Estate Planning Pitfall - You’re retiring to a foreign country

by Adler Pollock & Sheehan P.C.
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Adler Pollock & Sheehan P.C.

Do you have dreams of spending your retirement abroad in a tropical paradise or cultural mecca? Before you pull up stakes, be aware that your golden years may be tarnished if you don’t look into all potential estate tax and income tax implications first. Typically, you might encounter problems in the following three areas:

  1. Double taxation. If you remain a U.S. citizen, you’re still subject to the tax clutches of the United States — plus maybe taxes from your individual state — in addition to your new jurisdiction. In some cases, you can claim a credit against U.S. tax liability for taxes paid to a foreign country, but this tax break isn’t always available.

One option for avoiding U.S. taxes is to relinquish your citizenship. But this strategy raises a host of other legal and tax issues, including potential liability for a one-time “expatriation tax.”

  1. Real estate issues. If you intend to buy a home on foreign soil, you may be deterred by certain restrictions. For instance, some countries bar foreigners from owning property along a coast or within other specified boundaries. It may be possible to overcome these hurdles by using a corporation or trust to hold property, but this can result in other tax complications for U.S. citizens.
  2. Inheritances. Don’t assume that the estate and inheritance tax laws in foreign countries are comparable to the laws of our land. In certain countries, for example, a child may have a higher priority for an inheritance than a spouse, regardless of the terms of your will. This could create an estate planning calamity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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