Essential Information on Estate Planning & Administration

Wills, Estates and International

As Benjamin Franklin remarked "There are two inevitabilities in life; death and taxes". For some people it is uncomfortable to confront the inevitability of one's own mortality and to make the important and critical decisions that will affect the financial security and happiness of their loved ones in the event of their death. The most important step to be taken is the preparation of a well considered will. Note that one's last will and testament should be a very practical document, that has been carefully thought out and drafted. This can make things much easier for your heirs once you are dead.

Why a Will is Essential

The consequence of not having one's will done is that you are thereby stuck with the testamentary plan imposed by your country of domicile. Moreover, you may end up with a court appointed administrator who has no understanding of your wishes. Remember he or she was not appointed by you. For American expatriates abroad, dual nationals and others with assets in two or more jurisdictions the lack of a will may create uncertainty and conflicts may arise because of the different laws of descent and distribution in the various jurisdictions which apply to persons who die intestate i.e. without having a will.

Practice Tip: A will with respect to American assets property and/or American beneficiaries can be made abroad anywhere in the world. It will be valid so long as the procedural requirements with regard to the will itself, its execution and the witnessing of the individual's signature have been met.

Estate Taxes: A Further Reason for Having a Will
A further reason for preparation of a will and, where appropriate, the preparation of trusts (known in the UK as settlements) is to minimise the impact of inheritance taxes at death. Most countries impose an inheritance tax at death which is very considerable in other than modest estates. For American expatriates, dual nationals and/or anyone with assets in two or more jurisdictions, the impact of inheritance tax can be particularly severe as inheritance tax can be imposed on different bases by different countries. The United Kingdom imposes inheritance tax on people who are resident and domiciled in the United Kingdom and also on non domiciliaries who have immovable assets, (i.e. real property (e.g. a house or an apartment) and/or tangible assets (e.g. house contents, works of art, jewellery etc)). The United States likewise imposes its estate tax on residents of the Untied States including green card holders and others who although not in green card status, actually reside in the United States. There is a double tax treaty between the United States and the United Kingdom with respect to inheritance tax and gift taxes. Without the benefit of this treaty, certain estates would be subject to double taxation which could mean up to a combined tax rate of 90%.

US Estate Taxes

After considerable debate, substantial changes were made to US estate taxes with the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act"). This included the reduction in the marginal rate at which estate tax is charged. Estate tax is a progressive tax starting at 18% with top marginal rate in 2002 of 50% decreasing to 45% by year 2009. See tax rate schedule below. Under the Act effective January 1 2010 the US estate tax and generation skipping tax ("GST") will be repealed. There are, however, those who feel that Congress will revisit these provisions before 2010 and the abolition of US estate taxes should not be regarded as a certainty. The Act also increases the applicable exclusion amount to 1 million dollars in 2002 rising to 3.5 million dollars by year 2009. See exclusion rate table below. Gift tax rates were likewise altered by the Act with a top marginal rate in 2010 equal to 35%.

Tax Rate Table

British Inheritance Tax

British inheritance tax ("IHT") is at a flat rate of 40%. The current exempt amount for year 2001/2002 is £242,000.00. The exempt amount is inflation index linked and rises each year. The UK inheritance tax return is due 6 months after date of death. Payment of the estimated British inheritance tax with the exception of certain properties such as residential real estate and interest in family business should accompany the tax return. Payment of ("IHT") is required before the issue of a grant of probate.

Included in the estate for computation of IHT are gifts made within 7 years of the date of death. Such gifts, known as potentially exempt transfers, are not subject to liability when the gift is made but are includable in the deceased's estate if he or she does not survive 7 years after the gift. However, provided that the gift has been made at least 3 years before date of death, partial relief, known as taper relief, is available as per the following table.

The valuation of assets for IHT purposes is their fair market value. For stocks and shares listed on the London Stock Exchange or other exchange it will be the date of death value on the relevant exchange. For closely held companies valuation is a far more complex matter. Shareholders of closely held companies which have less than a 50% interest are usually valued at less than a majority holding but may be influenced by related property ownership, e.g. where spouses each hold a 40% interest in a company the value of each holding would be based upon an 80% valuation.

