International Estate Planning Guide: The Most Comprehensive Online Guide in the World

International Estate Planning Guide: The Most Comprehensive Online Guide in the World

by John Anthony Castro, J.D., LL.M.

International Estate Planning

  1. Introduction

This presentation will provide an overview of the planning considerations and pitfalls that advisors should consider when representing the international couple, including when different property regimes need to be considered and the applicable tax issues.

  1. U.S. Income Taxation
    1. Individuals
      1. Generally

U.S. citizens and residents generally are taxable on their worldwide income, subject to foreign tax credits for certain foreign taxes actually paid when the income to which it is attributable is reported.

In contrast, the U.S. Internal Revenue Code applies two distinctive methods of taxation to the income of foreign persons.[1] First, if a foreign person carries on an active trade or business in the U.S., U.S. federal income tax is imposed on all taxable income that is effectively connected with that U.S. trade or business (such income is referred to as “effectively connected income” or “ECI”).[2] For this purpose, taxable income is generally computed using the same rules as apply to U.S. persons. ECI of a nonresident is taxed at the usual marginal tax rates applicable to U.S. persons. A nonresident alien individual who is engaged in a U.S. trade or business must file Form 1040NR with the IRS, while a foreign corporation that is at any time during the taxable year engaged in a U.S. trade or business must file a Form 1120F.[3]

In contrast, income of a foreign person which is not effectively connected with a U.S. trade or business generally is exempt from federal income tax unless it is considered to be from sources within the U.S. and is of certain classes of income known as “fixed or determinable, annual or periodical” (“FDAP”) income. FDAP income generally includes passive income such as interest, dividends, rents, and royalties.[4] Tax on FDAP income is required to be withheld at the source by the U.S. payor at a rate of 30 percent of the gross amount of such income, unless such rates are reduced by an applicable income tax treaty election.[5] If the amounts withheld are sufficient to fully satisfy the federal income tax liability imposed for the tax year in question, the foreign taxpayer is thereby relieved of the obligation of having to file a U.S. tax return, unless the taxpayer is also engaged or deemed to be engaged in a U.S. trade or business.[6] Notably, capital gains of a nonresident that are not attributable to a U.S. trade or business are generally exempt from this FDAP withholding tax regime.[7]

  1. Real Property

Whether ownership of U.S. real property constitutes a U.S. trade or business is a question of fact which must be resolved on a case-by-case basis.[8] In general, to be engaged in a U.S. trade or business, a nonresident must carry on (directly or indirectly) activities in the U.S. that are regular, substantial and continuous. If the foreign person is engaged in a U.S. trade or business, then, as discussed above, the income from the U.S. trade or business is taxed on a net basis at the graduated rates applicable to U.S. persons generally. An election is available under which foreign persons not engaged in a U.S. trade or business with respect to ownership of U.S. real property can elect to be taxed on a net basis with respect to the rental income from such U.S. real property.[9] This allows the foreign investor to take any available deductions, for example, depreciation deductions, and to have U.S. federal income tax computed on a net basis.

Gains on the sale or exchange of U.S. real property interests (“USRPI”) are sourced (and thus taxable) within the U.S.[10] USRPI includes real estate situated in the U.S., certain associated personal property, and stock of “U.S. real property holding corporations.”[11] A “U.S. real property holding corporation” is defined as a domestic corporation, at least 50 percent of the assets of which consist of interests in U.S. real property.[12] If a corporation owning U.S. real property interests does not meet this definition, then sale of its stock producing capital gain does not trigger a § 897 withholding tax; instead, the tax will be imposed at the corporate-level when the actual U.S. real property interest is disposed of. For REITs, only dividends attributable to the disposition of a U.S. real property interest are taxed as ECI unless its publicly-traded REIT stock for which the foreign recipient of the dividend owns less than 5%. IRC § 897(h). Any gain or loss of a foreign person on a disposition of USRPI is deemed to be effectively connected with a U.S. trade or business, even if the property represented a wholly passive investment of the taxpayer. Any such gain or loss is combined with other income, gain, or loss from any business actually carried on in the U.S. by the taxpayer. As noted above, ECI is taxed to foreign persons at the same rates as apply to U.S. persons.

Upon the disposition of a USRPI, U.S. law generally imposes upon the buyer an obligation to withhold and pay over to the IRS 10 percent of the gross amount realized by the seller, often equivalent to the gross purchase price. Upon the receipt by the IRS of the 10 percent withholding along with certain compliance forms, the IRS will generally provide the foreign seller with a Form 8288-A acknowledging receipt of the amount withheld and entitling the seller, upon the filing of a U.S. federal income tax return, to a corresponding credit against its actual U.S. tax liability.[13]

  1. Trusts

There are two primary classifications of trusts that directly impact the U.S. federal tax treatment of such trusts. First, every trust is characterized for U.S. federal tax purposes (both income tax and transfer tax) as either domestic (i.e., U.S.) or foreign. A foreign trust is a trust that is both subject to the jurisdiction of a U.S. court and whose trustee is a U.S. person. IRC § 7701(a)(30)(E). Second, each trust is considered to be either a grantor trust or a nongrantor trust for U.S. federal income tax purposes (this is to be distinguished from estate and gift tax purposes). Each of these classifications may have important U.S. tax implications; however, a further discussion is outside the scope of this paper.

  1. U.S. Transfer Taxation
    1. Residency (i.e., Domicile) for Transfer Tax Purposes

In general, the U.S. federal estate, gift, and generation-skipping transfer taxes apply to U.S. citizens and U.S. residents on a worldwide basis. On the other hand, nonresidents who are not U.S. citizens are generally subject to these transfer taxes on a much more limited basis, as further explained below.[14]

For U.S. federal transfer tax purposes (as distinguished from U.S. federal income tax purposes), a “resident” is an individual who is domiciled in the United States. Conversely, a “nonresident” is an individual who is not a U.S. citizen and who is not domiciled in the United States. In general, a person acquires a domicile in a place by both living there, even for a brief period of time, with the intenton to remain indefinitely and no definite present intention of leaving. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will an intention to change domicile effect such a change unless accompanied by actual removal.[15]

Thus, it is possible for an individual to be a “resident alien” of the United States for U.S. federal income tax purposes by reason of holding a green card or meeting the substantial presence test, and yet remain a nonresident/nondomiciliary of the United States of U.S. federal transfer tax purposes. It is also possible for an individual to be a nonresident of the United States for income tax purposes and a resident domiciliary of the United States for transfer tax purposes.

  1. U.S. Federal Estate, Gift, and Generation-Skipping Transfer Tax as Applied to Nonresident Aliens
    1. U.S. Estate Tax

The estates of nondomiciliary/nonresident aliens are subject to federal estate tax with respect to any property situated or deemed situated in the U.S.[16] U.S. real property interests are considered to be situated in the U.S., as are shares in domestic U.S. corporations. In contrast, shares in a foreign corporation are not generally considered to be situated in the U.S., even if business assets or share certificates are physically located in the U.S. and business activities are conducted in the U.S.[17] It is for this reason that nonresident clients are often advised to form an offshore “blocker” corporation through which to own U.S. situs assets such as U.S. real property interests and shares of U.S. stock, such that the estate tax exposure is eliminated. The rules governing the U.S. taxation of the estates of nonresidents are quite unfavorable; under current law, only $60,000 of the value of the U.S. situs estate is exempt from federal estate tax, while the remainder of the U.S. situs estate is taxable at applicable U.S. estate tax rates on the then fair market value of U.S. situs assets.[18]

In some instances, a nondomiciliary/nonresident may bedeemed to own property situated in the U.S. at death as a result of certain transfers of U.S. situs property during life. Property of a nondomiciliary/nonresident decedent will be deemed to be situated in the U.S., and potentially taxable pursuant to this rule, if such property was transferred at a time when it was situated in the U.S., and if the deceased transferor retained sufficient rights in or powers over the property after making the transfer.[19] Under this rule, regardless of where the property is situated at the time of the transferor’s death, the property is included in the transferor’s estate for U.S. tax purposes, at its then fair market value. It is therefore important to plan ahead to avoid the application of this deemed situs rule.

Section 2056(d)(1)(B) states that § 2040(b) (which generally provides that property owned jointly with a right of survivorship between spouses will be included at one-half its value in the estate of the first spouse to die) does not apply if the surviving spouse of the decedent is not a U.S. citizen. Instead, in such cases 100% of such property is includable in the first decedent’s estate except to the extent the executor can substantiate the contributions of the noncitizen surviving spouse to the acquisition of the property. Thus, jointly owned U.S. situs property will be fully included in the gross estate of a nonresident alien who provided the funds to acquire such property. Because jointly owned property with a right of survivorship passes outright to the surviving spouse, if the surviving spouse is not a U.S. citizen, the surviving spouse will need to transfer the portion included in the gross estate to a QDOT in order to qualify it for a marital deduction.

  1. U.S. Gift Tax

Under U.S. federal tax law, nondomiciliary/nonresident aliens are subject to gift tax only on completed gifts of real or tangible personal property that is situated or deemed situated in the U.S. Nondomiciliary/nonresident aliens are not subject to federal gift tax on transfers of intangible property.[20] Where a gift of intangibles is concerned, the situs of the intangibles is irrelevant. As such, whether a nonresident alien makes a completed gift of stock in a U.S. corporation, or stock in a foreign corporation, federal gift tax is generally not applicable to the transfer.

  1. U.S. GST Tax

The U.S. Generation Skipping Transfer Tax (“GST tax”) is generally applicable when a transfer is made to someone who is considered to be more than one generation beneath the transferor. With respect to liability for U.S. GST tax, federal tax rules do not explicitly distinguish between resident and nonresident transferors. The GST tax is, however, a tax in addition to the federal gift and estate taxes, so it only applies to transfers that are or were previously subject to federal gift or estate tax.[21]

  1. Marital Regimes

A couple’s marital regime determines the rights of each spouse in terms of taxes, inheritance, and divorce. There are generally three major types of marital regimes including, separate property, community property of acquets, and universal community property, which dictate how property is owned.

  1. Separate Property
    1. A separate property regime treats all property, whether acquired before marriage or during marriage, as owned individually or separately.
  2. Community Propertyof Acquets
    1. In countries whose laws are influenced by the civil law, community property regimes are common. Throughout Latin America and continental Europe, marriage generally results in joint property rights between the spouses. Countries have different rules and in some countries individuals may elect one of several property regimes. In general, civil law countries provide that a standard regime will apply in the absence of any formal election. In some countries, once a given property regime applies it will do so for the life of a marriage and may not be changed, others are amendable.
    2. A community property of acquets regime treats assets acquired before marriage as separate property and assets acquired during the marriage as community property (i.e. 1/2 owned by each spouse) unless received by gift or inheritance during marriage.
  3. Universal Community Property
    1. Universal community applies to all of the couple’s assets, both assets that were brought into the marriage and those that were acquired during the marriage, including those received by gift or inheritance. Under the universal community property regime the spouses are deemed to jointly own all the assets. Each couple has no separate property. Universal community is the default marital property regime in Burundi, Namibia, the Netherlands, Philippines, Rwanda, and South Africa.
  1. Community Property and Joint Property Considerations for Non-Citizen Spouses
    1. Community Property
      1. Introduction

The world tends to be divided into common law jurisdictions and community property jurisdictions. Currently 10 states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin and Alaska by election),[22] and many foreign jurisdictions have a community property law system for ownership of property of a husband and wife. Community property law systems vary within them. The universal community system treats all assets acquired before or during the marriage as community property and hence owned 50/50 by the husband and wife. No state has adopted this wide net regime although the parties may elect it by contract. The ganancial community property or community property of acquets, which is the more typical community property regime, exempts some assets as outside the community and treats those as separate property, e.g., property received by gift or inheritance, or property acquired prior to the marriage. Some jurisdictions permit a couple to select the marital regime governing the couple’s property (e.g., France) or a default regime will apply. Some states which do not themselves have a community property regime, recognize community property and permit the couple to maintain its character as such.

  1. The Uniform Dispositions of Community Property Rights At Death Act (“Uniform Dispositions Act”)[23]

The following states have adopted the Uniform Dispositions Act: Alaska, Arkansas, Colorado, Connecticut, Florida, Hawaii, Kentucky, Michigan, Minnesota, Montana, New York, North Carolina, Oregon, Utah, Virginia and Wyoming. This Act effectively provides the adopting state to recognize and maintain community property as community property.[24] The purpose of the Act is to preserve the rights of each spouse in property which was community property prior to moving to a common law state. It is not intended to affect the rights of creditors who were creditors prior to the death of a spouse or the rights of spouses or other persons prior to the death of a spouse. The Act is limited in scope; if enacted by a common law state, it will only affect the dispositive rights, at death, of a married person in property subject to the Act and is limited to real property located in the enacting state and personal property of a person domiciled in the enacting state.[25]

A couple may own both community and separate property. Mixing or commingling separate property with community property will transmute the separate property into community property unless the separate property component can be traced.[26] Further, “property becomes community property unless the separate property portion can be traced. Tracing is done by allocating withdrawals, deposits or payments between community property funds and separate property funds. The burden of proof is usually on the party attempting to rebut the community property presumption created under state law.”[27]

For example, a couple is married in California and lived there for 10 years before moving to New York. Their net worth at the time of their move to New York was approximately $5,000,000, all accumulated during their marriage. They buy a flat in Manhattan for $2,000,000 and invest $3,000,000 in a brokerage account. Over the next 5 years their flat appreciates to $3,000,000 and their brokerage account to $5,000,000. They added after tax earnings from their salary of $1,000,000. It is likely that the salary and related appreciation that was added to the brokerage account would be considered separate property because it likely could be traced to the personal services of one spouse while in a separate property regime. The entire value of the flat and remainder of the brokerage account would be considered community property.

