The Hidden Risk of Doing Nothing: Why Every Global Retiree Needs a Legacy Plan

The Hidden Risk of Doing Nothing: Why Every Global Retiree Needs a Legacy Plan
Planning ahead helps you stay secure wherever you live.|©iStock/CJ_Romas

When Americans and Canadians approach retirement, they can take certain things for granted. They know how wills work. They probably understand the benefits of a living trust. They can anticipate estate taxes, in the rare instance that they might be applicable.

All that changes, however, when they move abroad. All sorts of pitfalls await unwary emigrants. But if you plan correctly, using strategies most people assume are reserved for the ultra-rich, you can avoid problems. I’ll talk about these strategies in a moment. But first, let me set the stage for you, so you understand the nature of the pitfalls out there and have a sense for the danger zones.

The biggest source of potential conflict and confusion is the underlying legal system in the country you’re heading to.

The United States and Canada follow common law, descended from medieval English law. It allows individual “testator choice” when it comes to wills and inheritance. It provides for the use of trusts to manage one’s estate. It’s what Americans and Canadians know and have used for generations.

But most foreign countries (other than those with a British background) practice civil law. This dictates that a fixed share of an estate must go to children or other family members, regardless of testator’s wishes. For example, in France and Spain, 50% of the estate must go to children even if the spouse is still alive. This overrides foreign wills.

Then there’s the probate process. In the U.S., this typically involves a single court process before a specialist probate judge. But as soon as you have assets abroad, you’ve got to deal with their legal systems too, with foreign lawyers in a foreign language.

For example, countries like Panama and Mexico require local probate proceedings to distribute assets held by a foreigner’s estate, even if a foreign will has already specified their disposition. These proceedings can be slow and expensive. It’s not uncommon for the foreign estate to lose 5% to 10% of its value in legal costs, in a process that can take as long as five years if the process is contested.

To make matters worse, some U.S. institutions will refuse to release funds and other assets due to a person’s heirs if there are outstanding foreign probate issues. This is particularly true of financial accounts like brokerages, and even IRAs and other retirement accounts.

Let that sink in: Failing to plan property for your foreign estate can prevent your heirs from accessing even U.S. assets until foreign probate is resolved!

Then there are mismatches in how estates are taxed. The U.S. exempts everything under $30 million from a couple’s joint estate from estate tax. But other countries have inheritance taxes that kick in at much lower levels.

For example, France taxes the value of an estate above €100,000, at progressive rates that can rise to 60%. Even modest assets like ownership of a flat can trigger significant tax burdens for heirs. In Spain, a popular retirement destination, some regions levy estate tax at anything over €15,000 to €25,000, at rates that can rise as high as 70%.

Then there’s the question of trusts, which are highly popular in the U.S. and Canada as a way manage one’s estate and tax issues.

The concept of a legal trust is unique to common law. Civil law countries, which include practically all of Europe and Latin America, either view foreign trusts sceptically or disregard them entirely.

Let’s say, for example, that a U.S. couple moves to Ecuador and buys a condo there. They assume their revocable California trust will cover that property. But Ecuador doesn’t recognize foreign trusts. When the husband passes away, the Ecuadorian property is treated as intestate, forcing his widow to sell it and divide the proceeds between herself and their estranged adult children. On top of that, the family must pay Ecuadorian estate taxes, even though they wouldn’t be required under U.S. law.

In other cases, foreign countries may not have treaties that cover double estate taxation. In France, for example, the estate of a U.S. citizen resident will be taxed by both the United States and the French government. There’s no bilateral estate tax treaty between the two countries, so such a person’s estate will be taxed twice—or, if they’re not liable for U.S. estate tax, once, by France, at potentially high rates.

Fortunately, all these challenges have solutions that have been tried and tested over many years. And we here at International Living can explain all of them in simple terms. You don’t have to be super wealthy to use them.

For example, it’s cheap and easy to create a limited liability company in almost any country to hold one’s assets there. U.S. LLCs can own property abroad, or you can create a foreign LLC. A U.S. LLC can even own a foreign LLC.

Every LLC requires an operating agreement. This specifies who the “members” (owners) are, and what happens to a member’s shares when they pass away. For example, the retired couple living in France who puts their flat in a local LLC simply specifies that their individual interest in the LLC will pass on to the surviving spouse when one dies. It could also specify that 100% of the ownership interest passes on to their foreign heirs when they both pass away. Neither requires probate, and both avoid estate taxes.

LLCs can also act as a bridge between foreign assets and U.S. trusts. Even though the trust itself cannot own foreign property directly, the LLC’s operating agreement can specify that the ownership interest devolves to the U.S. trust when LLC’s owners pass away. Again, this avoids both probate and estate taxes, since both are handled by the U.S. trust.

The first step to taking advantage of these workarounds and solutions is to know about them. High-net-worth individuals have been doing these things for generations. There's absolutely no reason why their experience can't be available to you as well.

Fortunately, here at International Living, we have specialists who’ve been dealing with these matters for years. Although we don’t actually create a trust or foreign LLC or write the requisite legal documents, we can help you understand your requirements, connect you with specialists who can take care of all your needs, and support you throughout the process.

Consult with Me, One-on-One

My Mission: To Make Your Life Simpler, Safer, and Freer … Not More Complicated

Stop overcomplicating, second-guessing, or giving in to “information paralysis” … Let’s sit down together (online), and I’ll help you create a custom blueprint for your international goals… second passports, tax, travel, retirement, estate, business, and more…

Consult with Ted

Share