Editor’s Note: Stuart B. Dorsett is a member of the Trusts and Estates Practice Group at Ward and Smith, P.A.

By Stuart B. Dorsett, Ward and Smith, P.A.

There are two basic estate planning issues that need to be addressed if you reside in the United States:

• Planning for distribution of property at death. You should have a Last Will and Testament to direct how your property will be distributed after your death. Alternatively, you can use a Revocable "Living" Trust Agreement for this purpose and also to avoid probate. In either case, the document should (a) designate the individual or corporate fiduciary who will administer your estate or trust at the time of death, (b) clearly identify the beneficiaries who will receive your property, and (c) include appropriate trust arrangements for any beneficiary who is incompetent or too young to receive property outright.

• Planning for incapacity. You also need to plan for the possibility that you may become incapacitated prior to death. You should have a Durable General Power of Attorney in which a third party (either an individual or a corporate fiduciary) is named as your "attorney in fact" to handle your personal and financial affairs in the event you become incapacitated. Similarly, you should have a Health Care Power of Attorney naming one or more individuals whom you trust to make health care decisions for you if you can’t. You also may want a so-called "Living Will" which expresses your wishes concerning end of life decisions.

Although your need for these basic estate planning documents is unaffected by your nationality, certain special considerations apply if you either are a foreign national or have property located in a foreign country:

Non-Tax Considerations in International Estate Planning

If you are a foreign national or you have property located in a foreign country, unique non-tax considerations apply including the following:

• A will or trust prepared under the laws of the United States may not be effective to dispose of property located in another country. Accordingly, if you have property located in a foreign jurisdiction, you likely will need a will or trust prepared under the laws of that jurisdiction, particularly if that foreign property consists of real estate.
• You might like to name family members residing in your home country as executor, trustee, or attorney in fact under your estate planning documents. Typically, there are no legal prohibitions on a foreign individual serving in these roles in the United States, but logistical issues and language barriers can make such service impracticable, which amplifies the importance of naming back up fiduciaries.
• A U.S. court will have initial jurisdiction over the guardianship of minor children and will require a local resident to serve as guardian. While it is possible to transfer guardianship to an individual in another country, the process is not simple and straightforward.

Estate Tax Considerations in International Estate Planning

If you are a resident non citizen or own property in another country, you must consider the impact of U.S. and foreign estate tax laws. An estate tax is a "transfer tax," which taxes the right of a decedent to transfer wealth to other individuals. In the United States, if the tax applies, it is generally due nine months after the date of death.

Three factors control the application of the U.S. estate tax laws: citizenship, residency, and situs (or location) of property. U.S. citizens are subject to estate taxation on their property located world wide, not just their property which is located in the United States. This world wide taxation system creates a real risk of double taxation, as property located in a foreign country may be subject to the estate tax of both the foreign country and the United States. Although many countries have tax treaties with the United States that avoid double taxation on income, few countries have tax treaties that avoid double taxation on estates.

For both U.S. citizens and resident non-citizens, three basic estate tax principles apply:

• The unlimited "marital deduction" allows property to pass to a surviving spouse tax free. However, this deduction is available only for spouses who are U.S. citizens. If your spouse is a non-citizen, the marital deduction may be claimed only if the property passes into a Qualified Domestic Trust ("QDOT") with a U.S. trustee. A QDOT will distribute all income to your surviving spouse and may permit distributions of principal to your spouse, but any principal distributions will be subject to estate taxation as if the property was part of your taxable estate. At your spouse’s subsequent death, all remaining trust property will be subject to estate tax at your tax rate, not your spouse’s tax rate.
• The unlimited charitable deduction avoids taxation on any property passing to a qualified charitable organization. Note, however, that most foreign charitable organizations do not qualify for the charitable deduction.
• The "applicable exclusion amount" is the amount of property that can pass free of estate tax to all other beneficiaries (regardless of the beneficiaries’ domicile or citizenship). At this time, the exclusion is $3,500,000; in 2010, it will be unlimited; but in 2011, it will decline to $1,000,000 (although it seems likely that Congress will change the exclusion before the end of this year). If the value of all of the deceased’s property is above the applicable exclusion amount, the portion of the value above the applicable exclusion amount will be taxed at 45%. North Carolina then will impose its own estate tax, which brings the effective tax rate closer to 53%.