  1. Treatment of Community Property
    1. Income Tax

For income tax purposes, if spouses file separate returns, each spouse is taxed on 1/2 of the total community property income regardless of which spouse acquired the income[28] and each spouse is taxed on all of his or her separate property income. Whether property is characterized as community property becomes less important if a joint filing election is made. Spouses filing a joint return, as a matter of federal law, are jointly and severally liable for the tax on all of the income of both spouses reportable on the joint tax return, whether it is community property or separate property.[29]

It is important to note that under U.S. federal income tax law, there are specific rules for the allocation of community property income of a married couple, one or both of whom are nonresident aliens. A married couple, one or both of whom are nonresident aliens, treat their community income as follows:

  1. Earned income (except income listed in (b) below) is treated as income of the spouse who rendered the services generating the income.[30] Thus, if a non-resident alien spouse who is married to a U.S. citizen spouse, both of whom are domiciled outside the U.S., performs foreign services that give rise to foreign-source income, the income generally is not subject to tax in the U.S. even though the foreign country of domicile treats the income as belonging one-half to the U.S. citizen spouse.
  2. Business income and a partner’s distributive share of partnership income are treated under a special, and rather outdated, rule. Business income that is treated as community income is treated as the income of the husband unless the wife exercises substantially all of the management and control of the business.[31]
  3. The partner’s distributive share of ordinary income or loss of a partnership is his or hers only.[32]
  4. Community income (not in one of the categories above) derived from the separate property of one spouse is income of that spouse.[33]
  5. Other community income (e.g., dividends, interest, royalties or gains from community property or earnings of unemancipated minor children) belongs to the spouse who has a proprietary vested interest in the income.[34]

Community income is determined under the applicable community property laws of a State, foreign country or U.S. possession where the recipient is domiciled (or where the property is located, with respect to income from real property). Thus, if a U.S. citizen or resident alien owns income-producing property, the income from which is treated as community property income under the community property laws of the citizen’s or alien’s domicile, 1/2 of that income is treated as earned by the taxpayer’s spouse. If that spouse is a non-resident alien individual, the spouse’s 1/2 share is subject to U.S. federal income tax only to the extent provided in the tax regime applicable to non-resident alien individuals.

  1. Gift Tax

A gift of community property to a third party is deemed to be a gift of 1/2 by each spouse.[35] Thus, if a couple gifts community property and the value is less than the combined annual exclusion threshold ($30,000 for 2019), then no gift tax return need be filed. By contrast, if one of the spouses gifts separate property for $28,000, then the gift splitting rules would apply (i.e., neither spouse can be a nonresident alien) and they would need to file a gift tax return.

What constitutes community property can vary considerably as property can be converted from separate property to community property by commingling or it can be transmuted by agreement. If property is taken from one jurisdiction to another, it may alter or retain its character.

  1. Estate Tax

Upon the death of a spouse, one half of the community property of the couple (both the decedent’s and the surviving spouse’s) is includible in the decedent’s estate together with the decedent’s separate property. This is true even for non U.S. citizen spouses. Thus, there may be an advantage for foreign couples to have a community property regime apply to their marriage. While normally in separate property regimes where the couple’s assets may not be well balanced and a rebalancing through gifts to a non U.S. citizen spouse are limited by the annual exclusion and lifetime exemption (not available to a nonresident non-U.S. citizen), for community property couples, their community property is already balanced.

In most jurisdictions where community property is a vested right and not a mere expectancy, the surviving spouse is deemed to own 1/2 of all community property, regardless of terms to the contrary in the decedent’s will. The decedent can dispose of the 1/2 he or she is deemed to own together with the decedent’s separate property.

The Internal Revenue Code does not specifically address the tax treatment of community property.[36] Section 2033 does provide that a decedent’s gross estate includes the value of all property to which the decedent has an interest at his or her death and interest in property is to be defined by local law.

A major advantage to a community property regime is that the entire community property’s basis is stepped up at the death of one of the spouses.[37] This treatment does not apply to jointly held property by a couple in a common law regime.

  1. Planning Considerations

When planning for a client who is moving from a foreign community property regime to a common law/separate property regime, the planner should determine the category of each of the couple’s assets: community property, quasi community property or separate property. Only then can one determine the income, gift, and estate tax consequences to the parties. It will also help facilitate the division of assets, if need be.

5. Practice Tip: Don’t fail to consider the effects of a community property regime.

Many jurisdictions outside the U.S. provide for community property as their default marital regime. For those couples married in such jurisdictions or electing into a community property regime by virtue of a nuptial agreement, they should take great care in the potential gift tax exposure, income tax exposure, and reporting requirements.

For example: Several problems may arise in the context of a couple’s marital regime: gift, income and reporting.

Firstly, it could trigger U.S. gift tax if a couple changes from a separate to community property regime. For example: a U.S. citizen wife and NRA husband marry at wife’s parents’ summer home in Nantucket in 1985. Several years later the couple moves to the Netherlands. They are advised that it would be preferable if they chose a community property regime so that all assets could pass to the surviving spouse without a forced heirship share passing to their children and incurring inheritance tax at the first spouse’s death. Dutch counsel fails to engage U.S. counsel and changes the couple’s marital regime to universal community property. Wife who is quite wealthy and inherited the family fortune is deemed to have given 1/2 of all her assets to her husband an NRA. To the extent the value of personal property assets exceed the $155,000 (2019) marital annual exclusion and her applicable exclusion amount, she will have to pay U.S. gift tax.

Secondly, it could trigger additional income tax. The husband must now include 1/2 of income generated from wife’s assets and report it on a U.S. income tax return if it is U.S. source income. Wife also must report on her U.S income tax return 1/2 of her husband’s income, with certain exceptions.

Thirdly, wife may have additional reporting obligations. Husband as a NRA has investments in foreign mutual funds which he holds in a Swiss account. Wife now has PFICs and may have additional foreign asset reporting, including Form 8938, Statement of Specified Foreign Financial Assets.

Fourthly, if wife has an interest in an S-corporation, her husband will be deemed to own 1/2 her shares and as an NRA will blow the S election causing the corporation to be a C corp.

Rule: Always confirm a couple’s marital regime and consider all the ramifications.

  1. Jointly Held Property between Non U.S. Citizen Spouses-Non Community Property
    1. Introduction

The tax treatment of jointly held property between non U.S. citizens spouses must be examined from the point of view of the type (real or personal) and the timing (creation or termination) and the applicable law in effect at the time of each event. The general rule is regardless of contributions, only one-half (1/2) of property held between two (2) U.S. citizen spouses jointly with rights of survivorship or tenancy by the entirety is included in the decedent’s estate.[38] However, when one spouse is a non-U.S. citizen, then the “consideration furnished” test applies, and the value of property titled jointly with rights of survivorship or tenants by the entirety is included 100% in the gross estate of the first joint tenant to die, except to the extent that the executor for the decedent’s estate can prove that the surviving joint tenant supplied the consideration for the jointly-held property.[39]

Exception: Only one-half (1/2) of the value of the property is included in the decedent’s estate where the property was acquired as joint tenants by gift, devise or bequest by the husband and wife from a third party.[40] Depending on the type of property acquired, the time of acquisition, and a grandfathering election, different rules may apply to determine whether a gift occurs upon creation of the joint tenancy.

  1. Creation of JTROS/TBE in Real Property
    1. Before Jan 1, 1982 and after July 13, 1988, i.e., current law:
      1. During this time period, the creation of a joint tenancy with rights of survivorship (“JTROS”) or tenancy by the entireties (“TBE”) interest in real property by a husband and wife is not a taxable gift regardless of the consideration furnished by each spouse. However, if a spouse made an § 2515(c) election (of 1954 Code) then there would have been a gift upon creation to the extent the retained interest is less than the portion contributed by that spouse. Thus, for years beginning after July 13, 1988. The creation of joint tenancy or a tenancy by the entirety in real property by a citizen with a non-citizen spouse will not constitute a gift to a non-citizen spouse.[41]

Query: Can a taxpayer add a non-U.S. citizen spouse to the deed and it is considered “creation of joint tenancy” and not be deemed a gift? Yes, but this would not be the case for a non spouse.

  1. Between Jan 1, 1982 and July 13, 1988:
    1. During this period, one must look to local law: if the JTROS can be unilaterally severed, then each spouse is treated as having retained 50% of the value of the property. If one spouse contributed more than 50% of the consideration, then he or she is deemed to have made a gift to the other spouse.
    2. If the JTROS/TBE interest cannot be unilaterally severed, then actuarial figures at time of purchase must be used to determine the ownership interest and then a gift from one spouse to the other is based on the contribution. The gift to the non-donee spouse is counted as consideration furnished when the donor spouse dies. Thus, that “gift” portion is not included in the estate of the donor spouse.
    3. The creation of tenants by the entirety and joint tenancy in real property was deemed a gift of one-half (1/2) of the property by the spouse who provided the consideration for its acquisition (i.e., the “donor spouse”). Section 2040(a) provides that one will apply the 50-50 rule for real property only, which is acquired after December 31, 1981 and prior to July 14, 1988. Under these circumstances, the non-citizen donee spouse is treated as having provided one-half (1/2) of the consideration for the purchase of this property even though there was no gift for federal gift tax purposes. Thus, when a decedent who provided the consideration dies with a non-U.S. citizen surviving spouse, the surviving spouse will be deemed to have provided 50% of the consideration and only 50% will be includable in the decedent’s estate. Some sources have pointed out that the legislative history is silent on whether the same tracing and consideration furnished rule under this grandfather provision applies where the decedent spouse is the one who provided the consideration for the acquisition of the property titled jointly with rights of survivorship.[42] The regulations seem to indicate that the deemed consideration under the grandfather provision rule only applies where the donor spouse dies first not the donee spouse.[43]
  2. Termination of JTROS/TBE in Real Property Other than by Death
    1. Before Jan 1, 1982 and after July 13, 1988, i.e., current law:
      1. A gift occurs to the extent a spouse receives more than his or her pro rata share of the amount contributed.
    2. Between Jan 1, 1982 and July 13, 1988 (“Grandfathering Rule”):
      1. If the creation was not treated as a gift by the contributory spouse, then one must look to local law.
        1. If the JTROS interest can be unilaterally severed then each spouse is deemed to have contributed 50% and receipt of more than 50% of the proceeds will be a gift by the other spouse.
        2. If the JTROS interest cannot unilaterally severable, e.g., TBE, then use actuarial values.
  3. Creation of JTROS/TBE in Personal Property
    1. After Dec 31, 1953 to present

Since January 1, 1954, the creation of JTROS/TBE ownership in personal property is a gift with certain exceptions.

  1. Special rule for certain types of personal property
    1. Joint Bank Accounts:

If one spouse creates a joint bank account with his spouse and the donor spouse can regain the entire account without the donee spouse’s consent, there is no gift at the creation because the gift is considered incomplete. Instead the gift occurs when the donee spouse draws upon the account for the donee spouse’s own benefit with no obligation to account for the proceeds to the donor spouse. If the creation of the bank account by one spouse creates a “true” joint tenancy and each spouse receives an alienable 1/2 interest in the funds, a gift may occur.

  1. Joint Brokerage Accounts:

The same rule applies, i.e., there is no gift on the creation of a spousal joint brokerage account with right of survivorship if one spouse provides all the funds and either spouse has the right to deal with the financial institution on behalf of the account. There is a gift where one spouse withdraws amounts in excess of that spouse’s contribution to the account and that spouse has no legal obligation to make a repayment to the contributor spouse. There is a gift upon termination other than by death where one of the spouses receives a proportion of the proceeds in excess of that spouse’s contribution to the account and there is no legal obligation for that spouse to repay to the contributor spouse.

The creation of a joint bank and/or brokerage account where each spouse can withdraw funds without an obligation to repay does not result in a taxable gift upon the creation of the joint tenancy.[44] Although there is no gift tax on creation, there will be a gift tax on termination of the account or at the time of a withdrawal from the account to the extent that either spouse receives more than the portion of the account balance that he contributed and there is no legal obligation to make a payment to the contributing spouse.

  1. Withdrawals from financial account for support:

Query whether withdrawals from a joint account for the support and maintenance of the non U.S. citizen spouse are considered a taxable gift?

Neither the Code nor the regulations specifically address the gift tax implications of expenditures made by one spouse in discharge of a taxpayer’s obligation to support a spouse. However, the proposition that such expenditures should not be treated as taxable gifts is consistent with the estate tax analysis in that debts resulting from a decedent’s failure to discharge an obligation to support dependents are deductible under § 2053(a)(3) in computing the taxable estate.

In 1946, the IRS published an announcement on this issue stating that discharging the obligation to support one’s spouse “does not have the effect of diminishing or depleting the taxpayer’s estate to any greater extent than the payment of other existing legal obligations.” Here is the reasoning proposed by one treatise.[45]

  1. Payments by a decedent’s estate to discharge the decedent’s duty to support a surviving spouse are deductible in computing the taxable estate under § 2053(a)(3)--either because:
  2. the obligation is not founded on a promise or agreement and hence need not be supported by consideration in money or money’s worth; or
  3. the surviving spouse’s support rights are not marital rights under § 2043(b) and therefore are adequate and full consideration in money or money’s worth.
    1. Under Merrill v. Fahs, § 2512(b) of the gift tax law has the same meaning as Section 2043(b), resulting in the gift tax not reaching transfers discharging claims that would be deductible in computing the taxpayer’s taxable estate.

Thus, it appears that as long as the payments made from the joint account are for discharging support obligations, there should be no gift tax implications. However, one must look to state law to determine if a spouse has a support obligation for the other.

  1. Treatment of JTROS/TBE Property at Death
    1. The value of property titled JTROS/TBE is included in the gross estate of the first joint tenant to die except to the extent that the executor of the decedent’s estate can demonstrate that the surviving joint tenant supplied the consideration for the property. Only 1/2 the value of the property is included in the decedent’s estate where the property was acquired by the joint tenants by gift, devise, bequest or inheritance. The decedent’s estate bears the burden of proof regarding the consideration furnished by the decedent and the surviving joint tenant.[46] The Service does recognize however that the proof can be shown indirectly. For instance if mortgage payments and improvements are made from a joint bank account held in the name of the husband and the wife, and the only funds deposited into the joint account are earnings of the two spouses, then proof of the approximate ratio of the earnings contributed to the bank account will generally be sufficient to establish the relative contributions of each spouse toward the purchase of the property.
  2. Planning Considerations
    1. Make gifts of jointly owned property

In order to limit the amount of property and assets that would need to be contributed to a QDOT, it may be beneficial to equalize the estates of both spouses. This can be done through the use of the annual exclusion. Although a gift tax return is not required if a gift between spouses is less than the $155,000 annual exclusion (2019 indexed for inflation)[47] it may be worthwhile filing one to have the three (3) year statute of limitations running particularly when a jointly held asset such as a marital home is being severed, there is some question regarding the consideration furnished, and a gift is being inferred.

