Naming Foreign Persons in Your Estate Planning Documents
“Naming Foreign Persons in Your Estate Planning Documents, that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Travis Hayes, ACTEC Fellow from Naples, Florida. Today, we will be hearing about issues that can arise when advising clients who want to name a foreign individual as a fiduciary of their estate plan or when a beneficiary resides abroad. To give us more information on this topic, you will be hearing today from ACTEC Fellows Michelle Graham of San Diego, California; Kevin Packman of Miami, Florida; Lyat Eyal of Tel Aviv, Israel; and Patrick Harney of London, United Kingdom. With that, I will hand it over to our presenters.
Overview of US Estate Planning Abroad
Great. Thank you. So, I am just going to start off with some highlights on estate planning and starting off with the trust, because in the United States, most of us use trusts in the estate planning. As a starting point, it is important to understand that many countries around the world are civil law countries, and they do not recognize trusts. So, if you are dealing with an asset in a foreign country, understanding whether they will recognize a trust or not is going to be critical. If they do not, you are obviously not going to want to put it in your trust. Second—you are going to want to take a closer look at your will; and the standard terms under a will are often a pour-over will where the assets pour into a trust. So, if you are dealing with foreign assets, you are not going to want to rely on that will and have those foreign assets pour into the trust if that foreign country doesn’t recognize trusts.
Another important thing, keeping in mind the topic of naming foreign persons, if you are looking at naming a foreign person in the trust, most likely, I think, the trust itself will be considered a foreign trust. In part, we are going to want to look at whether there is one trustee or several trustees, but if the substantial decisions under that trust are controlled by foreign individuals, that trust will be considered a foreign trust — carrying with it a number of US tax and reporting obligations that Kevin will touch on.
Other documents that we deal with include the will, of course, and the things to consider there would be naming a foreign person as executor. You have to be careful whether that foreign country will respect that. Some countries will require, particularly if there is real estate involved, that a local resident of that country serve as the executor. Further, as I said, you want to look at that pour-over provision and determine whether it makes sense to carve out a separate provision under the will or maybe even having a separate — what they call situs will — deal with the assets that are located in that foreign country.
The other thing that can be addressed in the will is the concept of taxation and who pays for tax. Many countries, particularly civil law countries, will have an inheritance tax, which is quite different than what we have in the United States where we have an estate tax and the estate is the one that pays the tax. In the foreign country, if they have an inheritance tax, it’s the reverse. It is the recipient who will end up paying the tax. So, you can see you have a potential mismatch with the United States, where the executor is responsible for covering that tax from the estate, and in the civil law country where the beneficiary will be responsible for paying that tax. So, working through the tax provisions in the will and trying to avoid the mismatch of foreign tax credits will be important under that will.
And lastly, one of the questions that comes up — dealing with powers of attorney — is will the US powers of attorney, whether they are an advanced health care directive or a durable general power of attorney, whether those powers of attorney will be effective in or valid in a foreign country if the need arises. And we took a poll among the ACTEC Fellows as to whether that would work; and overwhelmingly their responses were ‘we might accept it, but you are better off getting a local power of attorney or an advanced health care directive in that foreign country if the US individual intends to live in that foreign country’ — just to avoid any issues with respect to whether that document will be valid or not.
As it relates to trusts, as Michelle alluded to, the default is essentially that a trust is going to be a foreign trust. For it to be a US trust, it needs to satisfy the court test and control test. The court test is: only US courts can exercise jurisdiction over the trust, and control is: only US people can exercise substantial decision-making, substantial authority over the trust. As it relates to foreigners, and that is what Michelle alluded to, when you are naming people in the document, you want to make sure you are aware of the identity status of anyone who could conceivably become a trustee. And you have to take into account if they are moving and they become foreign, and they were not to begin with, because then your trust could become a foreign trust if a US settlor dies and the foreign trustee takes over. If there is a foreign trust, besides there being complications from a reporting standpoint, when a trust goes from being a US trust to a foreign trust, that is a tax event, and all the assets in the trust are deemed to be sold. There is a 12-month period in which you can reverse that to name a US person, so that they will become trustee and you eliminate the negative consequences of having that foreigner serve as trustee.
Staying with the concept of foreign trusts, however, when you are dealing with US people who have foreign family, if the foreign family have wealth, you might want to consider creating a Foreign Grantor Trust. Traditionally, foreign trusts can’t be grantor trusts. To be a grantor trust, they either need to be irrevocable or only the foreign spouse and foreign settlor are able to get income if it is an irrevocable trust. But if it is deemed to be a Foreign Grantor Trust, the foreigner would be subject to tax, possibly in their jurisdiction, and the beneficiary would not be subject to tax in the US when they are getting a distribution.
Other things to be aware of, as relates to foreign trusts, if a US person is utilizing assets that belong to a foreign trust, that is generally going to be a taxable event that you are going to have to pay fair market value for the usage of that asset. You need to pay it during a reasonable amount of time. There is no guidance as to what that really means. Similarly, if you get a loan from a foreign trust, that is a taxable event unless it qualifies as a qualified obligation. As it relates to US people serving as trustee, and they are living abroad, most of the ACTEC Fellows that we polled indicated that the local jurisdiction would recognize that individual serving in that capacity. However, depending upon the jurisdiction, the trust assets might become subject to tax in that local jurisdiction. If it is a beneficiary who lives in the jurisdiction, that may be sufficient. If the assets in the trust are located in the foreign jurisdiction, that may be sufficient for local taxation.
