Estate Planning in a Global Economy

Owning a vacation home in Mexico or retaining Canadian citizenship are just two scenarios that can create complex estate planning and tax issues. Below are five scenarios that can affect estate planning in a global economy.

1. Owning a home in Mexico

A home in Mexico is likely acquired through a fideicomiso (similar to a trust), and the IRS considers fideicomios to be trusts that are subject to reporting requirements for foreign trusts. As a result, homeowners must file Form 3520 and 3520-A every year to stay in compliance with IRS regulations. Additionally, after March 18, 2010, homeowners who use or let relatives use the home are subject to income tax on the property’s fair rental value. Owners have until August 31, 2011 to come into compliance with the IRS regulations.

2. Having an Overseas Bank Account

Taxpayers must disclose on their income tax returns any interest in or signatory power over any foreign financial account. If the account balance is $10,000 or more, the taxpayer must provide a Report of Foreign Bank and Financial Accounts; failure to do so can result in both civil and criminal liabilities.

3. Having a spouse who is a non-US citizen

If a spouse is a non-US citizen, then lifetime gifts received by that spouse are limited to $130,000 annually before credit against gift tax kicks in. A resident spouse’s tax credit begins immediately for gifts made at death to a non-citizen spouse. Using a Qualified Domestic Trust can help reduce the tax bill and preserve tax credits.

4. Born in the U.K.

Taxpayers who are U.S. residents with U.K. domiciles of origin will have a U.K. tax of 20% on any assets transferred to a U.S. revocable trust that exceed the U.K. nil rate band. The U.K. also taxes 6% of the value of trust assets every ten years during the taxpayer’s lifetime. Additionally, if the taxpayer is deemed a U.K. domiciliary at death, then the U.K. will tax the trust at a 40% rate.

5. Naming a non-U.S. citizen as a successor trustee

If a non-U.S. citizen begins serving as a successor trustee, the trust becomes a foreign trust for tax purposes. The trust will then be subject to all foreign reporting requirements on any income it generates.

See Laura Zwicker, Tips for estate planning and tax law compliance in a global economy, Smart Business, Jun. 1, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.