  1. Considerations for gifts of Jointly Owned Property

In making gifts of jointly owned property, one should consider the following:

  1. what types of property are available to be divided,
  2. when was the property purchased,
  3. was there an election to treat the creation of the joint tenancy as a gift,
  4. who provided the consideration for the original purchase,
  5. what evidence of consideration is there, and
  6. who paid for improvements and the reduction of any indebtedness secured by the property?

Although it may be difficult to trace, it may be easier when one spouse was the sole income earner. However, one may need to look at bank and brokerage accounts history, inheritances, earning histories of the couple, etc. This can be particularly troublesome when investments in the joint account have changed with some being exempt and some being non-exempt.

  1. Consider Gift Splitting

Spouses may split gifts provided neither spouse is a nonresident alien.[48]

  1. Consider Loans to a non-U.S. Citizen Spouse

Below market or interest free loans may provide a good alternative to gifts to a non-U.S. citizen spouse. Although the foregone or deemed interest will be imputed and treated as a gift from the U.S. spouse to the non-U.S. spouse, if such amount is less than the marital annual exclusion, there will be no gift tax and the non-U.S. citizen spouse will have the use of the funds together with the growth thereon.

  1. Consider Treaty Provisions

One must also look to treaties. Some marital deduction provisions in the treaties may override the provisions of the federal marital deduction. For example, the U.S.-France Estate and Gift Tax Treaty provides that property which was acquired during marriage by an individual who at the time of the gift or bequest was domiciled in, or a citizen of, the U.S., will be treated as community property unless the spouses expressly elect to have different treatment under French civil law. Further, the provisions found in the protocols to the U.S.-Canada Income Tax Treaty and the U.S.-German Estate and Gift Tax Treaty may cause the QDOT to be unnecessary in certain situations. If one claims the treaty benefit, then the executor cannot also make a QDOT election.[49]

  1. Consider the Foreign Tax Credit

The decedent’s testamentary documents should direct that specific bequests to a surviving spouse (or charity) be funded with property not subject to foreign tax. However, if a fractional share formula is used to fund a marital (or charitable trust), the assets that a foreign jurisdiction will tax should be left so they do not qualify for the marital (or charitable) deduction.[50]

  1. Conclusion

Under § 2040(b) regarding joint property and gift tax considerations, the presumption that each spouse owned one-half of the asset is not available when the surviving spouse or done spouse is a non-U.S. citizen. The presumption is 100% of the property is includible in the estate of the first spouse to die except to the extent the surviving spouse proves contribution. Thus, § 2040(a) requires that the estate of the first spouse to die substantiate the surviving spouse’s contribution to the ownership of the property. If the decedent has an ownership interest in jointly held property which passes automatically to a non-U.S. citizen surviving spouse, it will not qualify for the marital deduction unless the surviving spouse transfers the property to a QDOT before the decedent’s estate tax return is due or the surviving spouse becomes a U.S. citizen. Married clients must keep track of transfers between themselves because of § 2523(i). Since a QDOT cannot be used for lifetime gifts, there is no way to give assets worth more than $155,000.00 (2019 indexed for inflation) to a non-citizen spouse in any year without using the applicable exclusion amount, if available,[51] or incurring a gift tax. Those in common law jurisdictions are at a disadvantage in equalizing their estates whereas those in community property states will not be.

See Chart in Appendix regarding the Estate and Gift Tax Consequences for Gifts between Spouses.

h. Practice Tip: Be careful when titling assets when one spouse is a non U.S. citizen and be sure to trace contributions.

If assets are jointly titled between spouses one of whom is a non U.S. citizen, 100% of the value of the asset is includible in the estate of the first spouse to die except to the extent the surviving spouse can prove contribution.[52]

Similarly, if jointly titled assets are severed, then there will be a gift from one spouse to the other to the extent one spouse receives more than such spouse’s contributions.

Example: Husband and wife both Canadian nationals have been married for more than 20 years and living in Toronto where husband built a successful mining business. They titled all assets jointly including their home, their Whistler chalet, and all their liquid investments. They moved to Naples, Florida where the warm winters suited them better, and they obtained U.S. green cards. They were advised to have separate trusts as Florida is a separate property jurisdiction. The attorney told them to split their assets 50/50 into each of their respective trusts. To the extent that husband was the sole earner during their marriage, the value of the jointly held assets will be attributable to him. To the extent wife received 50% of them, husband made a gift to wife of that amount. If it exceeds $139,000 in 2012, it will chip away at husband’s applicable exclusion amount of $5.12 million. Thereafter, it will be taxable. Note: there is no unlimited marital deduction to a non U.S. citizen spouse and there are no lifetime QDOTs.

Rule: Be careful to trace all assets before changing title when one spouse is a non U.S. citizen.

  1. Effect of Tax Treaties
    1. General

Tax treaties are an often forgotten lynchpin in advising the international client. Structures are often put together which complicate a client’s situation when the simple, direct investment by the foreigner in U.S. assets would have yielded more favorable tax results under a treaty.

With respect to estate and gift tax treaties in force, as of January 1, 2012, the U.S. had sixteen (16) estate and/or gift tax treaties in force with the following countries, the prior estate and gift tax treaty with Sweden having been revoked when Sweden abolished its inheritance tax:[53]

  1. Australia (also a separate gift tax treaty)
  2. Austria (combined estate and gift tax treaty)
  3. Canada (this treaty ceased to have effect for estates of persons deceased on or after January 1, 1985; however, see the fourth protocol to the U.S.-Canada Income Tax Treaty regarding the application of estate and gift taxes and the recently enacted fifth protocol)
  4. Denmark (combined estate and gift tax treaty)
  5. Finland
  6. France (combined estate and gift tax treaty) (amended effective Dec. 21, 2006)
  7. Germany (combined estate and gift tax treaty effective December 14, 2000)
  8. Greece
  9. Ireland
  10. Italy
  11. Japan (combined estate and gift tax treaty)
  12. The Netherlands
  13. Norway
  14. Republic of South Africa
  15. Switzerland
  16. United Kingdom (combined estate and gift tax treaty).

Treaties serve to (i) prevent double taxation; (ii) prevent discriminatory tax treatment of a resident of a country; and (iii) permit reciprocal administration to prevent tax avoidance and evasion. Treaties often substantially reduce estate and gift taxes. If an estate wishes to claim an estate tax position based on an estate tax treaty with another country, it must complete IRS Form 8833, which should contain an explanation of the treaty based position and be attached to the estate tax return.[54] The purpose of transfer tax treaties is to prevent or minimize the double taxation of both lifetime gifts and transfers at death of domiciliaries of the two (2) contracting states (i.e., treaty countries). This is usually accomplished in one of several ways:

  1. Either by giving one country priority in taxing the property deemed by the treaty to be located in that country; or
  2. Giving one country priority to tax the estate or the gifts of the individual based on a determination of the decedent’s or the donor’s fiscal domicile.

Where application of the treaty gives rise to the imposition of tax in both countries, a credit mechanism is employed to minimize the double tax burden. Some of transfer tax treaties provide for a more beneficial marital deduction than otherwise would apply to a non-domiciliary of the United States.

Because of the savings clause, a U.S. citizen cannot invoke the treaty to avoid or minimize U.S. tax. The taxpayer can only avail himself of an increased foreign tax credit. The savings clause is found in all U.S. income tax treaties. This provides that the United States may tax its citizens as if the treaty were not in effect. The purpose of this rule is to prevent U.S. citizens who are classified as income tax residents of the treaty country from claiming the exemption from and reductions in U.S. tax on their income that would be available to non-citizens who are also resident in the treaty country.

Most treaties’ savings clause also provide that the U.S. may tax its residents as if the treaty were not in effect; however, this may not have any practical effect if the treaty contains tiebreaker rules which would treat the individual as a resident of the other country. Please note, many provisions are exempt from the savings clause, depending on the treaty.

  1. U.S.-France Estate and Gift Tax Treaty
    1. The Protocol to the U.S.-France Estate and Gift Tax Treaty provides for both advantages and troubling modifications.[55] Article 5(3) of the Protocol provides for an expanded definition of real property to include “shares, participations and other rights in a company or legal person the assets of which constitute, directly or through one or more other companies or legal entities, at least 50 percent of real property situated in one of the Contracting States or of rights pertaining to such property. These shares, participations and other rights shall be deemed to be situated in the Contracting State in which the real property is situated”.
    2. [Editor’s Note: It’s common knowledge that treaties only have effect if an election to apply them is made. See Model U.S. Income Tax Treaty, Article 1(2)(a). This section should be removed entirely.]
    3. Under the U.S.-France estate tax treaty and its protocol, there are two rules that are most relevant to a non-U.S. citizen surviving spouse of a decedent: (1) reduction of the decedent’s gross estate by partial application of community property rules to U.S. separate property; and (2) grant of treaty based marital deduction.
      1. Computation of Gross Estate - U.S. Separate Property. Generally, the gross estate of a non-domiciliary alien decedent of the U.S. includes 50% of U.S. situs community property owned by the decedent at the time of death, and 100% of U.S. situs separate property owned by the decedent at the time of death. Pursuant to the U.S.-France Estate and Gift Tax Treaty, the value of a decedent’s separate property included in the decedent’s gross estate is reduced if: (a) the decedent was domiciled in France at the time of death; (b) the decedent is not a citizen of the U.S. or a recent tax motivated expatriate; (c) the surviving spouse is not a U.S. citizen; (d) the separate property is real property, business property, or tangibles described in Articles 5, 6, and 7 of the treaty; and (e) the property passes to the surviving spouse.[56] The amount of the reduction to the value of the aforementioned real property is equal to lesser of: (i) one-half of the decedent’s U.S. gross estate that is described within Articles 5, 6, and 7, or (ii) the value of the decedent’s U.S. separate property passing to the surviving spouse described within Articles 5, 6, and 7.[57]
      2. Treaty Marital Deduction in Lieu of QDOT. The fair market value of property passing to a non-U.S. citizen surviving spouse will qualify for a deduction against the decedent’s gross estate if: (a) such property would qualify for the statutory marital deduction under § 2056 if the surviving spouse were a U.S. citizen; (b) the decedent is a U.S. citizen or domiciliary or a French domiciliary; (c) the surviving spouse is a domiciliary of France or the U.S.; and (c) if the decedent and the surviving spouse were both domiciliaries of the U.S. at the time of death, at least one of them was a French citizen at that time.[58] The amount of this deduction is limited to the applicable exclusion amount at the time of the decedent’s death and is in lieu of any statutory marital deduction against U.S. estate tax.[59]
  2. Practice Tip: Don’t ignore the provisions of a treaty.

The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a “saving clause” which prevents a citizen or resident of the United States from using the provisions of a tax treaty to avoid taxation of U.S. source income

Treaties generally only help not hinder, but occasionally they can render the taxpayer in a worse position than if there was no treaty at all. Many treaties re-situs shares of company stock to the domicile or residence of the decedent. For example: the treaties with France, UK and Germany treat a resident (not a U.S. citizen) of those countries’ interest in U.S. stock as non U.S. situs. Note however the exception for French real estate companies (shares in companies holding more than 50% real property in France are considered French situs and subject to French inheritance tax).

Rule: When advising clients with any foreign connection, check the provisions of any applicable treaty and consider the totality of a tax treaty election.

  1. Pre and Post-Nuptial Agreements

While most jurisdictions will impose a default marital regime, it may be possible to change the default regime through an agreement.

A. A pre-nuptial agreement is a contract entered into prior to marriage or civil union. The content of a pre-nuptial agreement can vary widely, but commonly includes provisions for the division of property and spousal support in the event of dissolution of the marriage. Conditions of guardianship may be included as well in some countries, although not in the U.S.

B. Post-nuptial agreements are similar but are entered into after the couple is married.

C. Pre-nuptial and post-nuptial agreements are not recognized in every country. When a couple is married, their advisor should review the nationalities of the couple, their residence, and location of assets. It should be noted that the law of the country that will govern the dissolution of the marriage may affect the marital regime. For instance, some countries do not consider pre and post-nuptial agreements to be valid, so some couples will be unable to vary their marital regimes.

D. Prenuptial agreements have historically not been considered legally valid in England. However, there is a 2010 Supreme Court case[60] which indicates that such agreements can “in the right case” have decisive weight in a divorce settlement.

E. Most countries in continental Europe accept a properly drafted pre-nuptial agreement, including France, Belgium, the Netherlands, Germany, Switzerland, Sweden, Denmark, Norway, and Finland. In France and Belgium, pre-nuptial agreements must be entered into in the presence of a notary.

F. In the United States, pre-nuptial agreements are recognized, although they may not always be enforced. Both parties should have lawyers represent them to ensure that the agreement is enforceable, there should be full disclosure of the couple’s assets and it should be entered into far enough in advance of the marriage so as not to be considered entered into based on coercion.

  1. Common Law Marriage

A right at common law to marry exists unless state law affirmatively changes the right. Common-law marriage can be contracted in eleven states: Alabama, Colorado, Iowa, Kansas, Montana, New Hampshire, Oklahoma, Rhode Island, South Carolina, Texas, Utah, and the District of Columbia. The requirements for a common-law marriage to be validly contracted differ in the eleven states which still permit them. A common-law marriage is recognized for federal tax purposes if it is recognized by the state where the taxpayers currently live or in the state where the common-law marriage began. If the marriage is recognized under the law and customs of the state in which the marriage takes place, the marriage is valid.[61] Whether a state will recognize a common-law marriage from another state varies by state. For instance, in Virginia a marriage’s validity is determined by the law of the state where the marriage took place, unless the result would be repugnant to Virginia public policy.[62] Virginia does recognize a common-law marriage that is valid under the laws of the jurisdiction where the common-law relationship was created.[63]

  1. Same-Sex Marriages

A. Same-sex marriage is legally recognized nationwide in Argentina, Belgium, Canada, Denmark, Iceland, the Netherlands, Norway, Portugal, South Africa, Spain, Sweden, and the United States. In Mexico, same-sex marriages are only performed in Mexico City, but these marriages are recognized by all Mexican states and by the Mexican federal government. Israel does not recognize same-sex marriages performed on its territory, but recognizes same-sex marriages performed in foreign jurisdictions. In Brazil, the state of Alagoas performs same-sex marriages. Also, in other states, a same-sex couple may convert their civil union into marriage with the approval of a state judge. If approved, that marriage is recognized in all the national territory. As of 2012, proposals exist to introduce same-sex marriage in at least ten other countries.

