your trust who has ⁓ who isn't a US person that suddenly turns your trust into a foreign trust with all sorts of attendant unpleasant consequences. ⁓ there's an exit tax when the US trust becomes a foreign trust. Then there's a ⁓ very unpleasant throwback tax when a foreign trust makes distributions to US people. speaker-2: Is that only if they live abroad or like if they don't have US citizenship? Like your kid could be that person and be a US resident taxpayer just living abroad and you're fine, or would that even trigger this? speaker-0: It's a US person. So it's a US citizen or a US resident. So if your best friend is Indian and living here in the US, you're fine. But if your best friend suddenly goes back to India and ceases to be a US person, you have an issue. Yeah, you have you have a year to cure if you have this accidental foreign trust. But if after a year, if that person is still ⁓ like I said, there's a an exit tax where all the trust's assets are deemed to be and then if it's not a grantor trust, you have the throwback. speaker-1: foreign than speaker-2: Okay. That makes sense. speaker-0: Citizenship and residence of everyone you care about, family members, trust office holders, and then location of speaker-1: of asset. speaker-2: Things get confusing here fast. And like there's like so many questions and things you need to know. And I think from like an advisor standpoint, like I think a lot of us kind of want to be the like end all be all for our clients, but there's just things that are like too far out of our zone that I think where advisor steps in and says, okay, like I can be dangerous and I can educate you on certain things like the exit tax, like that would impact you. Or, you know, maybe avoiding Roth accounts if you're going to go back to a different country. But a lot of this is really like kind of stepping and pushing them in the right direction of here's the right person to hire, I can introduce you to. I'll be on those calls. Here's the things to think about, the impact. Or just knowing like, okay, hey, you just bought a house in Mexico. Like we need to make sure we get an attorney there. So we can think about the right way to own that. And, you know, like you said about the will. Like there's just things that we can be a part of and and notice that there's an issue, but we still need to bring in other professionals who are going to kind of help own this because there's a reason why the fees are very high in this side of the world. And it's because very few people know it and it's because it's super complex. speaker-0: I think that's right. I mean, I have a very close relationship with my primary care physician. But if I have a heart issue, you know, I want her to send me to a heart doctor. If I have a a kidney issue, I go to a kidney specialist. And I trust her because I know that she knows the right people to send me to. And I would feel really uncomfortable if she said, ⁓ I hear a heart murmur. I'm gonna open you up next week and look at it. Right. Like some of this is just too complicated for any one person. speaker-2: Yeah, I think that's a perfect example. ⁓ all right, Chris, thanks for the time. Really appreciate it. I think this was an awesome episode, and I'm sure we'll do more episodes diving a little bit deeper into some of these areas, but appreciate the time. Everybody, thank you for listening. ⁓ please don't forget to rate and subscribe, and we'll see you back for another episode in a couple weeks.