A recent inquiry came in by email. Let’s call the corresondent by his initials. RH is a U.S. citizen, married to a non-U.S. citizen. They live in Australia. He and his wife have assets and retirement accounts in the United States and Australia.

RH and his wife are thinking about estate planning.

It’s a complex subject, and estate planning done right in situations like this will need detailed and careful work from lawyers in the United States and Australia.

What I can do here, though, is give RH (and people like him) some general guidelines on how to think about the whole process of estate and tax planning.

The two problems

There are two problems you are trying to solve when you do estate planning — in multinational situations as well as purely domestic situations:

  • make sure the right people inherit the right things from you (let’s call this the probate problem); and
  • make sure that as little tax is imposed as possible, in both countries (let’s call this the tax problem).

This week I will talk about the probate problem, and next week will deal with the tax problem.

Solving the probate problem

The probate problem (will the right heirs inherit the right stuff at the right time, with a minimum of delay, expense, and paperwork?) is a local law problem. The results are driven by:

  • Where you live (that place will want to impose its inheritance rules on your assets when you die);
  • Where your assets are (again, the place where the assets are located will think its laws should govern the transfer of ownership at death); and sometimes
  • Your citizenship (and the citizenship of your heirs). The primary example of this is with real estate — many countries have laws that prohibit ownership of real estate by noncitizens.

Forced heirship rules

Many countries have forced heirship laws — there are rules hardwired into law that assign fixed percentages to your heirs based on their relationship to you. A surviving spouse inherits a certain percentage; children inherit a certain percentage.

In many cases, these rules will be perfectly fine for you. But sometimes they are not. For instance, someone living in a country with Islamic law will have their assets divided amongst their heirs according to local law.

In general, a country that has British colonial heritage will not have forced heirship rules. Other countries frequently will have these rules.

The best way to avoid the forced heirship rules is to not own assets, or own them in ways that have their own hard-wired “transfer at death” rules. For instance:

  • An asset held in a trust is not owned by an individual; when the individual dies, his or her personally-owned assets will be subjected to the forced heirship rules. Since assets in the trust are not owned by the deceased individual, they will not be transferred according to local laws, but instead will be transferred to heirs according to instructions built into the trust.
  • Joint tenancy with rights of survivorship work in most cases as well. The survivor’s right to ownership will trump the normal inheritance rules and the survivor will take full ownership of the asset.

It is essential for you to look at the particular rules of the country you live in. Each country’s laws are idiosyncratic. What will work in France will not necessarily work in Spain, and what will work in Lebanon will not necessarily work in Dubai.

Remember the basic planning principle here: if you don’t own an asset, local laws will not control its disposition. If you must own an asset, try to own it in a way that automatically transfers ownership to someone else when you die (e.g., joint tenancy).

Avoiding administration complexity

In situations like RH (living in Australia where there are no forced heirship rules), the probate problem is more of a practical problem. Here, you want to minimize complexity.

One area of complexity is attempting to prove the validity of a foreign will in another country. Imagine (as I have experienced) the enforcement of a will that was signed in Taiwan by a citizen of Taiwan, written in Chinese. For assets in Taiwan, the procedures are straightforward. But for transfer of U.S. real estate to the heirs of this Taiwanese citizen, imagine the headaches, delays, expense, and complexity involved in going to a Probate Court in California and asking a judge to administer the will.

The basic planning principle here is: for every country in which you have assets that must be transferred at death, have a method using local law that is understandable, easy, and predictable. This can mean:

  • Multiple wills, one in each country; or
  • One will in your home country, with non-will methods of transfer for assets in other countries.

The problem of multiple wills

The problem with multiple wills is usually “which one is the real will?” Prepared carelessly, a will usually asserts that it invalidates all other wills previously drafted.

So, if RH prepares a will in Australia (to cover his Australian assets) and later signs a will in the United States (to cover his U.S. assets), what happens when he dies? Which of the two wills should his executor administer? If the U.S. will is the controlling will, how does the Australian legal system react when RH’s executor produces the U.S. will?