  1. Divorce

Foreign divorces are generally recognized under the discretionary principle of comity. However, “no State is bound by comity to give effect in its courts to the divorce laws of another State repugnant to its own laws and public policy.”[64]

Domicile and residency in the foreign country at the time of the divorce and service of process, or adequate notice, are often important factors considered by state courts in determining whether to award comity to foreign divorces.[65]

A. For example, in the context of immigration laws, the Fourth Circuit has recognized that “[t]he domicile of the parties has long been recognized as the primary, if not the exclusive, basis for the judicial power to grant divorce.”[66]

B. It is also important that the foreign country recognize the divorce as valid. Accordingly, whether a state court will recognize a foreign divorce requires a facts-and-circumstances analysis that will depend upon the domicile of the parties, the jurisdiction of the foreign court, and the procedures utilized by the foreign jurisdiction to award the divorce.

C. Generally, “the talaq,[67] while a valid means of divorce in Pakistan and Iran, is not recognized in the U.S. when said by a Muslim to his non-Muslim wife. . . . The talaq when said to a Muslim woman and confirmed by a foreign government is usually recognized.”[68]

  1. Usufruct Interests

Usufruct or life estate interests are quite commonly used in civil law jurisdictions. Firstly, a surviving spouse may have a usufruct interest in the deceased spouse’s estate. Secondly, in civil law jurisdictions which may not have the concept of § 2036 and retained interests, clients are often advise to retain a usufruct interest in an asset and give the remainder interest to descendants or other heirs. The civil law jurisdictions do not often consider that under U.S. law, the value of the asset will come back into the usufruct holder’s estate at death.

  1. Qualified Domestic Trusts
    1. General

Concern about a non-citizen surviving spouse fleeing the U.S. and the U.S. losing jurisdiction to tax the assets of the surviving spouse led to the denial of the marital deduction for assets passing to a non-U.S. citizen spouse. The test is no longer based on the nationality of the decedent, but the citizenship of the surviving spouse. For estates under the lifetime exemption amount ($11,400,000 in 2019 and $60,000 for non-resident non-U.S. citizens) the marital deduction and QDOT provisions do not come into play. For estates over the threshold, the decedent’s estate can pay tax, transfer the property to a QDOT, take advantage of estate tax treaties, or the surviving spouse can become a U.S. citizen within the specific time frames.

  1. The Marital Deduction for Non U.S. Citizen Surviving Spouse
    1. Obtaining the Marital Deduction

The Internal Revenue Code provides for the allowance of a 100% marital deduction for bequests to a U.S. citizen surviving spouse.[69] However, such a marital deduction is only allowed where the surviving spouse is a U.S. citizen unless the assets passing to a non-U.S. citizen are transferred to a Qualified Domestic Trust (“QDOT”). The QDOT rules provide that if any property passes from the decedent to the surviving spouse then such property shall be treated as passing to such spouse in a qualified domestic trust if:

  1. such property is transferred to such a trust before the due date of the federal estate tax return, generally 9 months from the decedent’s date of death, although extensions are permitted, or
  2. such property is irrevocably assigned to such a trust under an irrevocable assignment made on or before such date, which is enforceable under local law.
    1. Special rule on Becoming a U.S. citizen

The Code also provides a special rule where a resident spouse becomes a citizen of the United States before the day on which the 706 Federal Estate Tax return is made and (a) such spouse was a resident of the U.S. at all times after the date of the death of the decedent and before becoming a citizen of the U.S.; (b) no tax was imposed with respect to any distribution from a QDOT before such spouse became a citizen; or (c) the surviving spouse elects to treat any distributions from a QDOT on which tax was imposed as a taxable gift made by the spouse reducing the credit allowed to such surviving spouse under § 2505.[70] Therefore, from the time of the decedent’s death until the time of becoming a U.S. citizen, the surviving spouse should not leave the U.S. and jeopardize his or her residency status. One should note however, it is sometimes difficult to get citizenship within the short time frame allotted for filing the return.

  1. QDOT Requirements
  1. Section 2056A defines the QDOT but the Treasury Regulations provide all the details. If the trust satisfies the requirements of a QDOT, then distributions from principal before the death of the surviving spouse will be subject to tax as if the distributions had been includable in the deceased spouse’s estate, i.e., one applies the decedent’s estate tax rate. Any assets remaining in the QDOT at the surviving spouse’s death will also be subject to estate tax, again at the estate tax rates of the predeceases spouse. Distributions from principal during the surviving spouse’s life and at the surviving spouse’s death are both taxable events.
  2. A QDOT is any trust that satisfies these 4 main requirements:
    1. The “Marital Deduction Requirement”. The trust must comply with the general marital deduction requirements;
      1. If property passes directly to a QDOT, the trust must also qualify for the federal estate tax marital deduction (i.e., the surviving spouse must be entitled to all the income from the property in trust, payable at least annually) under one of the following provisions:

§ 2056(b)(5) (life estate with a power of appointment);

§ 2056(b)(7)(QTIP);

§ 2056(b)(8) (Charitable Remainder Unitrust); or

  1. Treas. Regs. § 20.2056A-2(b)(i through iii) Meeting the Requirements of an Estate Trust.
  2. In order to take advantage of the reformation provisions, the trust must qualify for the marital deduction. Therefore, one must always make certain to draft a trust to qualify for the marital deduction.
  3. If property passes outright to a non U.S. citizen surviving spouse such as life insurance proceeds, then it will qualify for the marital deduction only if the surviving spouse timely transfers it to the QDOT and the QDOT election is properly made.
  4. Property passing to a non U.S. citizen surviving spouse under a non-transferable plan or arrangement falls under a special rule.[71]
  5. The “U.S. Trustee Requirement”. The trust instrument must require that at least one trustee of the trust be an individual citizen of the U.S. or a domestic corporation and that no distribution other than a distribution of income may be made from the trust unless a trustee who is an individual citizen of the U.S. or domestic corporation has the right to withhold from such distribution the tax imposed under that section. Section 2056A(a)(l)(A) was effected for estates of decedents dying after August 5, 1997 to permit the establishment of a QDOT in situations in which a country prohibits a trust from having a U.S. trustee. The Treasury Department has regulatory authority to waive the § 2056A(a)(l)(A) requirement that a QDOT have at least one U.S. trustee. The Regulations provide an alternative mechanism under which the U.S. would retain jurisdiction and adequate security to impose U.S. transfer tax on transfers by the surviving spouse of the property transferred by the decedent.
  6. The “Security Arrangement Requirements”/The Requirements to Ensure Collection of Tax. The trust must meet the requirements for collecting tax under the Regulations.
    1. The governing instrument must include several provisions dealing with the ongoing reporting obligations of the QDOT trustee. The Treasury Regulations divide QDOTs into two types:
      1. The “small QDOTs”, i.e., those having assets at the date of death of decedent’s spouse of $2 million or less

For small QDOTs, the trust instrument must either:

  1. meet the bank trustee requirement or the bond requirement described below, or
  2. require that no more than 35% of the fair market value of the trust assets determined annually on the last day of the taxable year of the trust consist of real property located outside the U.S. that is owned by the trust (the “foreign real property requirement”). It applies a look-through rule for entities owning foreign real property.
    1. The “large QDOTs”, i.e., those having assets in excess of $2 million at the decedent’s spouse’s date of death.

For large QDOTs, the trust instrument must require either that:

  1. at least one U.S. trustee be a bank as defined in § 581 (the “bank trustee requirement”);
  2. the U.S. trustee furnish a bond or security in an amount equal to 65% of the fair market value of the trust corpus determined as of the date of the decedent’s death, (the “bond requirement”); or
  3. the U.S. trustee furnish a letter of credit.
    1. Special rules for tangible and intangible personal property

The trust instrument must require that all other trust assets including tangible personal property with an evidence of intangible property, stock certificates, bonds, notes and similar property must be physically located in the U.S. at all times during the term of the trust except in the case of a large QDOT or when an alternate arrangement or waiver has been granted.

  1. Personal residence exclusion

In determining if a QDOT is a large QDOT or a small QDOT, up to $600,000.00 of the value of a personal residence (wherever situated) and one other personal residence can be excluded. It cannot be rented to third parties even when not in use. Related furnishings can be excluded, too. The personal residency exclusion does not apply for determining the 35% foreign real estate exclusion.[72]

  1. Security

One such arrangement to provide adequate security and jurisdiction includes the adoption of a bilateral treaty that provides for the collection of U.S. transfer tax from the non-U.S. citizen surviving spouse, or a closing agreement process under which the surviving spouse waives treaty benefits, allows the U.S. to retain taxing jurisdiction and provides adequate security with respect to such transfer taxes.

  1. Disallowance of Marital Deduction for Substantial Undervaluation

If a U.S. trustee (not a bank) chooses the bond or letter of credit and reports the QDOT value on the Form 706 as a small QDOT but the value of the property is determined to be greater than $2 million, the marital deduction will be disallowed in its entirety if the undervaluation is 50% or more, unless the trustee proves reasonable cause and has acted in good faith.[73]

  1. The “QDOT Election Requirement”

The executor makes an election on the estate tax return.[74] The executor must make the election under § 2056A(d). One can make a protective election.[75] Partial elections are not permitted.[76] The election, once made, is irrevocable.[77]

  1. Withholding requirement

The trust instrument must require that no distribution other than income be made from the trust unless the U.S. trustee has a right to withhold the amount of any QDOT tax imposed on such distribution.

  1. Situs requirement

The trust must be created and maintained under the laws of the U.S. or any state or the District of Columbia. The QDOT should specifically require that the trust must always have a U.S. situs.

  1. Trust requirement. The QDOT must be an “explicit trust.”
  1. Other considerations
    1. Designated filer

The QDOT should have an explicit provision requiring the appointment of a designated filer, particularly if there are multiple QDOTs.

  1. Usufructs

The Treasury Department is also authorized to provide in regulations that certain arrangements having substantially the same effect as a trust can constitute a QDOT. This change would cover those jurisdictions where trusts are not permitted. Many civil law countries use an entity similar to a trust called a Usufruct. The regulations could permit such arrangements to qualify for QDOT treatment, although the U.S. would need to retain jurisdiction over such arrangement and impose adequate security to ensure the collection of transfer tax on transfers by the surviving spouse of property in the QDOT.

  1. Reformation
  1. The Code also permits reformations of a QDOT trust stating that the determination of a QDOT is made (1) as of the date on which the return of the tax imposed is made, or (2) if a judicial proceeding is commenced on or before the due date (determined with regard to extensions) for filing such return to change such trust into a QDOT trust as of the time when the changes pursuant to such proceeding are made. Drafters should be sure to include reformation provisions.[78]

The governing instrument should provide the executor or trustee to have the authority to amend the trust in order to meet the statutory and regulatory QDOT requirements added through a self-amending provision or authorization to seek judicial reformation.

  1. Taxation of QDOT Distributions
  1. General

Income distributed from a QDOT is not subject to the QDOT tax. Capital gains are not considered income even if the trust provisions state otherwise. Income does not include items of IRD under § 691. Distributions of principal are subject to the QDOT tax. To the extent the decedent still had remaining applicable exclusion, e.g., only a portion funded the bypass trust, distributions up to the remaining applicable exclusion amount will not be subject to the QDOT tax.

  1. Example: Decedent died with a $6 million estate in 2012 (when the applicable exclusion amount is $5 million). Decedent was a Maryland residence. Maryland estate tax is decoupled from the federal exemption and only allows a $1 million exemption for assets passing to a non spouse. Thus, to avoid Federal and Maryland estate tax, $5 million passed to the QDOT and $1 million passed to a bypass trust. Distributions of principal from the QDOT will be free from the QDOT tax up to $4 million (although the Form 706-QDT must still be filed on an annual basis). Depending on how the QDOT assets are invested, if the surviving spouse is a nonresident alien of the U.S., it is possible to pass the income tax free to the surviving spouse, e.g., if it is bank interest, etc.
  2. Distributions of corpus for “hardship” are exempt from the QDOT tax. Hardship seems to track permitted distributions from qualified plans and includes “an immediate and substantial financial need relating to the spouse’s health, maintenance, education or support, or that of the spouse’s dependents.” Other assets of the spouse must be considered. Illiquid assets do not count; e.g., real estate and closely held company stock.
  3. QDOT Taxable Events

An estate tax (“QDOT” Tax) is imposed on a QDOT in the following situations:

  1. On distributions from the QDOT other than income or on account of hardships;
  2. On the value of property remaining in the QDOT on the death of the non-citizen surviving spouse;
  3. On the value of property remaining in the QDOT on the date that the QDOT fails to meet the requirements of the Security Arrangements; and
  4. If the QDOT pays the tax on the distribution, the tax, too, will be treated as a taxable distribution.
  1. Death of Surviving Spouse

When the surviving spouse dies, the QDOT is entitled to normal estate tax deductions (marital, charitable) and other estate tax rules (e.g., alternative valuation), but is not entitled to use the applicable exclusion amount of the surviving spouse.

Exception. Where the predeceased spouse dies before January 1, 2010 (the repeal year), the QDOT tax on the death of the surviving non-U.S. citizen spouse does not apply to the following:

  1. The value of the QDOT on the death of the surviving spouse who dies after 12/31/2009 (because the estate tax is repealed), or
  2. The distributions made after 12/31/2020 from the QDOT before the death of the surviving spouse.

The reason for tax on lifetime distributions between 1/1/2010 and 20 years later is the concern that the surviving spouse will pull all the money out of the QDOT before death and Congress will bring back the estate tax.

