Analyzing the challenges of international estate planning for high-net-worth individuals
Over the past few decades, as international travel became more affordable and common, individuals began residing or conducting business in foreign countries. Some of these individuals prospered, amassing wealth and assets in multiple countries. This short study focuses on the estate planning challenges faced by high-net-worth individuals (HNWIs) with international wealth.
Estate planning is an essential aspect of wealth management, typically placing family members as beneficiaries while minimizing taxes. As wealth grows, the estate plan gains complexity due to various assets, holding structures, and jurisdictions involved. For international HNWIs, the complexity increases significantly, as wealth must be accumulated, taxed, and assessed under different jurisdictions. Additional complexities arise when considering the differences in family law, inheritance law, local assets comparison, and tax treaties. Nevertheless, these differences highlight the challenges HNWIs face with international estate planning.
Most individuals with international contacts have not contemplated the creation of an estate plan to address the matter. Understanding the main challenges faced by HNWIs with think for the wealth or assets overseas is essential to illustrate how planning is carried out but could entail resorting to financial or legal expertise. Since this often is not the case for HNWIs with international wealth or assets, a clear understanding of the possible challenges faced and the implications of not planning is most relevant.
Firstly, the default rules concerning inheritance upon death, international tax implications, and diversity in family law and social norms will be addressed. Furthermore, with regard to these challenges, the lack of knowledge on estate planning intentions will be explored as a sub-question.
The growing international mobility of high-net-worth individuals (HNWIs), coupled with differing tax rates and estate laws across jurisdictions, poses significant challenges for estate planning. Estate planning involves transferring wealth for future generations, ensuring financial independence while complying with laws and regulations. Although there is no universally accepted definition of HNWIs, individuals with investable assets above USD 1 million qualify. In 2020, global HNWIs numbered 21 million, with Asian-controlled wealth climbing from USD 19 trillion in 2000 to USD 30 trillion in 2022, despite fluctuations in 2022. HNWIs face increasing complexity and burdensome compliance requirements while continuing to seek ways to minimize wealth and income taxes. As wealth increases, estate planning becomes necessary to manage assets and reduce administrative and tax burdens and family disputes. The granting of residence and citizenship, as well as the establishment of commercial, banking, and investment structures in different jurisdictions, often coincide with the growth in wealth and the number of holding companies or local family offices. Consequently, there is increasing uncertainty surrounding estate planning for families with cross-border exposure.
Japanese laws governing estates and taxes apply to deceased persons who were either Japanese citizens or residents at the time of death. This addresses complicated jurisdictions and connections at every stage of the estate planning process. Common estate planning vehicles, structures, and legal entities such as trusts, family foundations, foundations, firms, and companies often differ in name and form, with similar structures operating in different jurisdictions and having different rights and obligations. Local rules, treaties, and laws in different countries regulate how property, income, and other assets can be transferred upon death. These laws impact international relationships associated with wealth and division by determining what common estate planning vehicles can be used and who has rights or owns property. Consequently, countries claim taxation rights over what is owned, depending on variables such as citizenship, residency, nationality, and property connection.
Scope and Objectives
High-net-worth individuals (HNWIs) often have financial assets (real estate, businesses, stocks, currencies, investments, etc.) in multiple countries and are typically domiciled in different countries than where they have assets. As a result, their estates may be exposed to the laws of different countries, including branches of taxation (inheritance tax, estate duty, gift tax, etc.), each with different rules, rates, and exemptions regarding the estate planning techniques and instruments. This leads to planning problems that involve more than one country and thus cross-border or international issues. HNWIs need to take seriously the complexities of having these taxes in the local jurisdictions—especially where the estate size is large and such taxes are relatively high.
Estate planning does not need to be complicated, but it does help to know beforehand what can happen and what needs to be done to avoid problems. Despite the inherent complexities, HNWIs must confront the challenges posed by the need to navigate a patchwork of disparate domestic laws in different jurisdictions. They must also deal with wealth advisors and private banking staff, who may have varying degrees of experience and capability with international estate planning issues.
