A Guide to the United States for International Estate Planning

Introduction

For United States citizens and residents, estate planning becomes significantly more complex when assets, family members, or business interests are located across international borders. The United States is one of the few countries that imposes estate and gift taxes on its citizens’ worldwide assets, regardless of where they live, creating unique challenges for those with global connections.

Without a comprehensive and strategic plan, individuals risk substantial tax liabilities, potential double taxation, and legal complications that can diminish the value of their estate and frustrate their intentions. This guide provides essential information on navigating the intricate landscape of US transfer taxes, offering insights into effective planning strategies designed to preserve wealth and ensure your assets are transferred efficiently and in accordance with your wishes.

Interactive Tool: Check Your US Estate Tax Exposure & Planning Options

Understanding US Transfer Tax Jurisdiction Domicile vs Residency

Determining Your Status for US Transfer Tax Planning

The United States employs different standards to determine who is subject to its income tax versus its transfer tax regimes. These transfer tax regimes specifically include:

• Estate taxes
• Gift taxes
• Generation-skipping transfer (GST) taxes

While income tax liability is based on an individual’s residency status, transfer tax liability hinges on the more subjective concept of domicile. Consequently, an individual can be a US resident for income tax purposes without being considered domiciled in the US for transfer tax planning.

For transfer tax purposes, you are considered domiciled in the US if you live there with no definite present intention of leaving. According to US Treasury Regulations, a person acquires a domicile by living in a place, even for a brief time, without a clear intention to move away later.

Ultimately, this subjective test considers various facts and circumstances to determine your intent. Courts and the Internal Revenue Service (IRS) look at a range of factors to establish domicile, including:

• The duration of your stay in the US compared to other countries.
• The size, value, and ownership status of your homes.
• The location of your valuable personal belongings.
• Where your family and close friends reside.
• Your community involvement, such as club or religious affiliations.
• The location of your primary business interests.
• Declarations of intent made on official documents like visas and wills.
• The jurisdiction of your driver’s licence and voter registration.

The Global Reach of US Taxation for Citizens & Domiciliaries

A critical aspect of international estate planning is understanding the worldwide reach of US transfer taxes. If you are a US citizen or are considered domiciled in the United States, you are subject to US estate and gift taxes on all your assets, regardless of where they are located in the world.

This means your entire global estate is within the jurisdiction of the US tax system. Furthermore, this principle applies even if you have lived outside the US for many years.

For individuals with assets in multiple countries, this creates a significant risk of double taxation. In these situations, both the US and a foreign country may seek to tax the same assets.

An Overview of Key US Transfer Taxes for Your Estate Planning

The US Estate Tax Explained

The United States imposes an estate tax on the transfer of a person’s assets after their death.

The application of this tax depends on your residency status:

• For US citizens or those considered domiciled in the US for tax purposes, this tax applies to your worldwide assets, which constitute your gross taxable estate.
• For individuals who are not US citizens or domiciliaries, the estate tax only applies to assets that are considered to have a US location, or “situs,” such as US real estate or stock in American corporations.

The tax is calculated on the value of the estate that exceeds a specific exemption amount.

Key details regarding these exemptions and rates include:

• For 2024, the lifetime estate and gift tax exemption is $13.61 million per individual.
• Any value above this exemption is taxed at a maximum rate of 40%.
• It is important for your planning to note that this high exemption amount is scheduled to be reduced by approximately half on January 1, 2026.
• Non-US domiciliaries are only entitled to a much smaller exemption of $60,000 for their US situs assets, unless a tax treaty provides more favourable terms.

Understanding the US Gift Tax & Annual Exclusions

The US gift tax applies to gratuitous transfers of property made during an individual’s lifetime.

This tax is unified with the estate tax, meaning they share the same lifetime exemption of $13.61 million for 2024, with specific applications based on residency:

• For US citizens and domiciliaries, the gift tax applies to all gifts made worldwide.
• For non-domiciliaries, it only applies to gifts of US-sited tangible personal property and real estate.

A key tool for tax-efficient wealth transfer is the annual gift tax exclusion. This provision allows you to make gifts up to a certain value each year without it counting against your lifetime exemption.

Key details of this exclusion include:

• Per-Donee Exclusion: In 2024, you can give up to $18,000 to any number of individuals without incurring gift tax or using your lifetime exemption.
• Gifts for Education and Medical Expenses: Payments made directly to an educational institution for tuition or to a medical provider for healthcare expenses are also excluded from the gift tax.
• Gifts to a Non-Citizen Spouse: There is a special, higher annual exclusion for gifts made to a spouse who is not a US citizen, which amounts to $185,000 for 2024.

The Generation-Skipping Transfer (GST) Tax

The Generation-Skipping Transfer (GST) tax is an additional tax imposed on transfers of wealth to individuals who are two or more generations younger than the person making the gift or bequest.

