What are the most important elements of estate and tax planning for US expatriates? Are you planning to move out of the United States? Are you a US taxpayer who lives and works outside of the country? What are some of the key issues you need to be aware of?
Estate planning is focused upon the wishes and needs of the person(s) establishing the estate plan. How will existing assets be held? What is the best way to protect these assets while minimizing any associated risk? What happens if the grantor is incapacitated and unable to make medical or financial decisions? Who will be designated to step into these vital roles and how are associated decisions to be taken? What are the best strategies to avoid the cost and time delays associated with probate? How will your property and assets be distributed to those you care about and the causes that are important to you when you pass?
The elements of a basic estate plan are a living will and or trust, advance health care directives and associated Power of Attorney (POA) documents. The nature of associated income and assets will determine the specific structures, entities, legal documents and planning required to accomplish the goals of the grantor.
Tax planning involves an analysis of the taxpayer’s unique financial situation in an effort to manage income, gains and losses while leveraging legal incentives, tax breaks, and deductions in order to reduce net taxable income.
Estate planning and tax planning for any US taxpayer are substantially interrelated. These issues become even more extensive and complex when addressing the best interests of a US expat (or expat to be). The discipline of “transactional planning” is a central component of this essential process.
Estate and tax planning for US expatriates must, by its nature, include an element of transactional planning. Transactional planning is designed to protect assets and mitigate risk while minimizing the impact of taxation. The first step in any transactional plan is an evaluation of existing income and losses including how, when and where income and/or losses are realized. The next step is to develop a strategy that combines entities, investment vehicles, fiscal tax years (versus a forced calendar tax year) and the acceleration or deceleration of income, gains and losses.
Where (in terms of geography and tax jurisdictions) are income and losses realized? When (what month of what tax year) are income and losses realized. How (from the perspective of short or long-term capital gains or losses and/or Passive Income Gains or PIGs and Passive Activity Losses or PALs) are income, gains and losses realized. Transactional planning should structure holdings, entities, income, gains and losses in a manner which provides the greatest opportunity to secure and protect income and assets while minimizing the tax impact upon the portfolio of the US expat.
Finally, estate and tax planning for US expatriates must include an acute awareness of the FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, better known as the FBAR as well as the IRS Form 8938, the Statement of Foreign Financial Assets, among others. US expats may not realize they not only have to report income, gains and losses, they must disclose information regarding any non-US financial account to which they are a signator, a foreign grantor or non-grantor trust and your role as a beneficiary or trustor, life insurance policies, retirement accounts including offshore superannuation plans), as well as any holdings of the expat and/or their spouse in real estate, a foreign entity or corporation, stocks, bonds, mutual funds, and even life insurance.
Estate and tax planning for US expatriates requires integrated legal, tax and accounting expertise in order to ensure compliance with the IRS and international tax authorities while positioning income and the portfolio of the expatriate to minimize or eliminate risk while reducing tax exposures.