The objective of this paper is to highlight the core needs for most HNWIs associated with exceptions—such as special family situations, Private Placement Life Insurance, onshore and offshore trusts, or private foundations etc.—from the standard process of international estate planning. The most critical areas of focus with regards to international estate planning are also identified. Finally, the challenges faced by policymakers in many jurisdictions that are experiencing a shift towards an environment of increasing interception of tax income flow arising from (or transferred to) other jurisdictions are focused upon.
Estate planning is important for everyone, but it is especially crucial for those with international assets. With investments and property worldwide, there is a greater chance of being subject to foreign jurisdiction laws.
Key Components
When considering the challenge of devising an estate plan, the necessity to address several key components will arise. The failure to consider one or more of these components could create significant unintentional consequences or hardship for heirs or beneficiaries of an estate. The financial affairs of all persons contemplating a will or an estate plan should be reviewed relative to these components to identify possible estate planning problems that need to be resolved.
A "will" is a legal document directing the disposition of property at death. To be effective, a will must conform to the legal rules within a jurisdiction where the maker was domiciled at the time of death. Wills should be considered for all owners of property regardless of the value of that property. In the absence of a will, the disposition of property at death will be determined by the law of intestate succession governing the jurisdiction where the maker died. The inability of the estate to dispose of property according to the maker's wishes, as permitted under a will, may be particularly problematic in the case of property in more than one jurisdiction. The absence of a will may also allow the distribution of property to unintended heirs. Additionally, trust provisions may not be enforceable in the absence of a will executing the trusts and nominating trustees.
An "inter vivos trust" or "revocable trust" is a trust created during the owner's life, which the owner may revoke at any time. If properly structured, an inter vivos trust can avoid the probate of property transferred to that trust at the owner's death. Probate is a court-supervised process to ensure payment of debts and to validate the disposition of property under a will. Probate is generally on the public record. Trust proceedings are not on public record. A properly funded and administered inter vivos trust causes the trust property title to be in the name of the trust. Consequently, that trust property will be disposed of according to the trust terms at the owner's death. A will may still be appropriate if the decedent owned property not titled in the trust name or for other reasons, but it will be the "back-up" document to the trust.
In the absence of a will, property titled solely in the name of the decedent will pass under the law of intestate succession and be probated. An inter vivos trust may not be appropriate for all individuals and for all property. Numerous factors should be considered when evaluating the merits of an inter vivos trust. In addition to avoiding probate, the overall goal of estate planning may include tax reduction and the desires to maintain control and minimize conflict regarding the disposition of the estate.
International Estate Planning
International estate planning is the process of understanding one’s assets, where those assets are located, their ownership, and their value. Knowledge of these issues is important, but not sufficient, in developing an international estate plan. Strategies must be implemented to achieve proper distribution of those assets upon death. The international estate plan must be sufficiently documented, communicated to heirs, and reviewed on a periodic basis for any changes of circumstances in the future. It is critical that the owner of assets abroad and any heirs and representatives of the estate be educated on the tax implications and planning strategies regarding these assets. Upon the death of a foreign national, therefore, these include knowledge of the rights under any applicable estate tax treaty, proper reporting with U.S. estate tax forms, and disclaimers of inheritances, if appropriate. The owner of foreign assets must properly plan for their heirs to understand how to successfully take ownership of foreign assets. This can be accomplished through proper estate planning and maintaining ongoing communication about the estate plan to heirs. International estate planning involves an understanding of taxation, which can be overwhelming and intimidating. Seeking guidance from professionals with extensive experience and knowledge can be invaluable to navigating the intricacies of international estate planning.
International estate planning involves the disposition of real or personal property by will or by trust formed within a will.