Important aspects of this tax include:

• It typically applies to transfers made to grandchildren or more distant descendants, whether made during life or at death.
• The purpose of the GST tax is to ensure that wealth is taxed at each generational level.

The GST tax is imposed at a flat rate of 40%, which is the same as the top estate tax rate.

Like the estate and gift taxes, there is a lifetime exemption available, with the following conditions:

• For 2024, the GST tax exemption is $13.61 million per person, which is separate from the unified estate and gift tax exemption.
• For non-US domiciliaries, the GST tax generally only applies to transfers of US situs assets that are also subject to US estate or gift tax.

Navigating Key Challenges in International Estate Planning

Special Planning Considerations for Non-US Citizen Spouses

A significant challenge in international estate planning arises when one spouse is not a US citizen. Specifically, this status impacts how assets are treated under US tax law:

• The unlimited marital deduction, which allows for tax-free transfers of any amount between citizen spouses, does not apply to a non-citizen spouse.
• Consequently, assets left to a non-citizen spouse could trigger an immediate estate tax liability upon the death of the US citizen spouse.

Careful planning is essential to manage this tax exposure effectively. To navigate these limitations, couples must consider the following rules and strategies:

• While lifetime gifts to a US citizen spouse are unlimited, gifts to a non-citizen spouse are restricted to an annual tax-free exclusion amount (which was $185,000 in 2024).
• To defer estate taxes on assets transferred at death, a special trust known as a Qualified Domestic Trust (QDOT) can be utilized.

Mitigating Double Taxation Through Tax Treaties & Credits

When an individual holds assets in multiple countries, there is a significant risk of double taxation, where both the US and a foreign country may impose estate or inheritance taxes on the same assets. For instance, if a US citizen owns property in France, both nations might claim the right to tax that property upon the owner’s death.

To address this issue, the United States has established estate and gift tax treaties with 15 other countries, including Australia, Canada, France, Germany, and the United Kingdom. Ultimately, these treaties provide a framework for avoiding double taxation by:

• Clarifying which country has the primary right to tax certain assets.
• Allowing for a credit for taxes paid in one country to offset the tax liability in the other.

If an individual’s assets are in a country without a tax treaty, it may still be possible to claim a foreign tax credit on a US tax return, although this process can be more complex.

Reconciling US Estate Plans with Foreign Inheritance Laws

A major conflict in international estate planning stems from differing inheritance laws between the US and other nations. This contrast is particularly evident when comparing different legal systems:

• In the United States, individuals generally have the freedom to distribute their assets as they see fit through a will or trust.
• However, many other countries—particularly those with civil law systems like France, Germany, and Spain—enforce strict “forced heirship” rules.

Forced heirship laws mandate that a specific portion of a deceased person’s estate must be inherited by certain family members, typically children and a surviving spouse. Consequently, these rules can directly override the wishes expressed in a US will or trust, especially concerning assets located within those foreign jurisdictions.

Specific Planning Considerations for US & Australia Cross-Border Estates

Leveraging the US-Australia Estate & Gift Tax Treaty

Individuals with connections to both Australia and the United States can benefit from specific provisions within the bilateral tax treaty between the two nations. Specifically, the US-Australia Estate Duty Convention offers a significant advantage for Australian non-residents who own US assets:

• Typically, a non-US person is only entitled to a $60,000 exemption from US estate tax for their US-sited assets.
• However, this treaty allows an eligible Australian non-resident to access the same, much higher estate tax exemption that applies to US citizens and domiciliaries.

This means that instead of the standard $60,000, they can utilise the full exemption amount (currently over $13 million), which often eliminates US estate tax liability entirely for many Australians holding US property.

Navigating Australian Trusts with US Beneficiaries & Fiduciaries

A major complication arises when an Australian trust involves a US person as a beneficiary, trustee, or appointor.

Under US tax law, specifically Sections 671-679 of the Internal Revenue Code, such a trust can be classified as a “grantor trust.” This classification means the trust is considered a disregarded entity for US income tax purposes.

Consequently, the trust’s income and assets are attributed directly to the US person who is deemed to be in control. This triggers significant US tax and reporting obligations for that individual, who must report the trust’s financial activities on their personal US tax return.

Importantly, these strict reporting requirements apply to multiple trust structures, including:

• Inter vivos trusts created during one’s lifetime.
• Testamentary trusts established by a will.

Coordinating Life Insurance & Superannuation Planning

It is essential to review Australian life insurance and superannuation policies as part of any cross-border estate plan. When evaluating these policies, keep the following factors in mind:

• Life insurance policies held within an Australian superannuation fund may not provide coverage if the insured person resides outside of Australia at the time of their death.
• You should always check the specific terms of the policy to ensure it remains valid.

Furthermore, death benefits paid from an Australian superannuation fund to a “non-tax dependant” are subject to tax in Australia.