  1. Spousal Contributions

For jointly owned property, there is no presumption of equal contributions by spouses if one spouse is not a U.S. citizen. Instead, a contribution furnished and tracing rule applies. A spouse is considered to make a transfer of the entire value of the property unless the other spouse can prove contribution.[79] So, good record-keeping is critical.

  1. Check Treaties

Some estate and gift tax treaties may yield more favorable treatment.

  1. Non-assignable annuities

There are two (2) methods available for deferral on the assets which are non assignable to a QDOT:

Pay as you go method: as withdrawals are made, the QDOT tax is paid; or

Corpus rollover method: as withdrawals are made, they are then deposited into the QDOT.

  1. Dealing with assets in foreign jurisdictions

The Taxpayer Relief Act 1997 introduced § 2056A(c)(3) which was effective for estates of decedents dying after August 5, 1997. It granted Treasury regulatory authority to treat legal arrangements that have substantially the same effect as trusts as trusts for purposes of qualifying as § 2056A qualified domestic trusts (QDOTs) to obtain the marital deduction for non-U.S. citizen spouses. This change was enacted because in civil law jurisdictions, trusts sometimes do not exist and/or trusts cannot have any U.S. trustees. To date, Treasury has not provided such guidance.

  1. Time to create the QDOT
  1. The Treasury Regulations provide that a decedent’s executor may create a QDOT after the death of the predeceased spouse. Therefore, one may ask why the decedent should create a QDOT at all prior to his or her death instead of relying on the executor to create one, if need be. This “wait and see” approach has drawbacks including the following
    1. The QDOT may not in fact be created or the trust created may fail to qualify as a QDOT;
    2. The QDOT may not be properly funded;
    3. One may have adverse income, gift and GST tax consequences because under the Treasury Regulations, property assigned or transferred to a QDOT pursuant to § 2056(d)(2)(b) is treated as passing from the decedent in a QDOT solely for purposes of §2056(d)(2)(a). For all other purposes, (e.g., income, gift, estate, GST, etc.), the surviving spouse is treated as a transferor of the property to the QDOT. Thus, if the QDOT is created after the decedent’s death, the surviving spouse will be treated as the grantor of the trust and subject to tax on the capital gains realized in the QDOT. Therefore, it seems preferable to create the QDOT under the predeceased spouse’s testamentary documents, and not rely on the “wait and see” approach.

2. QDOT Established by Surviving Spouse

  1. As a general rule, a QDOT election must be made within 27 months after the decedent’s death. If the property at issue is transferable to a QDOT, the surviving spouse may create a QDOT. A QDOT settled by the surviving spouse need only meet the QDOT requirements, not the marital deduction requirements.
  2. The decedent is the transferor of the spouse-settled QDOT solely for purposes of the qualification for the marital deduction. For all other purposes (e.g., income, gift, estate, and GST), the surviving spouse is treated as the transferor of the property to the QDOT.
  3. The advantages of establishing a QDOT by the surviving spouse include that the surviving spouse settled QDOT may be structured as a grantor trust as to the surviving spouse. So, if the surviving spouse is a non-resident alien, only certain U.S. source income will be taxable. Also, the surviving spouse is treated as the transferor for gift tax purposes and should therefore retain sufficient control over the disposition of the property to prevent it from being a completed gift. It should be noted it is unclear what happens if the tax rate has changed at the death of the second spouse.
  4. Planning Tips

In planning for a non-U.S. citizen, it may be more tax beneficial for such individual to become U.S. domiciled. This would be the case where the nonresident alien has significant U.S. situs assets, does not wish to use vehicles to convert them to non-U.S. situs (or is precluded from doing so in the case of a 401(k) plan for example), and has little or no non-U.S. situs assets. By becoming U.S. domiciled, his or her applicable exclusion amount will increase by 8,300%.[80] Clearly the determination must be made based on all the facts and circumstances of a particular taxpayer including applicable treaty provisions.

When planning for couples where one spouse is a non-U.S. citizen, it may be beneficial to alter the traditional “equalize the estates” of U.S. citizen spouses, and instead have more assets titled in the name of the non-U.S. citizen spouse. This is particularly the case where the non-U.S. citizen spouse may leave the U.S., and will minimize the need to transfer assets into a QDOT trust at death. Obviously, this does not take into consideration non-tax issues, e.g., divorce, creditor protection, etc.

In taking advantage of interspousal gifts, the couple should consider transferring to the non-U.S. citizen spouse foreign real estate (to avoid the large QDOT rules) business assets of which the spouse wishes to maintain control, the marital residence because if it is placed in a QDOT (unless the QDOT is a grantor trust with respect to the surviving spouse) it will no longer be eligible for the § 121 exclusion from capital gains tax.

Generally speaking, one usually wishes to avoid a QDOT. If an executor elects treaty treatment, a QDOT is not available.

The disadvantages of the QDOT include that there are no lifetime QDOTs and the surviving spouse cannot apply his or her applicable exclusion amount to the balance in QDOT at death.

Benefits of the QDOT: A QDOT allows estate tax deferral as distributions can be made free of estate tax where the distributions are of income or hardship amounts; all other distributions are subject to estate tax at the decedent’s estate tax. Given the Uniform Principal and Income Act, adjustments may be made to have what otherwise would be principal be considered income and may not subject them to QDOT tax when distributed to the surviving spouse.

  1. Practice Tip

: Beware of using a standard pour over will with revocable trust when the client has any foreign assets.

Where foreign property is owned in a civil law jurisdiction, generally it is not advisable to use a pour over will to transfer such assets into a revocable trust. In addition, there may be forced heirship rules which will override the will and trust terms.

Example: Virginia attorney prepares pour over will and revocable trust for a husband and wife. Husband owns a villa in St. Raphael. Virginia attorney does not consult with French counsel. At husband’s death, wife as executor is trying to deal with the will directing her to put the property into the trust which creates a bypass and marital trust. French law does not have a trust concept under its domestic law. France may not permit a spousal exemption and may treat the asset as passing to a third party taxable at a 60 percent rate..

Rule: Always engage foreign counsel when a client has a foreign asset. Generally, a trust may not be an appropriate vehicle in certain countries.

  1. Deceased Spousal Unused Exemption Amount
    1. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 introduced the concept of “portability.” It effectively provides that to the extent the first spouse to die does not fully “use” his or her applicable exclusion amount ($11,400,000 in 2019), the unused portion can transfer to the surviving spouse. The unused portion is called the deceased spouse unused exclusion amount (“DSUEA”).

2.The DSUEA applies to the estates of decedents dying in or after 2011. The executor of the estate of the first deceased spouse must file an estate tax return on which the DSUEA is computed. The executor must also make an election on that return that the DSUEA may be taken into account in the estate tax return of the surviving spouse. The applicable exclusion amount for the surviving spouse is the basic exclusion amount plus the DSUEA of the deceased spouse. Proposed and temporary regulations were released June 15, 2012 which allow executors of estates that are not otherwise required to file an estate tax return to avoid reporting the value of property that qualifies for the marital or charitable deduction. If an executor chooses to make use of this special rule in filing an estate tax return, the temporary rules say the executor must estimate the total value of the gross estate, including the values of the property that do not have to be reported on the estate tax return under this provision. In addition, the proposed and temporary regulations require estates to timely file an estate return even if they have no filing obligation, affirmatively opt out if they do not want to claim the election, and compute the portability amount using the applicable, rather than the basic, exclusion amount if more than one predeceased spouse is involved.

  1. DSUEA (as to the surviving spouse) applies only to the unused exclusion amount flowing from the estate of the deceased current spouse and must be elected in that estate. If the surviving spouse remarries after the death of a spouse, the DSUEA of the prior deceased spouse is lost upon the death of the prior new spouse. However, if the surviving spouse dies prior to the death of the new spouse, the estate of the surviving spouse may still use the DSUEA. Further, the estate of the surviving spouse may also make the DSUEA election that will result in making its DSUEA available to the estate of the new spouse. The limitations, however, prevent any DSUEA from the first estate from being transferred through the estate of the former surviving spouse to the subsequent estate of the new spouse. It should be noted that the statute of limitations remains open on any estate tax return on which the election is made so that the amount of the DSUEA can be adjusted in the estate of the surviving spouse.

4.The temporary regulations provide in Treas. Reg. §20.2010-2T(a)(5) that an executor of the estate of a nonresident decedent who was not a citizen of the U.S. at the time of death may not make a portability election on behalf of that decedent. The temporary regulations in Treas. Reg. §§20.2010-3T(e) and 25.2505-2T(f) provide that a nonresident surviving spouse who was not a citizen of the U.S. at the time of such surviving spouse’s death may not take into account the DSUEA of any deceased spouse of such surviving spouse, except to the extent allowed under a treaty obligation of the U.S. When a QDOT has been created for the benefit of a decedent’s surviving spouse, the executor of the decedent’s estate will compute a DSUEA, on a preliminary basis, that may decrease as distributions constituting taxable events under § 2056A are made. The DSUEA of such a decedent shall be redetermined upon the final distribution or other taxable event on which estate tax under § 2056A is imposed, which is generally upon the death of the surviving spouse or the earlier termination of all QDOTs created for that surviving spouse.

  1. Conflict of Law Issues
    1. Introduction

Having a revocable trust with foreign beneficiaries may incur a higher rate of tax under some countries’ laws. Oftentimes, practitioners plan under U.S. law without considering the consequences of the foreign beneficiaries overseas or the tax consequences in other jurisdictions.

For instance, a revocable trust established by a U.S. person with German resident beneficiaries (even if those German resident beneficiaries are U.S. citizen children living in Germany) under German inheritance tax laws, inheritances devolving to residents of Germany and distributions passing from a trust of any sort may be treated as devolving from a non-related party, and thereby subject to the highest rate of tax, being 50%. A properly drafted plan will consider the tax consequences in the other jurisdictions involved. The U.S.-German Estate and Gift Tax Treaty may provide some relief for the first 10 years of the U.S. citizen commencing residency in Germany.

Additionally, for UK residents who have U.S. revocable or grantor trusts, such status is not necessarily respected under UK tax law and such a trust may be considered UK resident and subject to UK taxes or not considered a trust at all . This could have the disastrous effect of causing immediate UK income tax on the unrealized gain of the trust assets. Further, if a UK resident resigns as trustee in favor of a U.S. trustee, then under UK law, there is a deemed disposition triggering UK income tax.

  1. Situs Wills
    1. The advantages of multiple wills include eliminating the coordination of the probate or estate administration between multiple jurisdictions which in turn could be expensive and time consuming particularly if property is located in a jurisdiction where English is not the official language. Further, each Will can be tailored to a particular jurisdiction to take into consideration its rules. Multiple wills may in fact be less expensive because they may reduce fees and expenses in jurisdictions that compute fees based on worldwide assets. These wills are referred to as “situs wills.”[81]
    2. So when should multiple wills generally be used, or when should they be avoided?

Multiple wills (situs wills) may be appropriate when the U.S. attorney is dealing with 1) civil law countries, 2) foreign language issues, 3) a country that has not signed or adopted the Hague Convention, and/or 4) complications for particular reasons in another country including forced heirship, etc.

The use of a single Will may be more appropriate in common law countries and where English is the official language.

  1. Some jurisdictions permit a testator to choose the law of his or her nationality to govern the devolution of the testator’s estate (e.g., Switzerland). In such cases, it may be recommended that the testator execute a will in the country of his or her nationality. The EU Parliament and the EU Council approved rules in June 2012 that permit a testator to choose the law of his or her country of nationality. The main features of the proposal allow for a single law to govern a succession document, mutual recognition of decisions in the European Union, and the status of heir, administrator and executor is recognized on the basis of the European Certificate of Succession. These rules will come into force in June 2015. Belgium, the UK, and Ireland have opted out of these rules.
  2. Validity in Foreign Country
    1. Will the U.S. will be valid in another country?

The answer points to several issues. One is the form of the will and the second is its substantive provisions. Firstly, regarding formal validity, the question is: will the U.S. admit to probate a will as a valid will and will the foreign jurisdiction admit the will as a valid will? The answer in each particular case is helped by the convention providing a uniform law on the form of an international will (the Washington Convention, also known as the International Will Statute).[82]

