Now that your affairs have been structured effectively, attention turns to estate planning.
In this edition of the Roadmap, Joshua Moss sits down with Ed Johnson, Wealth Planner at London & Capital and Laura Harper, Partner at Kingsley Napley to discuss estate planning for international Americans.
01. Review your current position: Domicile, Wills & Powers of Attorney
– Domicile
Identifying your domicile position is an essential start point in mapping out your estate plan. This is because your domicile determines your exposure to taxes on your estate.
A key issue is that domicile is not a unified cross-border term i.e., how domicile is determined for US purposes is not the same in the UK. Being aware of these differences is essential and you should seek professional advice in establishing your domicile position.
– Wills & Powers of Attorney
It is fundamental that any planning is aligned with up-to-date Wills and Powers of Attorney to ensure that your best wishes are well considered. The situation becomes more complex for international families who might have different exposures to differing country laws based on their domicile.
For example, where married couples consist of a US person and a non-US person, having a properly drafted Will can be very important to preserve any exemptions or relief from tax, at least on the first death. For US persons leaving assets more than the Estate Duty exemption, this might contain a QDOT (Qualified Domestic Trust) trust which can delay the payment of tax on an estate until the death of the second spouse.
It is also important to consider that some US states have Community of property regimes so these may limit the powers of disposal of people who were married in these states.
Powers of attorney do not travel well at all so if you have assets in the US and the UK, you will need separate powers appointing attorneys to deal with these from a financial point of view.
02. What is my exposure – the global balance sheet
By pulling together a global balance sheet of your family assets, this will determine your exposure to US and UK estate taxes at an asset level.
Important points to note during this exercise:
- UK domiciled individuals are subject to inheritance tax (IHT) on their worldwide assets, calculated upon their death
- US domiciled individuals are subject to US estate and gift tax on their worldwide assets, calculated during their life AND death
- If you are neither domiciled in the US or UK, then just the assets you hold in either jurisdiction will be subject to the IHT/estate tax rules
- The UK has a lifetime allowance currently at £325,000 nil rate-band (NRB) with an additional £175,000 residence nil-rate band (RNRB) in certain circumstances
- The US has a lifetime exemption currently at $12.06m (inflation adjusted) and due to sunset down to $5m (inflation adjusted) on the last day of 2025
- Any assets above these allowances, both the US and UK will charge a 40% tax
The significant contrast in allowances can explain the need for considered planning.
03. Gifting: should I be doing it?
In the previous Roadmap Part 3 – Cashflow Modelling, we ran through an exercise in which you could visually understand how gifting assets can impact you, your family and/or future beneficiaries.
In summary, funds that are surplus to your immediate and future needs (within reason) should be available for estate planning.
Again, some important points to note during this exercise:
- Gifts between UK domiciled spouses and/or made from normal expenditure are exempt from UK IHT
- Gifts between UK domiciled to non-UK domicile spouse is exempt up to a lifetime amount of £325,000 (in addition to the £325,000 NRB) and then exposed to IHT (depending on whether the gift is a PET (Potentially Exempt Transfer) or a CLT (Chargeable Lifetime Transfer))
- Gifts between US citizen spouses are fully exempt and gifts to any non-spouse donee are exempt up to $16,000
- Gifts between a US citizen spouse and a non-US citizen spouse have an annual gifting allowance of $165,000 with any gift above exposed to the lifetime exemption and reported with a US gift tax return
04. Gifting: how should I do it?
There are two main types of gifts:
- Outright gifts with no reservation of benefit
This is as simple as it sounds where you gift away the asset and have no entitlement to use or benefit from it.
- Trusts
Trusts can be an efficient structure for passing wealth on to future generations tax efficiently. There are various types of trusts, which have different tax treatments in both the US and UK.
It can make sense to use one, but it should be carefully considered because the reporting and administrative burdens and costs can be substantive. It is also important to consider the location of beneficiaries of the trust because families are so mobile now. This can have tax and reporting implications for the trust and careful records need to be kept.
05. Common types of trusts
– Excluded Property Trusts (EPTs)
EPTs can be created at any time before settlor of the trust becomes deemed domiciled to protect their non-UK situs assets from being subject to UK IHT. When the settlor becomes deemed domiciled and subject to UK IHT on their worldwide estate, the assets in the trust will not be considered part of their estate. They may, however, be subject to other taxes such as income and capital gains if distributions from the trust are made to UK resident persons.
This can be desirable when balancing UK IHT protection with UK cash flow requirements and highlights the importance of considering everything in the round.
– US probate trusts
The US probate process is long and costly. For that reason, the use of revocable lifetime trusts is commonly adopted by US persons to avoid the probate process. However, holding UK situs assets in this type of trust often creates complications. As such, it can be much more efficient to have a UK will that works alongside a US revocable trust so that assets here can be administered quickly and more cost efficiently. It can also be helpful to appoint UK based executors, although this is not essential.
If you have a US probate trust and you are moving to the UK, the UK position needs to be reviewed and as Laura says: “this is particularly true for revocable trusts that have provisions for someone else to become trustee on the event on incapacity, because at this point what was considered a bare trust may become a substantive trust.”