If you are a resident non citizen, you are subject to the same estate tax rules as U.S. citizens, including taxation on your world-wide property. For purposes of the estate tax, residency means domicile, which is a different, and more subjective, standard than the income tax concept of a resident alien. U.S. "domicile" has two components: physical presence in the United States and the intent to remain in the United States indefinitely. Proof of U.S. domicile is fact specific and includes the following factors:

• Entry into the United States on a permanent resident visa;
• The obtaining of a green card and a social security number;
• The number and location of property;
• The filing of tax returns in the United States and/or the individual’s home country;
• The amount of travel and the duration of stays in the United States;
• The obtaining of a U.S. driver’s license;
• The immigration history of the individual’s family;
• The size, value, and type of the individual’s home in the United States;
• The individual’s motivations for being in the United States; and,
• The individual’s group affiliations and involvement in community affairs.

Estate Tax Planning Techniques for U.S. Citizens and Resident Non-Citizens

If you and your spouse’s estates will include less than the applicable exclusion amount (currently $3,500,000), you need not be concerned about the effect of U.S. estate tax laws. However, if you are a resident non citizen, you need to consider whether your home country’s estate tax system will apply. Similarly, if you are a U.S. citizen who has property located in a foreign country, you need to determine whether such property is subject to taxation by that country.

If you and your spouse’s combined estates exceed the applicable exclusion amount, your estate planning documents should create trusts to utilize both spouses’ exclusions, which under current law allows a married couple to protect up to $7,000,000 of property from U.S. estate tax. In addition, both individuals and married couples may use lifetime gifts to reduce their taxable estates. Such gifts may utilize a $13,000 per year annual exclusion and a $1,000,000 lifetime gift tax exemption, and may take the form of gifts of cash, securities, and real estate, or may be used to fund life insurance policies. Often, irrevocable trusts are used to receive and hold the gifted property.

Estate Tax Planning for Non-Resident Non-Citizens

If you are a non-resident non-citizen ("NRNC"), you are not subject to the U.S. system of estate taxation on your world-wide property. Rather, your estate taxes are imposed only on your property legally located in the United States, including:

• Real estate located in the United States;
• Stock in a U.S. corporation;
• Deposits in U.S. banks;
• Debt obligations of U.S. residents;
• Intangible personal property if issued by or enforceable against a U.S. resident, a U.S. corporation, or a governmental unit (but not proceeds from a life insurance policy, even if issued by a U.S. insurance company); and,
• Tangible personal property located in the United States (for example, cars and artwork).

Virtually all of an NRNC’s property legally located in the United States will be subject to federal estate tax at a 45% rate because the available exemption for NRNCs is only $60,000. Accordingly, if you are an NRNC, most estate tax planning techniques for you will involve the transformation of your U.S. property into foreign property, through the use of foreign holding companies, foreign partnerships, foreign trusts, annuities, and life insurance contracts.


In today’s global society, international boundaries increasingly are blurred on business, financial, and personal levels. As a result, the fiduciary and tax laws of foreign countries impact virtually all individuals with foreign connections, not just those with large estates. If either you or your spouse is not a U.S. citizen, or if you have property located in a foreign country regardless of your citizenship, you must include consideration of international law in your estate planning if you want the maximum amount of your property to be distributed as you intend after your death.

©2009, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Stuart B. Dorsett practices in the Trusts and Estates Practice Group where he advises individuals, businesses, and charitable organizations on estate planning, estate administration, business succession planning, and asset protection planning. Comments or questions may be sent to sbd@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.