Additionally, the trustee is going to need to be aware of local reporting and compliance, be it trust registries, beneficial ownership registries, CRS (Common Reporting Standard), FATCA (Foreign Account Tax Compliance Act). And with that, I will turn it over to Lyat.
A Foreign Will in Israel
Thank you, Kevin. So, estate planning in Israel requires careful considerations, especially where non-residents are involved. Most importantly, Israel does not recognize foreign probate court orders, and an Israeli procedure is required in order to transfer the assets located in Israel irrespective of any probate process that takes place abroad. The procedure in Israel involves the submission of duly authenticated documentation together with an exemplified copy of the will that is submitted to probate in a US state. Also important is that executors are not regularly appointed in Israel, and if one is required for a certain estate, it cannot be a non-resident of Israel. One option to resolve some of the issues and the difficulties that I just mentioned is to have a separate Israeli will that relates specifically to Israeli assets. In connection with trusts and everything that Michelle and Kevin just mentioned, from an Israeli perspective, the appointment of a foreign resident as a trustee has no impact on the taxation of the trust. The governing factors on whether a trust is taxed in Israel are the country of residence of the grantor, the country of residence of the beneficiaries, and the location of the assets.
With respect to a durable power of attorney, if an Israeli resident signs a durable power of attorney, this area is very unique to Israel and requires a very specific process. In connection with a durable power of attorney that is prepared in a US state and signed abroad, it is very unlikely that that document is going to be accepted in Israel without a court process to confirm the validity and the appointment of the agent under that US state documentation. And with this summary, I now turn it over to Patrick.
Estate Planning Between the UK and US
Thank you, Lyat. So, I am going to focus on primarily the UK tax consequences of US clients appointing UK residents as either fiduciaries or beneficiaries under their estate planning documents. So, starting with executors, the route we have on them — taxation of executors — are for income tax purposes where all the executors are non-UK resident, the estate is non-UK resident. Where all the executors are UK resident the estate is UK resident; and when you have got a mixture of executors, some of whom are from UK and some of whom are not, then it will depend on the tax connection of the deceased; and if he is a non-UK resident and non-UK domiciled and with mixed resident executors, the estate is non-UK resident. So, applying that to a US-only person, they can appoint a UK resident as an executor as long as they are not the only executor. And if they are appointing with a US executor, then that is fine. The estate will be not resident for income tax purposes. For capital gains tax purposes, the rules are different, but there was a free step-up in basis under UK rules as well, if it is relevant. But the executors take the residence and domicile of the deceased for capital gains tax purposes.
Then turning to trusts, the rules on residents of trusts are less complicated than the US rules and kind of follow the ones I just said for executors for income tax purposes. So again, if all the trustees are UK resident, the trust is UK resident. If all the trustees are non-UK resident, the trust is non-UK resident; and if you have got mixed residents’ trustees, then if the settlor is non-UK connected, the trust would be non-UK resident. So, what that means for US attorneys advising clients is that they can actually have a UK child, say of a US parent co-trustee of their own trust, as long as it is co-trustee with a non-US resident trustee.
Turning to a point in UK residents as beneficiaries — and again that is complicated — generally, if there are beneficiaries of a trust, there won’t be any UK taxation on the distributions, assuming they are not the settlors of the trust. And then, you have the potential for double taxation, and Michelle referred to a kind of mismatch of double tax credits. So, if the trust is a US taxpayer trust, either grantor to a US person who is paying the tax or a US non-grantor trust and a UK resident receives distributions, then typically, there will be double taxation. There are ways to mitigate it, including giving the UK resident a right to the income, so you trigger tax in both countries at the same time or perhaps a properly structured loan, or there are ways to deal with it.
And then turning to attorneys under a lasting power of attorney, again it is possible to appoint UK residents’ attorneys of the US documents. Generally, the acts of the agent would be imputed to the principal. So, UK taxation shouldn’t be triggered by appointing a UK resident as attorney under a durable power of attorney, except in business situations, where perhaps, if in a business scenario, it might be possible that the UK agent could be found to be a permanent establishment of the US person if it was a business scenario.
And finally, US powers of attorney can be recognized in the UK, but you would need to apply to register them under the Court of Protection. So, if that is of concern to your clients, you will be better off having them execute a UK lasting power of attorney for property and affairs. Thank you.
Thank you to Michelle, Kevin, Lyat, and Patrick for educating us on issues relating to naming foreign persons in your estate planning documents.
You may also be interested in
This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel.
If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org.
© 2018 – 2021 The American College of Trust and Estate Counsel. All rights reserved.
Latest ACTEC Trust and Estate Talk Podcasts
An overview of comments ACTEC submitted to Treasury on 10/5/20 issues regarding proposed regulations under IRS Code Section 1061.