Estate Planning Challenges for Heirs in America
International families are often unaware of planning challenges they may face when leaving wealth to beneficiaries in the United States.
In recent years, the movement of wealthy individuals and families to the U.S. from Asia, Latin America, the Middle East and elsewhere has increased, perhaps for reasons including standard of living, security concerns, and business opportunities.
The movement of international families to the U.S. can sometimes be unplanned. Take the example of a child coming to the U.S. to attend college or graduate school and remaining after graduation to begin a professional career. The graduate may marry a U.S. resident and have children here (who are automatically U.S. citizens), and it may become convenient or even necessary to become a U.S. citizen or permanent resident. The end result is that an international family that had no intention of moving to the U.S. now has a branch of the family permanently established here.
Whether planned or unplanned, families transitioning to the U.S. often do not understand all the financial implications of their moves – and they often don’t realize that there are planning structures that can be highly beneficial to their families and heirs. Taking advantage of these planning opportunities can help to preserve wealth across generations, reduce tax implications, and better mitigate liability concerns.
Planning Problems for American Heirs
International families with children in the U.S. are often unaware of the problems that their children may face upon receiving or inheriting wealth. These problems may include:
- Estate and gift taxes. The U.S. estate and gift tax system, in most cases, taxes assets at every generational level as wealth is passed down in a family – from parent to child, from child to grandchild, from grandchild to great-grandchild, etc. International families coming from countries with different systems are often unaware of the effect the U.S. estate tax system can have on family wealth over extended periods of time.
- Income taxes. International families may not be aware that, in the U.S., taxes can be imposed at the federal, state, and local level. U.S. children who live in high-tax states may be subject to multiple layers of income tax, which can have a material impact over time on the growth of family wealth that has been received by a U.S. child.
- Tax reporting. Tax reporting can be very complicated for U.S. taxpayers who have interests in overseas trusts, companies and accounts. Rules relating to “foreign” entities and accounts have been in place for some time, but in 2014, the provisions of the Foreign Account Tax Compliance Act (FATCA) added another layer of regulatory burden to international families with U.S. connections. American taxpayers with interests in non-U.S. entities and accounts (for example, a family company overseas) may be unknowingly violating tax rules and could face significant penalties as a result.
- Liability concerns. While certain aspects of American culture may be celebrated around the world, less praised is the American penchant for litigation. Litigation and liability may arise from working in certain professions (such as medicine), engaging in business dealings, owning specific assets, or divorcing. International families are usually aware that family members in the U.S. face these risks, but they might not have strategies in place to address them.
While having an heir in the U.S. can introduce these additional planning challenges for affluent international families, your advisor can help select strategies to help address these concerns and mitigate associated risks.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.