We live in a multi-jurisdictional world where cross border marriages, international employment and the acquisition of foreign property are increasingly common. However, while it is becoming more common for individuals to have international aspects to their private lives, this has the potential to complicate the administration of their estate on death.
A recent instruction of a US resident (but UK domiciled) individual highlighted the key considerations for advisors who are advising clients on estate planning where there are UK and US connections. The client was unmarried with children with property in the UK and the US. We considered:
Domicile
Domicile should always be the first consideration as this will determine (among other things) the tax and succession regime applicable on death. A person will have a domicile of origin, which they acquire at birth, and which is broadly (although not always) the same domicile as their parents. However, it is possible for a person to acquire a new domicile of choice if they move to a new country and have a fixed and settled intention to give up their previous domicile and live in the new country permanently.
Domicile is a subjective assessment. In this case, the client was born in Scotland, owned Scottish property, had family here and returned on a frequent basis. The client had been resident and working in the US for a number of years and planned to stay there for the foreseeable future. However, he ultimately intended to return to Scotland permanently during retirement. It was concluded that the client had retained his Scottish domicile of origin.
Taxes on death
As a UK domiciled individual, the client's worldwide estate will be subject UK inheritance tax (IHT) on death. IHT is charged at 40% (or 36% if 10% or more of the deceased's property passes to UK registered charities) on the balance above the nil rate band (£325,000). The deceased's estate may also qualify for the residence nil rate band (£175,000) if certain conditions are met. It is worth mentioning that transfers between UK domiciled spouses on death or during lifetime are exempt from IHT but where the transfer is from a UK domiciled spouse to a non-UK domiciled spouse, the spouse exemption is capped at £325,000.
The client was also advised to obtain separate advice from a US attorney on equivalent US taxes on death, being estate taxes (paid by the estate) and inheritance taxes (paid by the beneficiary who inherits the estate).
Consideration was also given to the Double Taxation Convention between the UK and US which could provide some relief if a tax charge arises on death in both countries.
Forced heirship rules
If the client is Scottish domiciled at his death, his estate would be subject to Scotland's forced heirship rules, known as "legal rights". Legal rights apply automatically in testate and intestate estates. They can be claimed by the deceased's surviving spouse/civil partner and children. Legal rights are claimed from the deceased's worldwide net moveable estate. Legal rights will amount to either one third or one half of the net moveable estate, depending on who survives the deceased. Legal rights can only be defeated if there is no moveable estate, so in almost every case, they will apply.
The client was advised to consult a US attorney to ascertain whether any equivalent rules apply in the US. It is understood, however, that, with the exception of Louisiana, no forced heirship rules apply in the US, albeit the surviving spouse is given certain protections.
Wills
Where multiple jurisdictions are involved, the question arises as to whether a will is required in each country in which assets are located. The starting position is that you should have a will in the country in which you are domiciled. Whether a separate will is also required to deal with assets abroad is subject to some uncertainty and will ultimately depend on the individual's circumstances and the rules in the foreign country. However, having wills in each jurisdiction where assets are located will likely simplify the administration of the estate on death and reduce associated costs.
In this case, a Scottish will was executed dealing with the devolution of the client's estate but a separate US will was also executed dealing exclusively with the client's US estate. There was direct contact between the Scottish and US advisers to ensure that the two wills were compatible (and that the US will was compliant with applicable state laws).
Power of attorney
As the client owned property in Scotland, a continuing power of attorney was also put in place to give appointed individuals power to administer his Scottish finances and property in the event that he lost capacity to make those decisions himself. Given the uncertainty regarding whether the US would recognise a Scottish power of attorney, the client also put a US power of attorney in place.
This instruction highlighted the importance in cross-border cases of obtaining professional advice at an early stage from advisors in each relevant jurisdiction, and the need for those advisers to collaborate to ensure the advice is congruent with the client's objectives.
Brodies personal lawyers are highly experienced in dealing with private client affairs where there are US/Scotland matters.
