Estate planning becomes complex if you’re of the 8.7 million Americans living abroad (Expats) in more than 160 countries. The waters get murkier if you live in another country permanently but you retain your U.S. citizenship. For those nearing retirement, it can be a concern to make sure that your estate passes according to your wishes while complying with your estate tax obligations.
The cross-border regulatory waters get murky quickly if you retain your citizenship while residing permanently overseas. Successfully navigating dual-tax jurisdictions requires highly specialized international lifestyle and wealth planning to insulate your assets from surprise global transfer penalties.
Of the 39% of US Expats who cite career as their reason for location, 58% say they get paid more in their new country of residence and pay less in taxes. On the average, Expats can boost their salaries by $21,000 by living abroad. The remaining Expats cite retirement and adventure as their reasons for relocation. If you are planning to retire overseas, read on.
Wealth Stewardship Alert
Will Double Taxation or Foreign Probate Outflows Compromise Your Global Retirement?
Retiring overseas exposes your worldwide estate to aggressive dual-tax jurisdictions and strict non-citizen marital restrictions. At Stone Oak Wealth Management, our specialized Wealth Framework insulates cross-border assets, coordinates international treaties, and bulletproofs your legacy against costly compliance gaps.
A Guide for Future American Expats
Reviewing your will
No matter which country you live in, review your will from time-to-time to ensure your estate plan remains up-to-date. It makes sense to do this when you go to live in a foreign country. Make necessary changes and leave a copy with your attorney or executor back in the United States. If you bring personal property with you or buy real or personal property in another country, your property may have special treatment under the laws of that country and of the United States when you die.
3 International Safeguards for Choosing a Cross-Border Power of Attorney
When you update your will, make sure that your executor and any guardian you’ve named for your minor children are appropriate choices now that you’re living abroad. We mention this brashly because the complexities of managing an estate of a U.S. citizen living permanently abroad may overwhelm a family member who might ordinarily fulfill the duties of an executor quite well.
Consider naming an attorney who has experience with international law as your executor. In addition, any guardian you name for your minor children should be someone who can handle the responsibility of raising your children according to your wishes. Especially if your children are citizens of another country or if you wish your children to remain in the country in which they reside at the time of your death, your children’s guardian should be physically and emotionally able to raise them appropriately. You should also carefully consider the ramifications of naming a guardian who is not a U.S. citizen. Check the laws of the country in which you live.
In addition to having an executor for your estate, you may find it useful to empower someone to help you handle your affairs while you are living out of the country, particularly if you intend to become a permanent resident overseas. Checking your accounts online may be simple, but having a domestic address can make it easier to handle a complex transaction, such as closing a bank account or transferring substantial sums of money. Perhaps the simplest way to facilitate such matters is to give someone you trust power of attorney to handle your affairs in the United States, such as signing documents or carrying out business transactions on your behalf. You can then use that person’s home or office as your U.S. address of record. Such transactions can be handled through that person if you make sure the legal document conferring power of attorney is on file with the necessary institutions, such as your U.S. bank, brokerage, or financial professional.
Understanding The Estate Tax Landscape
Property owned abroad
U.S. law says that its citizens and permanent residents are subject to federal estate tax on property they own anywhere in the world, not just property owned in the United States. However, you may find that not only will your estate be taxed by the United States but also by your host country. The good news is that your host country and the United States may have an estate tax treaty that will mitigate part of the cost. You may also receive a credit for death taxes paid in another country under the foreign death tax credit.
How a QDOT Prevents Estate Tax Penalties for Non-Citizen Spouses
A Qualified Domestic Trust (QDOT) prevents estate tax penalties by allowing assets transferred to a non-citizen surviving spouse to qualify for the marital deduction. Without this legal structure, the IRS exposes international holdings to immediate taxation upon the first spouse’s death, severely fracturing the long-term wealth transition plan.
If your spouse is not a U.S. citizen, estate tax planning can be particularly complex. For instance, if your noncitizen spouse survives you, the unlimited marital deduction is not available unless you provide for your spouse using a Qualified Domestic Trust (QDOT). In addition, you may need to think about creating a separate estate for your spouse by making use of a gift tax exclusion that allows you to make annual tax-free transfers of up to $175,000 (in 2023) to a noncitizen spouse so that this money will not be included in your estate.