Estates Subject to Multiple Estate or Inheritance Taxes

Many individuals, particularly American citizens residing overseas, will be subject to 2 or more inheritance tax regimes at death. This is the case for a great many of American expatriates living in the United Kingdom or elsewhere as the United States taxes all US citizens regardless of their residence on its estate tax. Hence, a US citizen with an estate of $1,000,000.00 or more will be subject to US estate tax even if the value of the US assets in his estate is less than such figure. Take for example an American expatriate resident in the United Kingdom for the past 17 years who owns a villa in France. Such American expatriate will be considered domiciled in the United Kingdom for purposes of IHT and subject to IHT on his worldwide estate at the rate of 40% regardless of his domicile for British income tax purposes. He would be subject to French inheritance tax on the villa which he owns in France. Hence, his estate will need to file 3 estate tax returns and will need to employ the benefit of the aforementioned double tax treaty to avoid the double estate tax which would otherwise be imposed. If the estate is a substantial one, say over $5,000,000.00 it is likely that the federal estate tax (which has a marginal rate of currently 50% on the net estate in excess of $3,000,000.00) may exceed the British IHT. The French estate tax payable on the villa will be available as a credit against the US estate tax under a double estate tax treaty between the United States and France.

Matters to be Considered for a Will to be Practical and Effective

For a will to be practical and effective the following matters should be considered and where appropriate included in the will:

1. Naming of executors (personal representatives) and successor executors in the event that the initial executor predeceases or is otherwise unwilling or unable to act
2. Consideration of the individual's current residence and domicile status
3. Consideration of the jurisdictions in which the individual has assets and is likely to retain assets
4. Naming of specific beneficiaries, individual monetary legacies and legacies of particular possessions
5. Naming of residuary beneficiaries and successor residuary beneficiaries
6. Naming of guardians for minor children and others who because of disability are unable to look after themselves
7. Consideration of will trusts and spendthrift trusts
8. Provisions for successor guardians if the initial guardian predeceases or is unable or unwilling to act
9. Charitable requests
10. Funeral arrangements
11. Recitations with regard to residence and domicile. These can be particularly important for American expatriates who are currently in the United Kingdom
12. Consideration of whether to have a single will or multiple wills

13. Establishing a "living will". Living wills are a separate document from one's last will and testament. Living wills deal with the extent to which an individual will want medical intervention in the event of serious and debilitating illness or accident. Living wills are also used to donation of organs for medical and research purposes

International Estate Administration

What is it? Simply put it is the probating of any estate which involves more than one jurisdiction. Normally, this means an estate where you have assets in two or more jurisdictions. The purpose of probate is to transfer ownership of assets from the deceased to the estate and hence to the estate's beneficiaries i.e. the persons named in the deceased's will. This can be a fairly complex process where we are dealing with the formalities required under two or more jurisdictions. Ferman Law has had over 20 years experience dealing with complex international estate administration matters on behalf of American, British and other European nationals with assets in the United States and elsewhere, American expatriates with assets in the UK, United States and elsewhere and various other permutations. Complex international estate administration matters will require co-ordination with lawyers in various jurisdictions. Here Ferman Law can act in a legal coordination and general counsel role.

Tax Aspects and The Need for Federal Transfer Certificates

International estate administration also involves the preparation of estate tax returns or inheritance tax returns in the necessary jurisdictions. In order for an American financial institution to transfer ownership of assets fro the deceased to the estate (and hence to the beneficiaries) a federal transfer certificate must be obtained from the Internal Revenue Service . Such federal transfer certificates are issued only after the Service has received and accepted the estate's estate tax return and payment of any estate tax due has been made. For estates where there is no estate tax due, a filing is also made with the Service which then issues the federal transfer certificate. It is not merely a matter of preparing the return but dealing with the appropriate tax officials in the several countries and having an understanding of the relevant tax treaties so that the appropriate minimum total worldwide estate tax is paid. Here Ferman Law can assist executors and solicitors in dealing with the US aspects of international estate administration including obtaining the necessary federal transfer certificate.