  1. The Washington Convention
    1. The Washington Convention has been adopted by the following countries: Belgium, Bosnia and Herzegovina, Canada (subject to certain reservations and the non-application of the convention in Quebec), Cyprus, Ecuador, France, Italy (subject to certain reservations), Libya, Niger, Portugal, and Slovenia. Several countries have signed the treaty, but it has not yet been ratified or entered into force. These include the Holy See, Iran, Laos, Russia, Sierra Leone, and the United Kingdom.
    2. The U.S. is an original signatory to the Washington Convention, but it needs to be adopted by each state under the Uniform International Wills Act. Approximately half of the U.S. states have adopted the International Will Statute including the following: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Illinois, Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Virginia, and the Virgin Islands. Most of the Canadian Provinces have also adopted legislation implementing the principles of the Washington Convention.[83]
    3. The advantage of a jurisdiction’s adopting the International Will Statute is that those jurisdictions will accept wills executed in conformity with the statute’s requirements. The statute sets forth requirements as to form which are set forth in a certificate by an authorized person. The limitation of the International Will Statute is that it has no effect on the substantive validity of the will.
  2. The Hague Conventions
  3. The Hague Convention Relating to the Form of Testamentary Disposition of 1961 (“The Hague Convention on Form”) was the precursor to the Washington Convention and had similar aims. The Hague Convention’s approach was quite different and answered the question of formal validity through a uniform choice of law rule rather than a uniform law of substantive validity. In countries which adopted the convention (which include most of Europe but not the United States), a Will will be deemed valid:
    1. if it complies with internal law of the place where the testator made it, or
    2. of a nationality possessed by the testator either at the time when he made the disposition or at the time of his death, or
    3. of a place in which the testator had his domicile either at the time when he made the disposition or at the time of his death, or
    4. of the place in which the testator had had his habitual residence either at the time when he made the disposition or at the time of his death, or
    5. so far as immovable are concerned, of the place where they are situated.[84]
  4. The following countries are parties to the Hague Convention on Form as of August 19, 2011: Antigua and Barbuda, Armenia, Australia, Austria, Belgium, Bosnia and Herzegovina, Botswana, Brunei Darusslam, China (Hong Kong only), Croatia, Denmark, Estonia, Fiji, Finland, France, Germany, Greece, Granada, Ireland, Israel, Italy Japan, Lesotho, Luxembourg, Macedonia, Maldova, Mauritius, Montenegro, the Netherlands, Norway, Poland, Serbia, Slovenia, South Africa, Spain, Swaziland, Sweden, Switzerland, Tonga, Turkey, Ukraine, and the United Kingdom.
  5. The Hague Convention permits a country flexibility in adopting a general choice of law rule in the convention. Even though the U.S., is not a party to the Hague Convention on Form, some states in the U.S. have adopted its choice of law rule with respect to the formal validity of wills. This can be found in the Uniform Probate Code.
  6. In countries which have not adopted either the Washington Convention or the Hague Convention on Form, it is uncertain which law applies to determine whether the will is formally valid. Generally speaking, in common law countries which have not adopted The Hague Convention, they generally take an approach similar to English Law related to the formal validity of wills. Civil law countries, on the other hand, follow a nationality principle in choice of law matters. So, for U.S. citizen clients, a will valid in the U.S. should be valid in that civil law country.
  7. Holographic Wills can result in issues of vagueness. They may be valid and customary in the jurisdiction where they are executed but not necessarily accepted in another country. For example, testator executes a holographic Will in Switzerland where she is resident. Holographic Wills are valid in Switzerland. Under Florida law, unless the testator is domiciled in Switzerland when she executed it, it will not be valid in Florida resulting in a potential intestacy situation. New York, by contrast, would accept the Will as valid as long as it is valid in Switzerland, regardless of the Testator’s domicile. Subject to limitations, states that recognize holographic wills include, but are not limited to: Alaska, Arizona, Arkansas, California, Colorado, Idaho, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.
  8. Choice of Law
  1. What law should one use to determine whether your U.S. client’s Will will be substantively valid in the foreign jurisdiction? This turns on choice of law rules both in the U.S. as well as the foreign jurisdiction. This may be fairly complicated as some jurisdictions base the result on the type of property as well as the nationality or domicile of the decedent. For example, many civil law countries base their choice of laws, rules and succession law on a person’s citizenship rather than domicile. This would include Germany, the Philippines and some Scandinavian countries. France on the other hand uses domicile in choice of law on succession law matters as does Belgium. Switzerland has an unusual rule that uses different rules based on whether the non-Swiss citizen is or is not domiciled in Switzerland.
  2. New York has a unique statute[85] which permits a testator to choose New York law to apply to his or her estate. (See discussion below regarding forced heirship).
    1. Substantive Law

One of the major substantive issues in dealing with foreign jurisdictions is the forced heirship rules. U.S. courts generally try to avoid recognizing forced heirship claims based on the laws of the decedent’s country of citizenship. Several cases have examined this question and generally apply the U.S. principles of testamentary freedom rather than the foreign forced heirship laws.[86]

  1. Renvoi

When there’s a conflict of choice of law rules, the doctrine of Renvoi may come into play. Renvoi arises when the conflict of law rules in the U.S. refer a matter to the law of another jurisdiction. In applying that other law, generally under the substantive law and not the conflict of law rules, an exception may be triggered called double Renvoi. Under this concept, a succession law matter related to foreign real property owned by a U.S. decedent being litigated in a U.S. court, the court may attempt to decide the case in the same matter as a court in the other country applying both the substantive law and choice of law rules. However, in applying the foreign country’s choice of law rules, that foreign country may be applying U.S. substantive law. If the U.S. court concludes that the foreign court would not accept the “transmission” of the governing law from the U.S. court, then the U.S. court will apply its substantive rules.

  1. Hague Convention on Succession

In the 1989 Hague Convention on the Law Applicable to Succession to the Estates of Deceased Persons (“The Hague Convention on Succession”), it addresses the choice of law issues related to substantive succession law matters by trying to develop a uniform set of choice of law rules for substantive succession law matters. It has no real significance in international succession law matters at this point, since only Argentina, Luxembourg, the Netherlands, and Switzerland have signed the convention and only the Netherlands has ratified it.

  1. Hague Convention on Trusts

In the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition (“The Hague Convention on Trusts”), it attempts to coordinate choice of law rules so that one country will recognize a trust that is valid in another country. As of August 17, 2010, the following countries have ratified The Hague Convention on Trusts: Australia, Canada (subject to certain reservations and the non-application of the convention in Quebec), China (Hong Kong only), Italy, Liechtenstein, Luxembourg, Malta, Monaco, the Netherlands, San Marino, Switzerland, and the United Kingdom (including many of its territories, including Bermuda, Gibraltar, and the Isle of Man.)

Several countries have signed the treaty but it has not yet been ratified or entered into force. These include the Cyprus, France, and the United States.

  1. Documentation-What to Draft
    1. General

So how should one dispose of foreign assets under U.S. estate planning documents? Even if a jurisdiction with which the U.S. advisor is dealing with has adopted the Hague conventions, it still may be wise to avoid using a revocable trust. For example, even in registering property in the name of a trustee in a country which has signed The Hague Convention on Trusts, the registration may disclose only the name of the trustee and may not reflect the fact that the property is owned by a trust. Problems may arise when the client uses the pour over will and revocable trust combination. Canada, for instance, may not recognize a pour over gift to a trust if the trust has been amended since the execution of the will. Thus, it may be preferable to use outright specific gifts to individuals when possible as opposed to maintaining them in trust.

  1. Revocable Trusts
  2. Using revocable trusts may have adverse foreign tax consequences. Notwithstanding that many civil law countries are unfamiliar with the bifurcation of title in the trustee and equitable ownership in the beneficiaries, such countries may impose a higher rate of tax. Many civil law countries have true inheritance taxes taxing the recipient of gifts based on their relationship to the decedent. Germany, England and Canada all present examples of adverse tax consequences when using trusts.
  3. Germany. Germany, for instance, may treat a trust as a Class III beneficiary regardless of the trust beneficiaries. This triggers a top marginal rate on a gift or request to a trust at 50% whereas to a descendant, a Class I beneficiary, the top marginal rate would have only been 30%. Thus, in planning for clients leaving assets to German resident or citizen beneficiaries, revocable trusts should probably be avoided.
  4. UK. Under UK law, even though revocable trusts originated under English law, a bequest of UK real property to a wholly discretionary trust will result in the trust paying a tax every 10 years of up to six percent. Under UK law announced in 2006, there may also be other adverse ramifications including an entry charge of 20% and an exit charge of 20%.
  5. Canada. In Canada, which has repealed its estate tax, but has a deemed disposition at death tax, may except under limited circumstances, trigger a Canadian capital gains tax upon the transfer of appreciated Canadian real property to the revocable trust. Additionally, the trust will be deemed to have disposed of the property for Canadian capital gains tax purposes every 21 years in the absence of an intervening taxable event with respect to that property.
  6. France. Effective July 31, 2011, new French legislation imposes onerous tax and reporting rules on trusts where (1) the settlor is French resident; (2) any beneficiary is French resident; or, (3) any trust asset is French situs. There are certain exceptions for some French financial assets for non-French resident settlors, beneficiaries and trustees. For assets in a trust, French gift and inheritance taxes will now apply regardless of the location of the assets if either the settlor or the beneficiaries are French resident. French gift and inheritance tax will also apply to assets located in France even if both the settlor and the beneficiaries are non-French resident. The tax rate that will apply to the gift (upon transfer to the trust) or inheritance (if at death) depends on the relationship between the settlor and the beneficiaries. In addition, assets in trust are counted for French wealth tax purposes. The settlor must include the value of their assets in trust in his or her annual French wealth tax computation. A beneficiary will be deemed the settlor when the original settlor dies and then must include the value in his or her wealth tax calculation. The new law also imposes a new disclosure/registration requirement and onerous penalties for failing to comply.

Thus, whenever dealing with a client in another jurisdiction or property in another jurisdiction, the U.S. advisor should always engage foreign counsel and oftentimes avoid the use of trusts.

  1. Guardianship
    1. Custody and guardianship

, while distinct with respect to the powers and responsibilities involved, are both determined in some states (e.g., Virginia) based upon “the best interests of the child” standard.

  1. Guardianship. “[T]he chancellor should deny . . . a petition [for guardianship] only where it appears from the record that the transfer of guardianship of the person would be detrimental to the best interests of the child.”[87]
  2. Custody. “In determining custody, the court shall give primary consideration to the best interests of the child.”[88] In determining the best interests of the child, the court shall consider the factors set forth in Va. Code Ann. 20-124.3, as well as “[s]uch other factors as the court deems necessary and proper to the determination.”[89]
    1. A Virginia state circuit court case upheld a Vermont custody order between a now-dissolved civil union between same-sex parents.[90] Janet Jenkins and Lisa Miller lived in Virginia when they traveled to Vermont to enter into a civil union. After returning to Virginia, they had a child. Their civil union was dissolved in Vermont and a custody order awarded primary custody to Miller and visitation rights to Jenkins. Miller asked the Virginia court system to assert jurisdiction over the case. The Virginia Court of Appeals rejected Miller’s arguments, holding that Vermont’s courts, not Virginia’s, had jurisdiction in the case.Within the framework of the “best interests of the child” inquiry, the court is very likely to consider any foreign connections. Particularly as parental kidnapping cases involving abductions to foreign countries have become more publicized.[91]
    2. For example, in Samman v. Steber, the trial court considered, among other factors, that “[husband] has made, on more than one occasion, a threat to abduct [the child], to remove him to the country of Syria, which is a country that is not a signatory of the Hague Convention and is a country that does not observe U.S. law or U.S. Court orders with respect to custody.”[92]
    3. Accordingly, while there is no prohibition on awarding guardianship or custody to a person abroad, the court will likely consider the proposed foreign location within the facts and circumstances of the case to determine if such appointment is in the child’s best interests.
  1. Forced Heirship
    1. Introduction

It is crucial to look at conflicts of law, particularly a client’s domicile may differ from the situs of his or her assets. A look at conflict of law is important and often at the planning stage, but definitely confronted at the estate administration stage. The world tends to be divided into common law regimes or civil law jurisdictions. Common law jurisdictions generally permit freedom of testamentary disposition while civil law jurisdictions have the concept of forced heirship. Frequently, civil law jurisdictions have decedents dying without wills since the forced heirship rules provide for the majority of the estate being disposed of by absolute decree. Civil law jurisdictions often do not have the concept of trusts in their vernacular although by treaty (such as the Hague Convention on the Law Applicable to Trusts and their Recognition, they do recognize them. When planning for a client, one should examine the threshold question of the client’s domicile as well as the situs of assets in the client’s estate. If either the asset is located in a civil jurisdiction with forced heirship or the client’s domicile is in a jurisdiction with forced heirship, one must be mindful of the forced heirship rules. Often times there will be a direct conflict between the two jurisdictions and the two regimes. When examining the impact of forced heirship, rules on the estate of a decedent who has assets in the United States (a jurisdiction without forced heirship other than in Louisiana) one must determine if the forced heirship laws will disrupt the estate plan. When it comes to enforcing forced heirship in the United States, the U.S. case law tends to divide decisions into forced heirship for descendants and statutory share for surviving spouses. If a descendant is trying to enforce forced heirship, it frequently will not be upheld in U.S. courts, however, the statutory share claims are often upheld. Many forced heirship claims and the cases examining those claims are found in New York. Of course, many other states look at them also.

  1. Forced Heirship
    1. General

Forced heirship refers to rights under testamentary laws which limit the discretion of a decedent to distribute assets under testamentary document upon death. Forced heirship laws are most prevalent in civil law jurisdictions and in countries applying Islamic law (Sharia); these include major countries such as France, Germany, Saudi Arabia, Iran, and Japan and provinces e.g., Quebec and Louisiana. Most countries’ forced heirship laws protect the “reserved heirs” frequently the descendants even to the exclusion of a surviving spouse.

  1. Example of forced heirship in France. Under French civil law, domiciliaries of France and owners of French immovables do not have an unrestricted right to dispose of the estate and assets freely, since certain members of the decedent’s family have an absolute right to inherit part of the estate (legal reserve or “réserve héréditaire”). A will must respect the minimum (the legal reserve), which must be left to children and/or parents. For instance, below is the legal reserve for children, varying according to the number of children:

Number of children

Legal reserve to the children

One child

1/2 of the estate

Two children

2/3 of the estate (divided between the children)

Three children or more

3/4 of the estate (divided among the children)

Once the reserve has been calculated, the remaining assets can pass freely to another person, provided there is a will. The rights of the spouse vary according to the marital regime. Note, France has recently introduced provisions that will permit a beneficiary to waive his or her forced heirship rights.

  1. Practice Tip

: Don’t fail to consider forced heirship and the citizenship of your client.

Some countries apply forced heirship rules based on nationality rather than residency. For example: Germany applies its forced heirship rules on the nationality of the decedent. So, even if the client is a dual U.S. German national and resides in the U.S. with solely U.S. assets, an heir may make a claim under Germany’s forced heirship rules and again disrupt the plan. Thus, if your client wishes to leave 100% to his surviving spouse to take advantage of the 100% marital deduction, forced heirship rules applicable to him may force more unsheltered assets to pass to his children.

Rule: If your client has any connection to a foreign country, engage foreign counsel to advise on nontax ramifications.

  1. Practice Tip

: Don’t fail to consider forced heirship rules or fail to take into account foreign tax ramifications of the tax clause in wills and trusts.

Most civil law jurisdictions have forced heirship rules which provide for a reserved share to certain reserved heirs (e.g., children) which may disrupt and override the estate plan you have drafted. Further, in civil law jurisdictions, it is generally the recipient who pays the inheritance tax. So, if you draft a will whose tax clause provides as follows:

“all estate, inheritance, transfer, succession, legacy and other death taxes or duties, including any interest and penalties thereon, payable by reason of my death under any laws of the United States or any foreign country shall be paid as an expense of administration from my general testamentary estate”

the result could be that the U.S. beneficiaries and assets bear the brunt of the inheritance tax on assets passing to a disinherited heir.

