In our increasingly global society, estate planning is important, if not essential, for U.S. persons with ties to non-U.S. countries or international assets, especially during certain critical junctures and life altering events (i.e., immigration to the U.S., marriage, health issues, etc.)—belying each major life decision, a critical estate tax ramification. In the U.S., estate planning is relatively commonplace, in part, owing to the complex tax system and adversarial legal system (as compared with bureaucratic legal systems abroad), and in other part, owing to the desire to have certainty, finality, and stability in the ultimate disposition of one’s estate.
Indeed, even individuals with modest estates will have “estate plans,” generally consisting of a will, health care directive, power of attorney, and possibly a revocable living trust depending on the magnitude of an individual’s estate and jurisdiction in the U.S. in which he or she resides.1 For example, revocable trusts (also known as “living trusts”) are commonly used in states such as California, a jurisdiction in which it is desirable to avoid probate due to the added time and expense (in addition to emotional distress) incurred in a probate proceeding.
In common law countries such as the U.S., Canada, and the United Kingdom of Great Britain and Northern Ireland (“U.K.”), there is considerable control over how one may plan for the disposition of his or her estate, with few restrictions. Particularly for the high net worth taxpayer, it is not uncommon for bequests to a surviving spouse and children to have “strings” attached to the bequests. For example, a trust agreement may grant the trustee discretion to withhold distributions to a particular beneficiary, such as a child, if the child has drug or alcohol problems or perhaps because the child is not a productive member of society. Trust distribution schemes can often become quite complicated, often tailored to a client’s objectives and desires, requiring distributions at various intervals, or when the beneficiary has met certain age or other achievement milestones, such as graduating from college or university.
In juxtaposition, civil law countries often have in place laws that designate classes of beneficiaries who are entitled to benefit from a decedent’s estate by default. The proportion of inheritance distribution invariably depends on the composition of heirs, with children often required to receive a substantial portion of the decedent’s estate. It is perhaps for this reason that estate planning is not as commonplace in civil law countries as it is in common law countries like the U.S.; there is less incentive to plan when distributions to certain beneficiaries (e.g., descendants) is mandatory.
Yet another reason that estate planning may not be as commonplace in some countries is because there simply is no death, estate, or inheritance tax (i.e., Australia). In such countries, the burden of the U.S. estate tax system may seem onerous—even draconian—as the current gift and estate tax rate is 40percent, which is considered a historical low.
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