Challenges in International Estate Planning
The process of transferring wealth, assets, and property across national borders is fraught with a myriad of obstacles that must be surmounted. High-net-worth individuals (HNWIs) and their advisors forming or overseeing estate plans that will have cross-border ramifications should be aware of these impediments in advance and prepare accordingly. Potential challenges include, but are not necessarily limited to, the following:
Legal and Regulatory Complexity
HNWIs' wealth and assets are often spread across national borders, several jurisdictions. Each country has its own estate planning and transfer laws, regulations, and financial institutions. The legal and regulatory framework governing estates is further complicated by the fact that the primary residence of HNWIs may be different from the jurisdiction in which the wealth is held or the jurisdictions of some of the assets. HNWIs securing another citizenship may need to contend with conflicting laws governing their estate plans.
Tax Implications
Besides legal and regulatory issues, there are tax implications that need to be taken into account and analyzed carefully. The disparity between the tax systems in different countries may result in double taxation. HNWIs should be aware of the tax rules that apply to the wealth and assets they are looking to pass on in each jurisdiction and account for the potential liabilities and risk of unintended tax consequences in their estate plans. This is further complicated by the fact that the HNWIs may not be fluent in the language in which these tax rules are written and communicated. There may be tax authorities who have vested interests in misleading HNWIs and not communicating all necessary information, and HNWIs are advised to be on the lookout for the possibility of fraud.
Cultural and Language Barriers
Language barriers can lead to misunderstandings and failures to comply with laws and regulations. This is acutely distressing when it comes to estate planning. There may also be cultural differences in the creation and enforcement of estate plans; HNWIs and their advisors should be aware of and sensitive to these differences.
Strategies and Best Practices
International estate planning can be a complex process for high-net-worth individuals due to various legal, tax, and cultural challenges. It is essential to understand and implement effective strategies and best practices to mitigate risks and dangers and achieve the desired goals of transferring wealth. Several key strategies and best practices can ensure successful international estate planning.
Choosing the right legal structures to hold wealth is a key strategy in international estate planning. Various legal entities, such as companies, trusts, foundations, and partnerships, can be established in different jurisdictions to hold assets. Those who plan to pass on their wealth to family and future generations may consider holding assets in a trust, foundation, or similar vehicles designed to preserve and transmit wealth. Such structures can limit exposure to inheritance tax and, in some cases, ensure that the family business or assets remain in the family. Foundations and similar vehicles can also help avoid the loss of control over the family business due to subsequent generations becoming estranged or failing to meet suitable management requirements. Those looking to diversify their wealth and protect it from personal risks may consider holding part of their wealth in countries with favorable tax treaties and investment restrictions. On the other hand, temporary residents may consider establishing a company within the host country to ensure that their business complies with local laws and regulations and that profits are repatriated tax-efficiently.
Utilizing Private Placement Life Insurance and or foundations or trusts or a combination is a proactive risk mitigation strategy in international estate planning.
Private Placement Life Insurance and similar structures can be beneficial in various contexts, such as allocating funds in the event of divorce or death, involving children in family business operations, and shielding funds from claims. PPLI can also assist in protecting households, companies, and assets from tax claims and creditor claims. Private funds can be beneficial for family asset management, while private estate planning vehicles can consolidate wealth under a harmonized type of vehicle. PPLI can reduce the complexity of estate planning and improve family and corporate governance and compliance. Using PPLI to hold investments, art collections, or developments is also very common in several jurisdictions.
Engaging professional advisors in the areas of legal, tax, investment, and family governance is crucial in developing and implementing the right international estate planning structuring effectively. Professional advisors can assist in assessing the specific needs and dispositional concerns of individuals or family business groups, gathering data and information on all structuring obligations, risks, and goals, and monitoring and implementing planning steps. Professional advisors can also assist in communicating with involved family members, controlling life contingencies, supporting the decision-making of family members, and conducting periodic reviews of investment risks and yields.