Example: Mom, a U.S. citizen, establishes a U.S. revocable trust with the majority of her liquid assets. She also has real estate in a civil law jurisdiction e.g., France. Under her will and trust, she leaves all her assets to her granddaughter and charities and excludes her wayward son from whom she has been estranged for decades. Son makes a forced heirship claim against her estate in France and takes 50% of all her French assets valued at 10 million Euros. The tax is 45% or 4.5 million Euros[93]. Based on the terms of the tax clause in the U.S. will and U.S. trust, he guts the U.S. trust of 4 million Euros to pay his French inheritance tax obligation.

Rule: Carefully consider whether your client’s estate may be exposed to forced heirship claims which could disrupt the estate plan. Also, make sure you consider the tax clause in case an heir (even with a no contest clause) asserts a forced heirship claim in a foreign country.

  1. Forced Heirship-U.S. Cases
  1. Court cases also turn on an examination of the domicile of the decedent and the law applicable to the decedent’s estate. Others, such as NY, often look to the situs of the asset regardless of the decedent’s domicile and emphasize the right of testamentary freedom by selecting NY law to apply to the disposition of one’s estate.

The following cases involve forced heirship by descendants.

  1. Most recently, in Matter of Meyer,[94] the New York Appellate Court again upheld testamentary freedom of the decedent over the claims of her estranged son asserting a forced heirship claim under French law. Francine Meyer died in New York. She was a French citizen who maintained that her domicile was in Bermuda where she owned a condominium, had a residency permit there and recited Bermuda as her place of domicile in her estate planning documents and French passport. She left the majority of her $33 million estate to charity and others and not to her three children one of whom was her estranged son, Patrick Meyer. The decedent had executed a New York will and two codicils in which she directed that New York law govern the testamentary dispositions of her New York situs property; she also had a Bermudan will. Her son brought an action to recover his forced heirship share from the inter vivos gifts. He claimed that French forced heirship laws gave him (and his two siblings) the right to three-quarters of his mother’s estate including the lifetime gifts she made to the Emerald Foundation and other charities. The court stated that regardless of her domicile (which the court determined to be Bermuda) forced heirship provisions of a civil law jurisdiction like France are inapplicable to inter vivos transfers of property executed in New York, irrespective of whether the transferor’s domicile was New York or France. This is because the validity and effect of these transfers, as well as the capacity to affect them, are governed by the law of the state where the property was situated at the time of the transfer. The court stated that there is no valid policy distinction that would allow a non-resident testator to avoid French forced heirship claims by invoking New York law with respect to assets physically situated in New York, but not with regard to previous inter vivos transfers of assets physically situated in New York. The court ruled that under the New York statute, a French domiciliary could opt for the application of New York law to her New York property, thereby precluding her son from taking a share of it, as the French forced heirship law would have allowed. Thus, the court reinforced the policy rationale permitting testamentary freedom from forced heirship rules to apply equally to both testamentary and inter vivos transfers.

The court stated that there is no valid policy distinction that would allow a nonresident testator to avoid French forced heirship claims by invoking New York law with respect to assets physically situated in New York but not with regard to previous inter vivos transfers of assets physically situated in New York. Thus, the court reinforced the policy rationale permitting testamentary freedom from forced heirship rules equally to testamentary and inter vivos transfers.[95]

  1. In re Cook’s Estate, the court held that a Cuban domiciliary who directed that his will be probated in New York and construed under New York law leaving his entire estate to his wife, the New York Surrogate’s Court upheld the decedent’s disposition by applying New York law, leaving his entire estate to his wife, contrary to Cuban forced heirship law.[96]
  2. In re Estate of French, a Swiss decedent left his entire estate to his second wife and the New York Surrogate’s Court ruling that property located in New York would be disposed of under New York law upheld the testamentary disposition but conceded that the Swiss court may ignore the court’s decision with respect to property located in Switzerland.[97]
  3. In Wyatt v. Fulrath,[98] the New York court upheld the right of a husband and wife, both of whom were Spanish domiciliaries, to have a bank account pass to the survivor in contravention of Spanish forced heirship rules. The court held that if the transferor has the capacity to make a transfer according to the law of the situs of the chattel at the time of the conveyance, it is immaterial that he does not have that capacity according to the law of the state of his domicile. In this case, the couple was domiciled in Spain, a community property jurisdiction, and they established a series of joint tenancy bank accounts in New York. Upon opening the accounts, both executed survivorship agreements spelling out that the funds therein would pass to the survivor. The issue at the husband’s death was whether the law of Spain (his domicile) or New York (where the asset was located) would control. If Spanish law governed, the wife would take her one-half share as community property, with at least two-thirds of the decedent’s half passing to his heirs, since Spanish law provides forced share rights for children in an amount equal to two-thirds of the decedent’s assets. The Court of Appeals, relying both on the survivorship agreements and the local public policy of encouraging foreign persons to place assets in New York, held the New York survivorship feature controlled, with the husband’s portion passing entirely to the benefit of the wife.
  4. The New York Court reaffirmed the Wyatt principle in De Werthein v Gotlib,[99] holding that New York law, rather than the laws of Argentina, governed the ownership and distribution of two New York “Totten trust” bank accounts a deceased Argentine national had established during his lifetime. The decedent had opened the accounts with his brother named as beneficiary. Upon the decedent’s death, his surviving spouse and the daughter of a deceased prior spouse brought separate actions to recover the proceeds of the accounts. The New York Supreme Court consolidated the actions and granted summary judgment for the brother. On appeal, the court affirmed. With regard to the surviving spouse’s claim, the court held that she was not entitled to a “forced share” of the accounts under Argentine law because New York law, rather than the law of the foreign country in which the spouse was domiciled, controlled as to whether she had any interest in the accounts that were created before the marriage and never revoked.
  5. In Hutchinson v. Ross, a domiciliary of Quebec established an inter vivos trust in New York, and the court held that New York law should govern the validity of the trust in spite of the fact that the trust’s dispositive provisions violated Quebec law.[100]
  6. In Watts v. Swiss Bank,[101] French domiciliaries opened a joint account in New York with rights of survivorship and designated that New York law governed. The husband died and his daughter from a prior marriage claimed her forced heirship share of the account. Here, the New York Court of Appeals said that the issue was res judicata because a French court had already decided in favor of the daughter who had sought judgment for her forced share in a French court, and only the issue of whether or not the New York court would recognize a foreign judgment under the rules of comity remained. The court held that public policy was not violated in such a manner as to justify non-recognition of the French judgment and therefore the French judgment was upheld. This case predates the New York statute which allows decedents to choose New York law to govern the disposition of their New York assets. Furthermore, cases subsequent to Watts have clearly shown a propensity of New York courts to resist forced heirship claims.
  7. The landmark forced heirship case is In re Renard.[102] This is a two-part case with Renard I and Renard II (the Renard cases). In this case, Jean M. Renard was a domiciliary of France, but had formerly resided in New York. She executed a New York will providing that New York law would govern the disposition of her assets located in New York. She was survived by a son who resided in California. He attempted to enforce his French forced heirship claim of one-half of her estate against her will in the New York probate proceedings. The New York Surrogate’s Court granted the executor’s applications for distribution of assets in the manner set forth in the will and contrary to any forced heirship claims, concluding that New York law was intended to permit a non-resident testator to invoke New York law with respect to assets physically situated in New York and thereby avoid the forced heirship rules of his or her domicile. The New York court reiterated that a non-domiciliary of New York may elect in a will to apply New York law so as to avoid the forced heirship provisions of the law of her domicile at the time of death. It was the opinion of the court that New York’s interest in testamentary freedom was paramount and thus its law should apply. The New York Surrogate’s Court concluded that based on its legislative history, New York law[103] was intended to permit a decedent to avoid forced heirship rights of a foreign jurisdiction in personal property by directing the application of New York law. The court held that New York when a non-domiciliary directs her will to be probated in New York, and that it is to be governed by its law, the forced heirship laws of a foreign state do not apply. Specifically, New York Estates, Powers and Trusts Law §3-5.1 (h) gives a testator the option of having New York law apply to the disposition of property in New York on matters relating to the “intrinsic validity” of the disposition.
  8. In In re Accounting of Garretson, the court upheld a testamentary disposition of property against the forced heirship claim of an illegitimate child arising under Mexican law where the testator was domiciled.[104] Again, the court found that the laws of New York were applicable to personal property at issue.
    1. Forced Heirship-foreign cases
  9. Contrary to the cases in New York, the French courts provide examples of enforcing forced heirship claims. The facts of Holzberg v. Sasson, are as follows: an Italian citizen who was domiciled in NY transferred assets to a Liechtenstein foundation in order to leave assets to her three sisters instead of her daughter who was a French citizen and domiciled in France. Prior to her death, the decedent opened three accounts in Pairs, one with each sister. At her death, the daughter was able to obtain an order freezing the accounts, counting their value in the worldwide estate in order to calculate her forced heirship share and then use the accounts to satisfy such claim.[105]
  10. In Leslie Caron v. Odell, the French Cour de Cassation again upheld the claim of a child to enforce her forced heirship claim against her deceased father’s estate. In this case, Mr. Caron, a French citizen moved to the United States and became a naturalized citizen. Knowing that French forced heirship rules may apply to his French real estate, he converted it into an immovable by purchasing it through a U.S. corporation. He transferred 2/3 of the shares to a trust for his lifetime, with the remainder to Mrs. Odell. The other 1/3 was owned by Mrs. Odell. Under the terms of his will, Mr. Caron left 1/2 of his estate to Mrs. Odell and 1/2 to charity, and nothing for Leslie Caron. The French court held that Mr. Caron’s action were an abuse of the law and a fraud used to deliberately disinherit a child. The court held the French real property held in the U.S. Corporation was available to satisfy the daughters forced heirship claim.[106]
    1. Comity

1.Nahar v. Nahar[107] is the landmark Florida case regarding comity. On May 15, 1984, Roebi Nahar, a citizen of Surinam, died in Miami, Florida. He was survived by his second wife, Glenda, their three minor children, and six adult children by a previous marriage. At the time of his death, the decedent, his wife, and the couple’s three minor children resided in Miami in a home owned by the decedent and his wife. At the time of his death, he held $657,000 deposited in six Florida bank accounts, three of which were joint accounts with right of survivorship between the decedent and his wife, two were trust accounts established for the minor children with the decedent and Glenda named as joint trustees, the last was a Totten trust account opened by the decedent for Glenda and the minor children, naming the decedent as trustee. The decedent also owned certain other assets located on the island of Aruba.[108] The decedent’s adult children, residents of Aruba, petitioned the Aruban court of First Instance to administer the disposition of the Aruban properties and the Florida bank accounts according to the law of The Netherlands, arguing that he was domiciled in Aruba. The adult children did not ask for a ruling on the Miami real estate. The adult children alleged that the decedent, his wife, and their minor children only resided in Miami temporarily and that their actual permanent place of residence was in Aruba. The Aruban court obtained personal jurisdiction over Glenda when she appeared in Aruba to contest the action. The Aruban proceeding ordered Glenda to transfer the money from the Florida accounts to Aruba. Glenda appealed and the Hague ruled that Dutch law, not Florida law, controlled the decedent’s estate and that the money from the Florida accounts was presumptively an asset of the estate.[109]

2.The adult children filed an ancillary administration in Florida requesting that the Florida court order a transfer of the bank accounts to Aruba, thereby enforcing the Aruban court order. Glenda argued that the Florida bank accounts and Miami real estate had passed by operation of Florida law to her and her children and thus their disposition was made outside of any probate proceeding.[110] The Florida trial court entered summary judgment for the adult children and ordered the bank holding the proceeds of the original accounts to transfer them to Aruba for probate. Glenda appealed. The Court of Appeals for the Third District of Florida found that the trial court was correct in enforcing the Aruban court order because a foreign order should be extended comity where the parties have been given notice and an opportunity to be heard, the foreign court has original jurisdiction, and the order does not offend the public policy of the state of Florida.[111]

3.The court in Nahar held that the statute did not apply to bank accounts opened and closed before July 1, 1988. Three of the accounts at issue were held by the decedent and Glenda as joint tenants, two were trust accounts naming the decedent and Glenda as co-trustees for their minor children, and one account was a Totten trust account which named Roebi as trustee for Glenda and their children. The court determined that while Roebi’s personal and intangible property may be governed by the judgment of the Aruba court, the Miami real estate may be subject to a different result.

4.The court determined that the Restatement (Second) Conflict of Laws should be used instead of deciding on a case by case basis whether comity should be granted. The court went on to state that “any foreign decree should be recognized as a valid judgment, and thus be entitled to comity, where the parties have been given notice and the opportunity to be heard, where the foreign court had original jurisdiction and where the foreign decree does not offend the public policy of the State of Florida.” The Florida court found that the Dutch court had the power to determine the decedent’s domicile and determine the substantive law that would apply to the decedent’s estate.[112]

5.The court held that the trial court erred in finding the “Totten Trust” to be under the jurisdiction of the Dutch court as it was not subject to dispute in the Dutch action, Glenda was not on notice, nor was it the subject of any order by the Dutch court. Additionally, the court held that it was a true trust account which vested on the decedent’s death.[113]

6.In Nahar, the dissent viewed the use of comity to be inappropriate because of the controlling Florida conflict of law rules governing joint bank accounts and Totten trusts and the public policy considerations involved.[114] Under Florida law, the bank accounts would have passed to Glenda and her minor children. It is under Dutch “forced heirship” law that the bank accounts are presumptive probate assets notwithstanding their ownership under Florida law. The dissent claims, however, that Florida law, not Dutch law, should govern the disposition of all the bank accounts based on the Florida conflict of law rule, that comity principles are inapplicable, and Florida law requires the bank accounts to pass to Glenda and her minor children.[115] In particular, the dissent determined that conflict of law rules require the law of the situs of the account to govern the disposition of a joint bank account and that comity principles are inapplicable.[116] The dissent cited previous caselaw which stated that the disposition of a joint bank account is governed by the law of the situs of the account regardless of the domicile of any party to the account.[117] Finally, the dissent points out that the court did not provide comity to a Dutch decree as no decree had been entered into regarding the disposition of this property, instead the court turned jurisdiction over the accounts to the Dutch court without a judgment.[118]

  1. Spousal Claims

By contrast, even New York courts will uphold the right of a surviving spouse to claim an elective share right under the laws of another jurisdiction giving a larger share than New York. In In re Clark, the New York Court of Appeals permitted a surviving spouse (from Virginia) to claim the Virginia elective share which was greater than that offered by New York against her Virginia decedent husband’s estate who chose New York law. The court reasoned that an elective share is not a “testamentary disposition” but a restriction on the decedent’s right to make a disposition in contravention of such right of election.[119]

Rights of spouses are often upheld in U.S. courts, even of the rights arising in another state. Clark is an example of such a decision and forcing a spousal share right. This may be grounded in the fact that most common law jurisdictions grant a spouse the right to take against the decedent’s will in effect to forced heirship share for a spouse, but treated quite differently in the United States. An example includes, Estate of Gould. In this case, the decedent was resident in Bermuda but the will left the personal property located in Ohio to someone other than his spouse. Even though Bermuda did not give the surviving spouse any elective share rights, she was able to claim them under Ohio law and the Ohio court enforced such claim.[120]

  1. Trusts

In examining the enforcement of forced heirship laws against trust, the courts will often look at the applicable law/governing law of the trust. A distinction may be made between inter vivos trusts and testamentary trusts. How a civil law jurisdiction will treat trusts may vary in approach. Sometimes the civil law jurisdiction will look through the trust and see who ultimately receives the assets and whether the distribution is outright or in further trust and whether it is in satisfaction of a forced heirship claim. Again, U.S. courts seem resistant to permit forced heirship claims in contravention of a trust’s terms. If a client wishes to strengthen the argument that the trust assets should be governed by the terms of the trust and not disrupted by forced heirship and the like, the client should establish the trust during life, fund it during life, select a trustee in the trust’s jurisdiction and no trustees domiciled in a civil law jurisdiction over whom a civil law court may have jurisdiction.

