Estate planning for British expatriates living in America can be extremely nuanced and challenging. This is compounded by the fact that expatriates are often unaware that they may be impacted by legal ties to the UK that can result in surprise complications and taxes – both during their lifetime and/or on death. These challenges can usually be overcome by working with the right professionals who will carefully craft an efficient estate plan that avoids the worst of each country’s pitfalls.
The estate planning documents you likely need as a minimum are a will, financial power of attorney and a power of attorney for healthcare. US Living Trusts (aka revocable trusts) may be part of your estate plan, but as you will read below, careful planning and tax considerations need to take place before setting up any trusts.
Risks of Poor Estate Planning
Dying intestate (i.e. without a valid will) can be disastrous for your family left behind. Your assets are divvied up by the state and not in accordance with your wishes. Assets can get locked up in a lengthy and expensive probate process, during which your survivors could be denied access, making life extremely difficult for them. Dying intestate with minor children could also result with them becoming wards of the state. This makes it especially important for those with minor children to have a valid will, even if it’s a temporary measure until more comprehensive estate plans are put in place.
Becoming incapacitated without Powers of Attorney (aka POAs) in place (for finances and/or healthcare) again puts your family in a potentially very difficult position. Decisions about your care are left in the hands of others, and funds you consider “shared” can become inaccessible. It can be a significant strain and place undue hardship on your family during an already difficult time.
UK Domicile Status should also be considered in a cross-border estate plan. Just because you consider yourself completely severed from your original country does not always mean you are from a legal standpoint. If you are still considered UK Domiciled by HMRC (or you inadvertently trigger a reversion back to UK Domicile by, for example, moving states) you will be liable for UK Inheritance Tax on your worldwide estate at your death and will only benefit from a £325k exemption (Vs the $12.92m that is currently available in America, if you meet their domicile requirements).
US Trusts for British Expats
US Trusts are commonly used to avoid probate and are fairly simple for US persons. For British Expats living in America, US trusts, even basic revocable living trusts, should be avoided without specific US:UK cross border legal advice. US trusts can trigger unforeseen and unfortunate UK consequences, as a result of UK domicile being either still retained or inadvertently reverted back to.
While they share the same name (“trust”) the two country’s regimes are not particularly compatible and great care must be taken. A British trust may be downright disadvantageous to a US resident beneficiary and vice versa. There can also be negative consequences if the US resident is a trustee of a British trust. The repercussions can be significant.
For some people, establishing trusts will be inadvisable, no matter the motivations. For others it may be sensible to get a “non-domicile opinion” to allow trusts to be established
To do this properly, it can get very expensive for expats.
As such, many don’t do anything and risk dying intestate and/or becoming incapacitated without powers of attorney.
Others visit a local attorney with no understanding or awareness of the cross-border issues and who inadvertently sets up estate planning structures that create issues and taxes that could have been avoided.
Neither outcome above is desirable (and frankly, can be disastrous). We suggest that all expats execute a will and powers of attorney as soon as reasonably possible. These will provide a baseline plan that avoids the worst repercussions (dying intestate or being incapacitated without POAs) without exposing oneself to the financial repercussions that inappropriate trust planning can result in. This gives some breathing room to revisit an estate plan properly – committing the required resources of time and money – with the appropriate panel of professional advisers in the future, once you are more certain about your personal plans.
Some important additional information regarding estate tax:
- The most relevant concept to estate planning is “domicile” as opposed to the much more familiar “residence”
- Domicile is a much more permanent concept (whereas residence can easily change from year to year)
- If you are still considered UK Domiciled by HMRC (or you inadvertently trigger a reversion back to UK Domicile by, for example, moving states) you will be liable for UK Inheritance Tax on your worldwide estate upon death.
- If you are considered US Domiciled by the IRS you may be subject to US Estate Tax on your worldwide estate upon death
- Some relief from double taxation should be available under the Estate Tax Treaty between the US and the UK
- The UK has a personal exemption of £325k that can be rolled over to one’s spouse, giving a married couple £650k. Anything over this is subject to 40% tax
- The US currently has a personal exemption if $12.92m that that can be rolled over to one’s spouse giving a married couple $25.84m. Anything over this is subject to up to 40% tax. Note that this only refers to federal estate tax. Six US states have their own inheritance tax that is calculated separately from your federal tax.
- The US $12.92m exemption is set to reduce by 50% in 2026 to $5.6m
- Both countries have unlimited gifting between spouses, but the US does not extend this to non-citizens.
- Non-citizen domiciles (e.g. most Legal Permanent Residents) will not benefit from the unlimited exemption, unless the transfers are flowing to a US citizen. They will however benefit from the $12.92m exemption, but will have to declare gifts over $17k p.a. (2023) which will reduce their remaining lifetime exemption.
- Non-citizen, non-domiciles (e.g. those on a visa) are only liable for US estate tax on their US assets (i.e. not their worldwide estate), but they only get a $60,000 lifetime exemption, with anything other this taxed at 40%. Furthermore, a non-citizen, non-domicile can only gift US assets worth $175k p.a. (2023) to their non-citizen, non-domicile spouse, with anything above this taxed at 40%.
- Married US residents on visas need to exercise extreme caution moving money and assets around, even between each other.
- You should understand that Gift Tax and Estate Tax, whilst related and very similar, are two different things.
If you’re a British expat in America, now is the time to get started on your estate plan. If you don’t know where to start, feel free to contact us
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