Estate Planning Tips for Mixed Nationality Families

With the world becoming a global village, international borders have been merely limited to textbooks. Today, America is accepting diversity and letting go of social taboos, giving a steady rise to mixed nationality families in the country. As per a study conducted in 2019, merely 35% of the families in America are the typical heterosexual couples with kids. And even that figure is increasingly shrinking, leaving no doubt that diversity and complexity in the country’s family picture are strongly growing. While the ratio of mixed nationality families increasing in the country is a proud fact, it is also progressively more challenging when it comes to tax and estate planning matters.

In earlier times, decision making and much of estate planning was simple and also patriarchal. However, times have taken interesting turns. People are now subduing geographical limits. This brings a need for revision in the decision making and financial planning process. Modern times call for modern strategies. Here are some estate planning tips for families with mixed nationalities.

1. Keep all documents updated<

   The most important thing for a mixed nationality family to do before beginning the estate planning process is to ensure that all documents including tax-filing status, residential papers, property claims, bank accounts, loans, asset-ownerships, etc., are updated and correct. The name, address, nationality, age, and other personal details of all family members should be accurate, and all documents must be valid and up to date. This helps prevent any legal issues once the estate is due to the nominee. This step is critical in passing ownership and inheritance without legal delays or infighting

2. Choose to file jointly

   The most important thing for a mixed nationality family to do before beginning the estate planning process is to ensure that all documents including tax-filing status, residential papers, property claims, bank accounts, loans, asset-ownerships, etc., are updated and correct. The name, address, nationality, age, and other personal details of all family members should be accurate, and all documents must be valid and up to date. This helps prevent any legal issues once the estate is due to the nominee. This step is critical in passing ownership and inheritance without legal delays or infighting.

3. Keep ownership of foreign assets separate

   To ensure hassle-free estate planning, it is important for mixed-nationality families to have separate ownership of assets. While joint ownership may seem like a short-term solution, it can have multiple long-term financial impacts. For instance, in the case of a couple where one person, a U.S. citizen owns joint assets with a non-resident U.S. spouse, high tax filing can get very complicated. The distribution and taxation on capital gains, interest, dividends, etc. become a matter of concern for such couples. In the joint ownership scenario, the mixed nationality couple will have to disclose all income in the U.S. while also comply with all tax obligations of the country of tax residence. Moreover, if the assets owned are foreign exchange-traded funds (ETFs), foreign mutual funds, etc., the couple will also face increasing tax reporting and tax compliance problems. This will levy substantial reporting obligations on the U.S. resident spouse in terms of disclosing all foreign financial accounts.

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4. Maintain separate bank and asset accounts

   Not only foreign assets, but even domestic assets owned by a mixed nationality couple should be separate and individually named. For all cases where the U.S resident owns joint domestic assets with the non-U.S. spouse, the filing will be made under the U.S. resident’s name. The U.S. domicile spouse will provide a Social Security number, and the 1099 bank or brokerage will be issued on the particular spouse’s name. This will imply that the legal and beneficial owner of the asset, from the Internal Revenue Services’ (IRS) perspective, is the U.S. spouse reporting the complete income from his/her account on the 1040 form.

   Even if the couple decides to shift the tax burden on the non-U.S. spouse, the tax bracket for each will differ vastly. In many cases, such as that of dividends and interest, taxes for non-U.S. residents are a massive 30%. In addition to the burdening tax implications, joint ownership of accounts and assets will also make cross-border estate planning very complicated. While some may argue that joint ownership makes transfer and access of the assets easy, when weighed with its complex legal proceedings and substantial administrative requirements, this advantage seems faded.

5. Do not gift or shift the tax burden on non-resident members

   While there are attractive aspects about shifting the tax burden on the non-resident members, especially a spouse, it is still not a wise move to make. Gifting or shifting burden on the non-resident spouse allows for several tax advantages, especially if the spouse’s residing country is a low-tax zone. However, there are transfer tax treaties which create significant complications too. Couples where both members are U.S. domiciliary, have to pay lower gift, estate, and GST taxes. This is because each spouse has a lifetime exemption limit on $11.4 million (as of 2019) of their whole wealth (including foreign assets). But in the case of a mixed nationality couple, the U.S resident will only have a lifetime exemption limit of $60,000, which is inclusive of all wealth. Hence, a mixed nationality family must not shift any tax-burden or gifts to its non-resident members.

6. Have individual estate ownership

   While there are attractive aspects about shifting the tax burden on the non-resident members, especially a spouse, it is still not a wise move to make. Gifting or shifting burden on the non-resident spouse allows for several tax advantages, especially if the spouse’s residing country is a low-tax zone. However, there are transfer tax treaties which create significant complications too. Couples where both members are U.S. domiciliary, have to pay lower gift, estate, and GST taxes. This is because each spouse has a lifetime exemption limit on $11.4 million (as of 2019) of their whole wealth (including foreign assets). But in the case of a mixed nationality couple, the U.S resident will only have a lifetime exemption limit of $60,000, which is inclusive of all wealth. Hence, a mixed nationality family must not shift any tax-burden or gifts to its non-resident members.

To sum it up

The daunting task of estate planning can be made easy by following these easy tricks. However, these are not exhaustive tips, and there are multiple more aspects which can be considered to ensure a smooth estate planning process for families that have mixed nationalities. In cases where a mixed nationality family has an existing complicated plan or no estate plan at all, professional help from Financial Advisor can be taken to crack loopholes and make a definitive and advantageous estate arrangement. These advisors can help optimize tax minimization strategies for mixed nationality families.