Because the rules regarding estate planning for U.S. citizens living abroad are very complicated and beyond the scope of this discussion, please consult additional resources and legal counsel.
Federal transfer taxes
A federal transfer tax may be imposed on transfers to U.S. persons from U.S. citizens who relinquish that citizenship, or from their estates. Expatriates who meet guidelines on net worth and average annual net income tax liability for the five years preceding residency termination, and who fail to certify that he or she has complied with all federal tax obligations for the five years preceding the loss or relinquishing of citizenship are subject to the transfer tax.
- U.S. citizens living abroad are subject to federal estate tax on all property they own worldwide… not just assets held in the United States.
- If you move to another country, review and update your will to reflect new property, changed circumstances, and international legal considerations.
- Your executor should have experience with international law. A family member who handles domestic estates well may be overwhelmed by the complexity of a cross-border estate.
- Granting someone trusted power of attorney for U.S. affairs makes it easier to manage accounts, sign documents, and conduct financial transactions while living overseas.
- Your host country and the U.S. may have an estate tax treaty in place. A foreign death tax credit may also apply to offset taxes paid abroad.
- If your spouse is not a U.S. citizen, the unlimited marital deduction is not available at death unless you use a Qualified Domestic Trust (QDOT). Annual tax-free gifts to a noncitizen spouse were capped at $175,000 in 2023.
- U.S. citizens who renounce citizenship may face a federal transfer tax on assets transferred to U.S. persons if they meet certain net worth or income thresholds.
- Estate planning for Americans abroad is highly complex. Always consult legal counsel with experience in international estate law.
Frequently Asked Questions
Do U.S. citizens living abroad still owe U.S. estate taxes?
Yes. U.S. law requires citizens and permanent residents to pay federal estate tax on all property owned anywhere in the world… not just assets located in the United States. You may also owe estate or inheritance taxes in your host country. Estate tax treaties between the U.S. and some countries can help reduce the total tax burden, and a foreign death tax credit may apply as well.
Should I update my will when I move abroad?
Yes, and sooner rather than later. When you relocate to another country, your will should reflect any new property you’ve acquired, account for the laws of your host country, and name an executor capable of managing a cross-border estate. Leave an updated copy with your attorney or executor in the United States.
Who should I name as executor if I live outside the U.S.?
Consider naming an attorney experienced in international law rather than relying solely on a family member. Managing the estate of a U.S. citizen living permanently abroad involves complex legal and financial requirements that can overwhelm someone accustomed only to domestic estate administration.
What is a power of attorney and why does it matter for expats?
A power of attorney is a legal document that gives someone you trust the authority to act on your behalf for financial and legal matters in the United States… such as signing documents, managing accounts, or closing transactions. For Americans living abroad, having a trusted person with power of attorney on file at your U.S. bank or brokerage can make handling stateside affairs significantly easier.
What happens to estate planning if my spouse is not a U.S. citizen?
The unlimited marital deduction… which normally allows you to transfer unlimited assets to a surviving spouse tax-free… is not available if your spouse is not a U.S. citizen. To provide for a noncitizen spouse at death, you may need a Qualified Domestic Trust (QDOT). You can also make annual tax-free gifts to a noncitizen spouse up to the IRS limit (set at $175,000 in 2023) to build a separate estate during your lifetime. This area of planning is particularly complex and requires experienced legal counsel.
In the Word
“But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”
Matthew 6:20-21 (NIV)
Jesus warns about the importance of prioritizing eternal treasures over earthly possessions. The warning is meant to help us avoid the worldy entrapments of idolizing wordly wealth and keeping it as treasures in our hearts. God’s desire is for our hearts to be affixed on Him.
For a brief time, we are all stewards of material wealth, whether alot or a little. It’s in that stewardship we are to guard our hearts from idol worship, to ensure our devotions are rightly directed. Ensuring the security of our material wealth allows believers to then redirect our attention to spiritual pursuits, such as acts of kindness, love, and service.
Sources: Broadridge Investment Management Solutions
Money Geek (post 5/2/23)
The Association of Americans Resident Overseas, World Economic Forum, InterNations
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Stone Oak Wealth Management does not provide tax advice and a qualified tax accountant should be consulted.
Stone Oak Wealth Management does not provide legal advice and a qualified attorney should be consulted.