Estate planning is an important aspect of financial planning that many expats overlook. It’s important for expats in particular as expats often have assets in both the US and in their country of residence in Europe and so are often liable to estate or inheritance taxes in two jurisdictions. Estate planning helps to ensure that they avoid leaving a complex administrative burden to their loved ones when they pass.
At EAFA, we work with qualified attorneys who specialize in cross-border tax and law to incorporate international estate planning into the overall financial planning picture.
Despite the serious nature of estate planning, it provides peace of mind that comes from knowing that your heirs and beneficiaries are well-protected. In this article, we delve into some of the most important estate planning considerations and strategies for American expats living in Europe.
- What is estate planning?
- Avoiding double taxation on estates and inheritances
- Trusts and the foreign death tax credit
- The validity of US wills in foreign countries
- Consider a multi-jurisdictional will
- Health care directives
- International estate planning
What is estate planning?
Estate planning involves arranging for the transfer of assets in the event of an individual’s passing. The process revolves around determining the optimal way to pass on cash, assets, and property to loved ones, while aiming to simplify their lives as much as possible. When Drafting an estate plan it is important to work with an attorney who understands the relevant local and cross-border laws related to tax and inheritance.
An estate plan serves as a detailed blueprint that articulates how you wish your affairs to be managed posthumously. It should encompass estimating the net worth of assets, calculating liabilities and debts owed to creditors, and ensuring the presence of all necessary documentation for the legal enforcement of your wishes.
Avoiding double taxation on estates and inheritances
US citizens living abroad are still subject to US taxation on their worldwide income and assets as well as local taxation in the European country where you live. While the United States doesn’t have a federal inheritance tax, it does impose a federal estate tax. Depending on the estate’s value, a maximum 40% US federal estate and gift tax applies to assets exceeding the lifetime gift tax exemption amount, set at $12.92 million for individual filers in 2023 ($25.84 million for married couples filing jointly). Note that these thresholds are currently set to be reduced by half in 2025.
Fortunately, the substantial size of the exemption means that many US citizens face minimal or no exposure to US federal estate taxes. As a result, their primary estate tax obligation typically happens in their country of residence in Europe.
Trusts and the foreign death tax credit
To avoid US double estate taxation, some opt for renouncing US citizenship. Alternatively, expats can utilize the foreign death tax credit, allowing them to claim a credit for taxes paid to a foreign government on property located there. In the USA Trusts, such as irrevocable life insurance trusts, charitable remainder trusts, and qualified personal residence trusts, offer avenues to reduce estate tax liabilities. However, this becomes significantly more complex for Expats, it’s important to consider that most EU countries do not recognize trusts established in the United States. For this reason, careful planning and professional advice specific to the country where you live are essential for navigating this complex landscape.
The validity of US wills in foreign countries
The validity of your US will in a foreign country depends on factors including your residence, status and estate value. Some countries, under international conventions like the Hague Convention and the International Will Statute (Washington Convention), recognize US wills. If your country is not part of these agreements, consulting a local attorney can help assess the legitimacy of your US will abroad, and you may otherwise have to create a second will such as a Situs Will that is subsidiary to your main will, in the country where you live. Further, for your US will to be recognized abroad, it often needs to be notarized.
Consider a multi-jurisdictional will
Opting for a multi-jurisdictional will, instead of two separate ones, can be a practical approach for managing property in different countries. If you choose this option, you’ll need to work with attorneys in both countries who are familiar with the other countries’ laws.
Healthcare directives
Healthcare directives should be part of your estate planning. They empower someone of your choice to make healthcare decisions on your behalf in the event that you became incapacitated. It’s essential to note that existing US-based healthcare directives might not be valid overseas. Due to variations in how each country handles healthcare directives, you may require specific documentation in your current country of residence. Note that in many countries, default authority for such decisions may rest with the next of kin.
Final Thoughts
Whether you’re already residing in Europe or still planning your relocation, international estate planning gives you confidence that your affairs are well-organized both at home and abroad.
Estate planning safeguards your legacy and protects your heirs from undue chaos or expenses. Seeking assistance from an expat financial planner who specializes in cross-border estate planning will help give you peace of mind as you enjoy your expat life in Europe.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.