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Can Dual Citizenship Ruin Your Estate Plan?

In early 2020, married actors Tom Hanks and Rita Wilson became honorary citizens of Greece.  The president of Greece bestowed this honor upon them due in large part to their humanitarian work in the country after a deadly wildfire swept through Athens in 2018. Hanks and Wilson spend considerable time in Greece as it is one of their favorite spots for extended vacations, so when this honor was offered to them, they graciously accepted. Although neither of them gave up their US citizenship, there will nevertheless be important estate planning considerations that Hanks and Wilson must address.

Any US citizen with dual citizenship must be prepared to carefully consider a variety of complex legal issues when planning for death. This is particularly true if the dual citizen owns property in one or both countries.

Passing Property to Heirs

One of the most important things for a dual citizen to understand about owning property in different countries is that the laws governing the distribution of a deceased individual’s property can vary widely and lead to results very different than intended. In countries like the United States, the United Kingdom, and Canada, which all share a legal heritage based in English common law, there generally exists much greater flexibility when it comes to an individual’s freedom to determine who should receive the individual’s property at death. Typically, in common law countries, an individual can draft a last will and testament that determines who will receive the individual’s property and in what proportions. The individual can also usually name who should be in charge of his or her final affairs.

However, in much of the rest of the Western world, a very different set of legal principles applies with respect to who can inherit property and the amount of freedom an individual has to alter the country’s default inheritance rules. In many European countries and in Central and South America, the inheritance laws originate primarily in Roman law, which can be very rigid and detailed when it comes to how property can be passed on. This type of law is often referred to as Napoleonic law or civil law. Middle Eastern countries usually follow Muslim inheritance laws, while African and Asian countries have a wide variety of hybrid approaches to inheritance that may include local customary law, civil law, and even English common law elements depending upon the legacy of Western colonization in those countries.

Thus, if US citizens like Hanks and Wilson acquired significant amounts of property located in Greece and relied solely upon estate planning completed under California law, their heirs and beneficiaries could be in for an unpleasant surprise when attempting to claim the Hanks/Wilson residence in Greece. Provisions of their estate plan that reflect their intent to leave their Greek residence to a certain family member might unknowingly be completely invalid under Greek law, and it could end up in the hands of a family member whom they had every intention of disinheriting.

It is therefore critically important that US citizens who obtain dual citizenship seek competent legal counsel in each country in which they have citizenship. Local counsel will help them understand the unique inheritance laws of each country and how those laws can be coordinated effectively to most closely reflect their testamentary intent, with reference to the appropriate legal texts, including relevant statutes, laws, international treaties, and directives that govern such issues.

Transfer Tax: Estate and Inheritance Tax Issues

When a US citizen works, resides in, or owns property in another country, whether the individual becomes a citizen of that country or not, it is imperative that the individual become familiar with the laws that govern the taxation of that property. Transfer tax implications for a US citizen with dual citizenship in another country depend upon many factors, including the physical location of the property (such as real estate or business entities), the type and character of the property (e.g., is it cash, art, stock, or precious metals?), the availability of tax credits between the two countries, and the existence of transfer tax (estate and gift tax) treaties that exist between the United States and the other country.

Generally speaking, a US citizen will be liable for estate taxes on all property the individual owns, whether it is located in the United States or in other countries. However, depending upon the country in which the property is located, and whether a treaty exists that grants a tax credit for estate taxes paid in the United States, the estate of a deceased dual citizen may escape paying inheritance taxes on certain property in both countries. Currently, only fifteen countries[1] have estate or gift tax treaties with the United States. These treaties safeguard US citizens from double taxation or discriminatory tax treatment. The treaties can also provide important provisions for handling the administration of a deceased individual’s estate to create order and fairness in the process. However, outside of these fifteen countries with such treaties, there is much less certainty with respect to how the property of the dual citizen will be taxed for inheritance tax purposes.

What If I Have a Living Trust?

Many US citizens mistakenly believe that if they have formed a revocable living trust for estate planning purposes and have transferred their property into that trust, this planning will be effective for inheritance purposes in other countries. While this may be true for US citizens who move only between states in the United States, this is not typically the case for international purposes. Unfortunately, it is actually quite rare for living trusts formed in the United States to be effectively used in other countries for estate planning purposes. Holding property in a living trust can even have significant negative tax consequences just by virtue of being owned by a living trust. For example, if a US citizen moves to the United Kingdom with property held in an existing US trust, the taxing authorities in the United Kingdom may actually assess capital gain taxes immediately upon the assets in the trust that have grown in value.[2] A similar realization of capital gains for assets held in a trust may result if a US citizen moves to Canada with a US trust in tow.[3]

It therefore bears repeating that individuals with dual citizenship who own significant property that could be subject to estate taxes should quickly obtain competent legal counsel. Such advice will help them determine appropriate strategies for minimizing the potentially significant tax liability that could be imposed by both countries on property at death. If you have dual citizenship and need assistance determining the best way to handle your estate planning needs, please give us a call. We are available for in-person and virtual consultations.

[1] Estate & Gift Tax Treaties (International), IRS, https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international (July 2, 2020).

[2] Thun Financial Advisors, A Guide to International Estate Planning for Cross-Border Families, at 12 (2019), https://thunfinancial.com/PDF/2019-Guide-to-International-Estate-Planning-for-Cross-Border-Families.pdf.

[3] Id.