Cross-border estate planning: your need-to-knows

If you’ve moved abroad or have assets in different locations, you’ll be familiar with dealing with different regulations and requirements – and it’s no different when considering your wishes for inheritance. There’s a lot to think about with cross-border estate planning, so we’ve compiled our top list of need-to-knows to set you on the right path.

Succession regulation: which country’s laws apply to international assets?

The first aspect to consider is which country’s laws your estate is actually going to fall under. This will naturally affect important considerations like tax due, but also – in something that can be a surprise to those from common-law countries – may bring in what’s known as “forced heirship” or a “reserved portion”.

What is forced heirship?

Forced heirship is the legal requirement that a defined portion – known as the reserved portion – of your estate must be inherited by a certain category of people, usually close family members. This is especially common in continental Europe, where many countries have derived their rules from the Civil Code. In France, for example, children are considered protected heirs and must receive between 50 and 70% of the estate. In Spain, one to two-thirds of the estate must go to children and descendants. In the United States, the French-influenced state of Louisiana also has a similar law, providing for “first-degree” descendants.

How do you know which country’s laws apply – and can you choose?

Your estate is made up of two kinds of assets: real/immovable and personal/movable. Immovable refers to physically fixed assets like property – hence the term real estate – while movable refers to non-fixed assets like money or personal items.

The general rule of thumb when planning a cross-border estate is that the country you are resident in is the one whose laws apply to your movable assets, while the country where your immovable assets are located is the one whose laws apply to that. There are, however, a number of caveats to this.

For example, there is a well-publicised rule in the EU known as Brussels IV, by which you can choose the law of your nationality over the law of your residency or location for your cross-border estate. For example, if you’re Italian and live in France, you can choose that Italian law will apply to your assets, not French law.

The law isn’t restricted to choosing only EU countries, either. If you’re British living in Spain, for instance, you can choose that British law will apply. The crucial point is that you are a resident within the EU, not that the jurisdiction of your nationality that you choose is in the EU. Put otherwise, you couldn’t live in the UK and nominate Spanish law as a Spanish citizen, because the UK doesn’t have this kind of law. You could, however, live in Spain as a British citizen and nominate English or Scottish law, as Spain (and the wider EU) does have the law allowing this.

This can have some significant benefits if you’re looking to avoid reserved portions or rules on fixed heirship and your own country doesn’t have these rules.

Do note, however, that this does not necessarily impact your tax allowances. As we’ll discuss next, this is covered by taxation treaties separately.

How are taxes determined in cross-border estate planning?

This is where things can get quite complex.

In theory, if you have an international estate, particularly of immovable property located in multiple countries, you would be liable for multiple instances of taxation. Fortunately, however, dual taxation treaties mean that you can often claim relief from one jurisdiction. The UK has, for instance, a dual taxation agreement with the United States.

As you go through the process of cross-border estate planning, you may encounter the two terms of inheritance tax and estate tax. The difference between these can become somewhat blurred (not least because some places, such as the UK, use the term inheritance tax for what is more commonly known as an estate tax), but the main differences are:

• Inheritance tax: paid by individual beneficiaries based on the value of what they receive.
• Estate tax: paid by the estate of the deceased on the value of that estate.

For example, this means that in the UK, as the estate pays the tax, the beneficiary receives a net sum on which tax has already been paid.

Note that there are some countries, such as Canada, Australia and New Zealand, that do not have inheritance tax. However, they do still charge capital gains tax in some circumstances. For example, if you sell an inherited home in Australia more than two years after inheritance, then you will still be liable for CGT.

Can gifts and trusts make a difference to taxation?

This will depend heavily on the jurisdiction. Trusts don’t exist in most civil-law countries but are common in places like the UK. If you place your assets in an “interest in possession trust” in the UK, for example, then your beneficiary usually does not pay inheritance tax for as long as the assets remain in the trust. The British government, however, is expanding the expectation of a so-called 10-year charge, where you pay inheritance tax at each 10-year anniversary of a trust for certain types of property.

Likewise, gifts often avoid taxation as long as they are given at a certain cut-off point before death. Some countries do impose a limit, such as the USA, which taxes at 40% any gifts (regardless of decease) above a certain limit. In 2023, the annual exclusion limit for gifts is $17,000.

Can pensions be inherited by international beneficiaries?

We recently covered how you can take your pension overseas when you move abroad through a QROS. A spouse may be able to inherit your State Pension as a lump sum if they meet certain criteria.

Likewise, a private pension may be able to be passed to your spouse, depending on your provider’s rules. The key consideration will be taxation in the country where the pension is located. In the UK, for instance, taxes are decided based on the age of the deceased. If you have a defined contribution pension that will be inherited as a lump sum, then your beneficiary would usually only pay tax if you pass away over the age of 75.

What are the extra costs of inheriting across borders?

You may find in the process of cross-border estate planning that it is advantageous to transfer certain movable assets to another jurisdiction. However, it’s important to remember that any financial transfers will likely involve contact with the live currency markets – and this can significantly impact the value of any sum of money.

This is because the currency markets never stop moving – and can be influenced by the smallest of events, as our daily market commentary shows. If you need help with your international money transfers, sign up now or contact us today.