  1. Treaties and Conventions

One must not overlook the impact of any applicable treaty or the 1989 Hague Convention on the law applicable to succession to the estate of deceased persons (“1989 Convention on Succession”). Some treaties may give a testator a choice of applicable law. For example, In re Estate of Zietz, a Liechtenstein domiciliary died in Austria. The executor sought administration in New York. Liechtenstein and Austria were treaty partners which declared that the laws of the decedent’s nationality would govern the deceased disposition of the estate. The New York court applied Liechtenstein law. Under the 1989 Convention on Succession, a testator’s jurisdiction of habitual residence and nationality is what applies. If the testator’s nationality and habitual residence are not the same, then the law of the jurisdiction of habitual residence will trump the nationality provided the testator lived in such jurisdiction for a continuous period of five years prior to death. If not, the law of the testator’s nationality will apply unless the decedent had closer connections to the other jurisdiction.[121]

The 1989 Convention on Succession also provides that the testator may choose the law of habitual residence or nationality at the time of making a will or at the time of death.

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  1. Conclusion

Whether a client is attempting to circumvent forced heirship of the client’s domicile, nationality or location of assets, where the case will be brought will typically affect the outcome. There may be methods to carry out a testator’s intent even absent changing domicile or converting assets from one classification to another, but it will often involve advance planning.

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About the Author

John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.

To provide feedback on this article or suggest an idea for a future article, please contact Tiffany Michelle Hunt, J.D., LL.M., Director of Tax Planning at Castro & Co., at T.Hunt@CastroAndCo.com.


Bluebook Citation: John Anthony Castro, International Estate Planning Guide, Castro Int’l Tax Blog (September 8, 2019).


[1] For this purpose, the term “foreign persons” includes nonresident aliens and foreign corporations, as those terms are defined under IRC § 7701. Unless otherwise noted, all Section or § references are to the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and the Treasury regulations promulgated under the Code.

[2] IRC § 871(b), 882.

[3] Treas. Reg. § 1.6012-2(g)(1).

[4] See IRC §§ 871(a)(1), 881(a).

[5] IRC §§ 871(a)(1), 881(a), 1441-1443.

[6] Treas. Reg. §§ 1.6012-1(b)(2)(i), -2(g)(2)(i).

[7] Treas. Reg. § 1.1441-2(b)(2)(i).

[8] See Rev. Rul. 88-3, 1988-1 C.B. 268.

[9] IRC §§ 871(d), 882(d).

[10]IRC § 861(a)(5).

[11] See IRC § 897(c).

[12] IRC § 897(c)(2).

[13] See Treas. Reg. § 1.1445-1(f)(2).

[14] See IRC §§ 2101(a) and 2103 (estate tax); §§ 2501(a) and 2511(a) (gift tax).

[15] See Treas. Reg. § 20.0-1(b)(1).

[16] IRC § 2103.

[17] IRC § 2104(a).

[18] See IRC §§2101, 2102.

[19] See Treas. Reg. § 20.2104-1(b).

[20] IRC § 2501(a)(2).

[21] See Treas. Reg. § 26.2652-1(a)(1).

[22] W. Ed Funiak & M. Vaughn, Principles of Community Property 1 (2d ed. 1971).

[23] Uniform Disposition of Community Property Rights at Death Act (“Uniform Disposition Act”), 8A U.L.A. 191 (1993).

[24] See Robert C. Lawrence, III, International Tax & Estate Planning, 4.1– 4.84, for an excellent discussion of the effect of community property on the international estate plan.

[25] Uniform Disposition of Community Property Rights at Death Act as drafted by the National Conference of Commissioners on Uniform State Laws, prefatory note (1971).

[26] Internal Revenue Manual 25.18.1.2.23 (02-15-2005).

[27] Internal Revenue Manual 25.18.1.2.24 (02-15-2005).

[28] Poe v. Seaborn, 282 U.S. 101 (1930).

[29] Internal Revenue Manual, 25.18.1.1.4 (03-04-2011).

[30] IRC § 879(a)(1).

[31] IRC § 879(a)(2); Treas. Reg. § 1.879-1(a)(3).

[32] Treas. Reg. § 1.879-1(a)(4).

[33] IRC § 879(a)(3); Treas. Reg. § 1.879-1(a)(5).

[34] Treas. Reg. § 1.879-1(a)(6).

[35] Roeser v. Comm’r, 2 T.C. 298, 303 (1943).

[36] See Robert C. Lawrence, III, citing Wiley, Rosepink & Brecheen, Handling the Tax Problems That Can Result from a Move to or from a Community Property State, 24 Tax’n For Acct, 312, 313 (1980).

[37] IRC § 1014(b)(6).

[38] IRC § 2040(b).

[39] IRC § 2056(d)(1)(B).

[40] IRC § 2040.

[41] IRC § 2515(a), now repealed.

[42] Siegler, Transfers to Noncitizen Spouses, 842 T.M. A-4.

[43] See Treas. Reg. § 20.2056 A-8(a)(2).

[44] Treas. Reg. § 25.2511-1(h)(4).

[45] Bittker & Lokken, Federal Taxation of Income, Estate, and Gifts.

[46] Treas. Reg. § 20.2041-1(a)(2).

[47] IRC § 2523(i).

[48] IRC § 2513(a)(1).

[49] Treas. Reg. § 2056 A.

[50] Treas. Reg. § 20.2014-3(b).

[51] The applicable exclusion amount of $60,000 is not available to a nonresident alien for lifetime gifts.

[52] IRC § 2040.

[53] The revocation of the U.S- Sweden Estate and Gift Tax Treaty was effective as of Jan. 1, 2008.

[54] Treas. Reg. §301.6114-1.

[55] Protocol Amending Tax Convention on Inheritances with France, Nov. 4, 2005, U.S.-Fr. (ratified Dec. 8, 2006), amending the Convention for the Avoidance of Double Taxation, Nov. 24, 1978, 32 U.S.T. 1935.

[56] Article 11(2) of the U.S.-France Estate Tax Treaty as amended by the 2004 Protocol.

[57] Id.

[58] Article 11(3) of the U.S.-France Estate Tax Treaty as amended by the 2004 Protocol.

[59] Id.

[60] Radmacher v. Grantino, UKSC 42 (2010).

[61] Rev. Rul. 58-66.

[62] Kleinfield v. Veruki, 372 S.E.2d 407, 409 (Va. Ct. App. Sept. 20, 1988).

[63] Farah v. Farah, 429 S.E.2d 626, 629 (Va. Ct. App. May 11, 1993) (finding that a Muslim “proxy” marriage celebrated in England was invalid because the parties never “created a common-law marriage by entering into a relationship as husband and wife in any jurisdiction that recognizes common-law marriages”); see also Kelderhaus v. Kelderhaus, 467 S.E.2d 303, 305 (Va. Ct. App. Feb. 27, 1996).

[64] McFarland v. McFarland, 19 S.E.2d 77, 82 (Va. Sup. Ct. Mar. 2, 1942).

[65] See Va. Prac. Family Law section 6.2 (2011-12 ed.); see also 27C C.J.S. Divorce section 1215 (“A state may not recognize a quick divorce obtained by its citizens on overnight trips to foreign countries where the attitudes and philosophies of the courts, as well as the concepts of substantive and procedural due process, are entirely unknown and probably inconsistent with our own.”)

[66] Jahed v. Acri, 468 F.3d 230, 235-36 (4th Cir. 2006) (quoting Matter of Luna, 18 I. & N. Dec. 385, 386 (BIA 1983)).

[67] In Islam, when a man initiates a divorce the procedure is called talaq, when a woman initiates a divorce it is called khula.

[68] Kristen Cherry, Marriage and Divorce Law in Pakistan and Iran: The Problem of Recognition, 9 Tulsa J. Comp. & Int’l L. 319, 349-50 (Fall 2001).

[69] IRC § 2056.

[70] IRC § 2056(d)(4).

[71] Treas. Reg. § 2056A-2(b)(3).

[72]Treas. Reg. § 20.2056A-2(d)(1)(iv).

[73] Treas. Reg. § 20.2056A-2(d)(1)(ii)(D).

[74] Treas. Reg. § 20.2056A-3(a).

[75] Treas. Reg. § 20.2056A-3(c).

[76] Treas. Reg. § 20.2056A-3(b).

[77] Treas. Reg. § 20.2056A-3(a).

[78] IRC § 2056(d)(5).

[79] Treas. Reg. § 20.2056A-8(a)(1-3).

[80] $60,000 v. $5 million.

[81] M. Read Moore, Foreign Affairs 101: Advising U.S. Clients Who Own Foreign Property, Heckerling Institute, January 2006.

[82] Uniform International Wills Act, 8 Unif. Laws Ann. at 281 (1998 and 2005 Supp).

[83] See attached Appendix E International Will Certificate.

[84] Hague Convention on Form Article 1.

[85] New York Estate Powers and Trust Law § 3-5.1 (h).

[86] In the matter of Estate of Renard, 437 NYS. 2d 860 (Surr. 1981) applying New York law rather than French forced heirship law; Wyatt v. Fulrath, 211 NE 2d 637 (NY 1965) applying New York law rather than Spanish community property law; Neto v. Thorner, 718 F. Supp. 1222 (SD NY 1989) applying New York law rather than Brazilian forced heirship law; Sanchez v. Sanchez, 547, So. 2d 943 (Fla. App. 1989) applying Florida law rather than Venezuelan forced heirship law.

[87] In re O’Neil, 446 S.E.2d 475, 479 (Va. Ct. App. July 19, 1994); see also Va. Code Ann. 31-5 (setting forth the procedure for appointing guardians).

[88] Va. Code Ann. 20-124.2(B).

[89] Va. Code Ann. 20-124.3(10).

[90] Miller v. Jenkins, 276 Va. 19, 22-25, 661 S.F. 2d 822, 824-25 (2008).

[91] See, e.g., Maryl Sattler, The Problem of Parental Relocation: Closing the Loophole in the Law of International Child Abduction, 67 Wash. & Lee L. Rev. 1709 (2010).

[92] Samman v. Steber, 2005 WL 588313, at *2 (Va. Ct. App. Mar. 15, 2005).

[93] The French inheritance tax is at graduated rates to descendants up to 45%.

[94] Matter of Meyer, 2009 NY Slip Op 01932 (62 A.D. 3d 133).

[95] See Wyatt v Fulrath, 16 N.Y.2d 169 (1965); see also Hutchison v Ross, 262 NY 381 (1933);cf. Neto v Thorner, 718 F. Supp. 1222 (SD NY 1989), holding that a Brazilian domiciliary’s establishment of a Totten trust account in New York was an election to have the trust funds governed by New York law, even if inconsistent with the law of the testator’s domicile.

[96] 123 NYS 2d 568 (Sur. Ct. 1953), aff’d 131 NYS 2d 882 (1954).

[97]267 NYS 2d 138 (Sur. Ct. 1964).

[98] Wyatt v. Fulrath, 16 N.Y.2d 169 (1965).

[99] De Werthein v. Gotlib, 188 A.D.2d 108 (1993).

[100] 187 N.E. 65 (1933).

[101] Watts v. Swiss Bank Corp., 27 N.Y.2d 270 (1970).

[102] In re Renard, 108 Misc.2d 31, 437 N.Y.S.2d 860 (1981).

[103] New York Estate’s Powers and Trusts Law §3-5.1(h).

[104]73 NYS 2d 297 (Sur. Ct. 1947).

[105] Cass. 1e civ., Feb 4, 1986 Rev. Crit. Dr. Intern. Priv. 1986 685.

[106] Rev. Crit. Dr. Intern. Priv. 1986 66.

[107] Nahar v. Nahar, 656 So. 2d 225 (Fla. 3d Dist. Ct. App. 1995).

[108] Id.

[109] Id. at 227.

[110] Id. at 227-228.

[111] Id. at 229.

[112] Id. at 229.

[113] Id. at 230.

[114] Id. at 234-239.

[115] Id. at 231.

[116] Id. at 232-235.

[117] Id. at 233.

[118] Id. at 236.

[119] 21 N.Y.2d 478, 236 N.E.2d 152 (1968).

[120] 1 Ohio Op. 2d 366 (P.Ct.), aff’d 1 Ohio Op. 2d 372, 140 N.E.2d 801 (Ct. App. 1956).

[121] 96 NYS 2d 442 (Sur. Ct. 1950)

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