A non-tax dependant is generally anyone other than the deceased’s spouse, minor child, or a person who was financially dependent on them. For example, if a death benefit is paid to an adult child living in the US, that payment would likely be taxed in Australia, reducing the net inheritance.

Using Trusts for Tax-Efficient Wealth Transfer & Planning

The Qualified Domestic Trust (QDOT) for Non-Citizen Spouses

When a US citizen leaves assets to a non-citizen spouse, the unlimited marital deduction does not apply, potentially triggering an immediate estate tax liability. A Qualified Domestic Trust (QDOT) defers that tax by postponing payment until the surviving spouse’s death or until principal is distributed.

To be effective, a QDOT must satisfy several US legal requirements:

• The trust must be governed by US state law or the District of Columbia.
• At least one trustee must be a US citizen or US corporation; if assets exceed $2 million, this trustee must be a bank or post a bond.
• The surviving spouse must receive all income generated by the trust.
• The trustee must have the express right to withhold estate tax from any principal distributions to the spouse.

A QDOT may be created under a will or by election within 27 months of the citizen spouse’s death. Thus, it does not eliminate estate tax but offers critical deferral, allowing the surviving spouse to benefit from the assets without an immediate tax burden.

Using Life Insurance & ILITs to Provide Estate Liquidity

US estate taxes are payable in cash, typically within nine months of death. Consequently, many heirs face a liquidity squeeze that can force the sale of valuable assets.

Owning a life insurance policy personally brings the death benefit into your taxable estate. By contrast, an Irrevocable Life Insurance Trust (ILIT) owns the policy, keeping the proceeds outside your estate and therefore free of estate tax.

Upon death, the ILIT collects the payout tax-free. The trustee can then provide liquidity in two common ways:

• Purchasing estate assets (such as real estate or business interests) at fair market value.
• Lending cash to the estate to cover taxes and other expenses.

This structure ensures heirs have ready cash to meet estate obligations without a forced sale of other assets.

Advanced Planning with Grantor Retained Annuity Trusts (GRATs)

A Grantor Retained Annuity Trust (GRAT) lets a grantor transfer future asset appreciation to the next generation while minimising gift tax. The grantor places assets in the GRAT and receives a fixed annuity for a set term.

For the strategy to work, two conditions must be met:

• The trust assets must outperform the IRS hurdle rate, so appreciation above that rate passes to beneficiaries tax-free.
• The grantor must survive the full term; otherwise, remaining assets revert to the estate and are taxed.

When those requirements align, a GRAT can shift significant tax-free growth to heirs with minimal gift-tax exposure.

Critical US Reporting Requirements for Your Foreign Assets

Reporting Foreign Bank & Financial Accounts (FBAR)

US persons are required to file a FinCEN Report 114, more commonly known as an FBAR, if they have a financial interest in or signature authority over foreign financial accounts. This reporting obligation is triggered if the combined value of all foreign accounts exceeds $10,000 at any point during the calendar year.

Importantly, the FBAR is a separate filing from your annual income tax return and must be submitted electronically with the Financial Crimes Enforcement Network (FinCEN). When preparing this submission, keep the following key details in mind:

• The standard deadline for filing is April 15, though an automatic extension to October 15 is available.
• Failure to file on time can result in substantial penalties.

Complying with the Foreign Account Tax Compliance Act (FATCA)

In addition to the FBAR, US persons may also need to comply with the Foreign Account Tax Compliance Act (FATCA) by filing Form 8938, Statement of Specified Foreign Financial Assets. This requirement applies to a wider range of assets than the FBAR, including stock in non-US corporations and interests in foreign trusts.

The reporting thresholds for FATCA are significantly higher than for the FBAR and will vary based on your location:

• For those living abroad, filing is required if foreign financial assets exceed $200,000 at the end of the year or $400,000 at any time.
• For US residents, the thresholds are lower, sitting at $50,000 at year-end or $75,000 at any point.

Disclosing Foreign Gifts & Trust Transactions on Form 3520

US persons must also report certain interactions with foreign entities and individuals using Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Ultimately, this form is essential for maintaining transparency with the IRS regarding foreign financial activities.

Specifically, you are required to file Form 3520 under the following circumstances:

• If you receive large gifts or bequests from foreign persons, with the reporting threshold being over $100,000 from a foreign individual or estate.
• To report any transactions with, or distributions received from, a foreign trust.

Conclusion

Navigating US international estate planning involves understanding complex rules around worldwide taxation, transfer taxes, and strict reporting obligations for foreign assets. Strategic use of trusts, tax treaties, and careful planning for non-citizen spouses are essential to protect your wealth and ensure your wishes are fulfilled across borders.

Given the intricate nature of these regulations, seeking specialised advice is crucial for achieving your wealth preservation and tax optimisation goals. Contact PBL Law Group’s international estate planning lawyers today for trusted guidance on developing a comprehensive international estate plan tailored to your unique circumstances.

Frequently Asked Questions