Planning for the International Client

As the world continues to emerge from the pandemic, many find themselves taking trips that they had postponed. If the pandemic taught us anything, it’s that the world has become more interconnected than ever before. It’s common to hear messages about remote work, which means that individuals can work from anywhere. By extension, that means that there is a need to understand the ramifications for clients both at home and abroad, as well as for those clients who were not born here but reside here.

When I considers estate planning for an individual, I need to ascertain the client’s citizenship and residence. In addition, I need to understand the worldwide assets of the individual. The estate of a United States (U.S.) citizen includes the worldwide assets of the citizen, regardless of the location of such assets and the individual. Under Internal Revenue Code (“Code”) Section 2010, a U.S. citizen has a permanent exclusion of $5 million, adjusted for inflation. The Tax Cuts and Jobs Act of 2017 temporarily doubled the applicable exclusion through December 31, 2025. Thus, in 2022, a U.S. citizen has an exclusion from estate taxes of $12.06 million.

The temporary doubling of the exclusion offers unique planning opportunities for U.S. citizens, regardless of their country of residence. If clients have an estate that exceeds the applicable exclusion amount, it’s vital that they begin to plan for that now, while the exclusion remains doubled.

For anyone not a U.S. citizen, residence dictates how their estate will be taxed at death. If the individual resides in the U.S., even if they are not a citizen, whether here legally or not, the Code imposes tax on such individual, exactly the same as that of a U.S. citizen. If the person moves or changes residence, the result changes dramatically. A “green card” provides Lawful Permanent Resident Alien status to the holder. Thus, the green card holder pays taxes like a resident, whether or not physically residing in the United States. Someone who is neither a citizen nor resident of the United States pays tax only on their U.S. assets; however, the Code reduces the applicable exclusion amount to $60,000, rather than the $12.06 million enjoyed by a resident or citizen of the U.S.

Let’s look at an example. Jorge was born in Mexico and is a citizen of Mexico (and is not a citizen of the United States). Although Jorge has lived in the U.S. for decades, he has no documentation. Years ago, Jorge purchased shares of stock in prior to it going public and made millions. He used those funds to purchase a ranch in California which has grown substantially in value to $12 million. If Jorge died today while living in the U.S., his estate would escape taxation because the applicable exclusion amount of $12.06 million would cover the value of his property.

Because of Jorge’s status, he faces the threat of deportation. If removed from the U.S., he would lose resident status. If he died after deportation, but while owning the ranch, his estate would face a significant estate tax liability. While the estate tax would apply only to his U.S. assets, the ranch represents a valuable asset. His non-resident exclusion would only cover $60,000, subjecting the remaining $11,940,000 of value to tax. While the first $1 million is subject to tax at graduated rates, the estate tax would apply on the amount above that at a rate of 40%. Jorge’s estate would owe over $4 million in U.S. estate taxes. If Jorge sought the services of a U.S. attorney, that attorney may have counseled that he could avoid tax exposure by owning the ranch in a foreign corporation, or by using other acceptable estate planning techniques.

Estate planning for the international client involves understanding numerous, and sometimes convoluted provisions of the Internal Revenue Code. Similarly complicated provisions govern gift and income taxation. Often, these clients need advice regarding the tax implications in another country as well, which means that I usually seek to partner with an expert from the other country to lay the best made plans understand the tax and legal circumstances that an international cliet may pose.