By far the smarter solution is to avoid wills as much as possible. Have a single will, but everything else is held via trusts or other structures that make the transfers on death automatically, without intervention of the local legal system.

(Hint: estate planning lawyers sometimes refer to these structures as will substitutes — they do the same thing as a will, but without having to go through court proceedings to make them happen.)

Basic planning principle: you will need a lawyer in every jurisdiction where you own assets. Make sure that every lawyer knows about everything you own worldwide, so what is done in one place does not accidentally invalidate something that is done in another. If you need a will (and it is a good idea to have one as your ultimate fall-back to ensure assets transfer properly to your heirs), strive to have one only, and understand ahead of time what it means to administer that will in the courts of every country where you have assets.

Instead of using a will . . .

By now you might have seen that I heavily favor not using wills. What can you use instead?

  • Trusts. A trust does the same thing as a will: it is a document that contains your instructions for who gets to enjoy the assets you put into the trust. A trust does not get enforced by court proceedings (unless someone challenges it or demands court supervision), so there is no need to worry about conflicting country rules for inheritance. Stick the assets in a trust designed specifically for the purpose, and your heirs will inherit the assets as you have instructed.
  • Foundations. Countries whose legal systems are derived from English law have trust law as part of their laws. Other countries (everywhere in Continental Europe, for instance) typically do not have the concept of a trust as part of their legal system. Many of them use “foundations” that give much the same functionality as a trust. These entities might be called other things, but the basic principle is the same: you transfer ownership of an asset to this entity you create, and the entity holds the assets with specific instructions from you on what to do and who should receive the asset when you die.
  • Corporations. Another workaround is to use corporations. You have a piece of real estate in Ecuador. You own the real estate in a corporation. When you die, the asset you own is shares of stock of the corporation. The transfer of those shares is much easier than the transfer of the underlying real estate. What I do in situations like this is to have real estate owned by a local corporation, which in turn is owned by an offshore corporation (British Virgin Islands, Bahamas, even Delaware or Nevada), so that the actual asset transferred at death is stock of the offshore corporation — far, far away from the legal system of the country where the real estate is located.

Pension assets

Pension assets are usually a special case. It is usually fairly easy to designate people who are the successor beneficiaries of the retirement account, so the need for a will is minimized. Pension assets are more of a tax problem:

  • how will the beneficiary be taxed (for income tax) after the primary participant dies?
  • what is the impact of estate tax (USA) or local inheritance tax?

I will talk about these assets — and the tax problems — next week.

Next week, the tax problem

This write-up has barely touched on the probate problem for Americans abroad with assets in multiple countries. Again, keep these principles in mind:

  • Use ownership methods for assets that will cause automatic transfer of ownership on death to the heirs. Attempt to avoid reliance on the local legal systems of multiple countries.
  • Strive to avoid multiple wills. You do not want to accidentally invalidate a will by signing another will in another country.
  • Have a lawyer in every country, and tell every lawyer everything. With luck, this will minimize the opportunity for accidents.

Of course, the easiest solution is to simply sell assets and centralize your assets into one location. The estate planning job will be markedly easier and cheaper. 🙂

Next week I will talk about the tax problems. An American abroad has all assets exposed to the U.S. estate tax, no matter where those assets are. For an American abroad married to a noncitizen, the risks are even higher: transfers at death to a noncitizen spouse might incur an estate tax. This is something that the surviving spouse will deeply resent.

Not legal advice

I am writing this from a house on the beach in Oceanside, California. Below, one of the young boys in our party is flying a drone over the beach and water, with a video camera taking pictures of the surfers. This quick overview is just as superficial as the drone’s video. Getting cross-border estate planning wrong can add years to the administration of your estate, and multiple tens of thousands of dollars in legal fees. Go hire someone to do things right.

See you next Friday.

Phil.