Americans Helping Americans Abroad

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Succession laws and treatment of trusts varies across countries, planning ahead is vital.

Estate planning strategies for Americans tend to be quite complicated in a pure domestic context, often involving the use of trusts. The degree of complexity increases further when Americans live outside the USA. It is important that, in these situations, legal and tax advice is sought from a professional with an international expertise that can advise on foreign (i.e. non-US) laws and efficiently liaise with the US estate planning attorney.

1. Which succession law is applicable? Do forced heirship rules apply? How can I make sure that US succession law applies?

The applicable succession law determines, among the others, how assets are disposed if the individual dies intestate or whether the dispositions provided in the will are valid.

In many jurisdictions, including most of EU countries, if an individual is resident therein, a local court would have jurisdiction on the succession and (lacking an effective choice of law) would apply the local succession law to the worldwide estate.

So, if an American citizen is resident in Italy, for instance, an Italian court would by default apply Italian succession law to the worldwide assets of the deceased.

Italian succession law provides for forced heirship rules, which require that a certain minimum percentage of the assets must be transferred to certain individuals, usually spouse and children, thus significantly limiting testamentary freedom. The application of Italian forced heirship rules may render ineffective the dispositions set out in the will and may also affect lifetime gifts or transfers to trusts since forced heirship legislation includes claw back rules that may extend to lifetime gifts or transfers to trusts.

In Italy, as well as in most of the EU, there should be the possibility to make a choice of succession law but only in favor of the law of the State of citizenship (or the law of one of the States of citizenship).

If the individual is an American citizen, he/she must choose the law of a specific State within the USA (since each of State of the USA has its own succession law). The specific US State cannot be freely chosen by the individual. It must be determined on the basis of specific rules.

It is important to correctly determine the specific US State and execute a valid choice of law, in order to be able to rule out the application of the succession law of the foreign State of residence (please note that clauses stating that the will is to be interpreted and construed on the basis of a certain legislation are not a valid choice of succession law).

2. Treatment of trusts in foreign jurisdictions

U.S. estate planning techniques often involve the use of trusts. Specific advice must be sought in the foreign State of residence to understand whether trusts are recognized (some States, e.g. Spain or Germany, do not recognize them), how they are treated for tax purposes (for instance, in some countries the creation of a revocable trust may be taxed as a gift, despite the fact that in the USA it will be treated as a grantor trust) and whether there are any specific reporting obligations (in some countries discretionary beneficiaries, including minors, may have reporting obligations, whilst other jurisdictions may lay down reporting obligations upon the trustee in case of resident beneficiaries).

It is important to provide an explicit choice of law in order to determine the law governing the trust (including if the trust is created through the will). In Italy, absent a choice of law, the law of the State with which the trust has the closest connection would apply. This may lead to the application of a law that does not provide for trusts, which may even jeopardize the creation of the trust.

Finally, living trusts may trigger unintended consequences: indeed, in some States, such as the UK, they are treated as non-grantor trusts. So, if the settlor/trustee of a living trust moves to the UK, he may assume that the trust is looked through and that foreign (i.e. non-UK) trust income and gains may benefit from the remittance system of taxation in the UK. However, the trust will be treated as a UK resident non-grantor trust in the UK, so that its worldwide income and gains is subject to tax in the UK as soon as it arises without the benefit of the remittance system of taxation, which applies only to individuals.

3. Property regime among spouses

The residence of the spouses outside the USA may affect the property regime among spouses and for instance trigger a switch from a separation of property regime to a community of property regime. This may lead to assets being owned by both spouses without them being aware, even if the assets are purchased in the name of one spouse only. This may also affect the validity of subsequent transfer of assets to trusts, to the extent that the assets are not transferred by the effective owner, and can thus jeopardize the whole US estate tax planning plan. If the issue is addressed, it can be easily dealt with as there is often great flexibility in choosing the law regulating the property regime among spouses. For instance, in Italy it is usually possible to choose the property regime of the law of any State of citizenship of at least one of the spouses.

4. Foreign tax

Many jurisdictions levy taxes on the basis of the residence of the individual. This may apply to income tax, capital gain tax, wealth tax and inheritance, estate or gift taxes. It is therefore important to check the local tax ramifications of any estate planning strategy in the country of residence with local counsel and to coordinate the US and foreign tax advice to maximize the double taxation relief.

5. Where shall I relocate outside the US?

For the Americans that are currently considering a relocation outside the USA, it is worth mentioning that some foreign States may offer favorable tax regimes for individuals relocating therein.

For instance, Italy provides for a lump sum tax regime for individuals moving their residence to Italy, hinged on the levy of annual fixed amount tax of 100,000 Euro to non-Italian source income and gains and on the exemption of non-Italian situs assets from wealth tax and inheritance and gift tax. From an immigration standpoint, In order to be able to move their residence to Italy, non-EU citizens may have recourse to the Italian investor visa: such visa can be obtained in approximately am couple of month and typically requires an investment of 500,000 Euro into Italian shares or an investment of 2 mil Euro into Italian public bonds.

The above are just some of the main estate planning areas to be addressed when an American lives or moves abroad. It is important to address them since, quoting Benjamin Franklin, “If you fail to plan, you are planning to fail.”

Nicola Saccardo is an Italian lawyer and chartered accountant specialized in Italian tax and private clients. He is also a solicitor of England and Wales. He is a partner of Charles Russell Speechlys LLP, an international law firm focused on private wealth with offices in Europe, Middle East and Far East.

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