If you are a non-US person buying real estate or forming a business entity in the US, one consideration should be what would happen to those assets in the event of your death. Who would manage them, and how and to whom would they pass? Would your will from your home country be recognized in the US?
While this article will focus on non-tax aspects, planning for the US estate tax is an integral part of any US estate planning. For a US non-citizen and non-resident, US estate tax is payable on US real property, stock in US corporations, and certain other assets located in the US. For a non-citizen non-resident, an exclusion is available for only the first USD 60,000 of assets, unlike the exclusion of about USD 13 million available to citizens and residents. While the exclusion for non-US persons is not very generous, the limitation of the tax to certain types of assets offers planning opportunities. With the right ownership structure, preferably implemented before purchasing property or forming an entity, an asset may be excluded from the estate tax.
With US estate tax in mind, the best ownership structure for a non-US person may be outside the US, or an irrevocable trust in the US. If you wish to receive the income from the investment, then ownership might be through a non-US entity that, directly or indirectly, owned the US property or entity. The non-US entity, in turn, might be owned by a trust established outside the US, or it might be owned outright by you and covered by your home country will.
If the US investment is for the benefit of family members living in the US, then it may make sense for the US family members to own the asset, or for it to be owned by a US irrevocable trust that benefits the family members. Such strategies must take into account the US gift tax, which applies to gifts by non-US persons of certain types of assets. For example, if a home is being purchased for use by US family members, an irrevocable trust might be established in a trust-friendly US state. The trust could be funded with US treasury notes or other securities that are not subject to gift tax, and in an amount that would cover the purchase price and provide funds for maintenance.
In some cases, however, this type of estate and gift tax planning is not applicable. If you become a US resident, then the larger exclusion for citizens and residents may make such planning less important or even unnecessary. If you do not intend to hold the investment for the long term, then you may wish to purchase life insurance to cover any estate tax in the event of your premature death. Whatever the reason, if you are planning to own US assets in your own name, then a US will or revocable trust may be in order.
If you have made a will in your home country that applies to your worldwide assets, the will should be recognized in most US states, but the implementation of the will may be difficult. In order for a will to be effective, it must be admitted to probate (validated) by the court having jurisdiction over the estate. For real property, this court is a court in the state where the property is located, even if the deceased owner lived in another state or country. If the will is in a language other than English, or if it has been executed with formalities different from those used in the US, the probate court may require additional filings and explanations.
Instead of relying on a will from your home country, it may be more efficient to have a separate will that applies only to assets located in a particular US state, or perhaps to assets located anywhere in the US. If such a will is used, it must be carefully drafted in three respects:
- The US will must be coordinated with your existing will in your home country, to be sure that it does not unintentionally revoke the existing will. Coordination between counsel in the US and in your home country is essential.
- It should describe very specifically the types of assets included. The “location” of many assets can be ambiguous. For example, instead of referring to “all bank accounts in the United States,” the will might say “all accounts with any bank chartered or incorporated under the laws of the United States or any state or territory thereof.”
- The will must comply with the laws of the state where it is likely to be filed for probate after death. The will should be drafted by an attorney who is admitted to practice law in that state.
If you are contemplating a will for assets located in California or certain other states, you may wish to consider a will alternative, known as a revocable trust or living trust. These trusts differ from the irrevocable trusts described above for gifts to family members. They have the advantage of avoiding the need for a proceeding in the probate court after death. While the transfer of assets to a revocable trust is generally considered tax-neutral in the US, it may be considered a taxable event in other countries. Coordination with tax advisors in your home country would be essential before taking this step.