A Special Relationship - How having a US family member can impact your estate planning

28 Nov 2012

With the recent US presidential election, the eyes of the world have turned stateside, and they are likely to remain there whilst President Obama faces the 'fiscal cliff' looming at the end of the year.

However, whilst everyone has an indirect interest in the outcome, anyone with a US connection (including a spouse) may end up feeling the impact in their pocket.

Never been to the US? You might still have to pay tax there

The US is one of only two countries in the world (the other being Eritrea) that taxes individuals based on citizenship. Most nations limit their jurisdiction to people and/or assets that are based in that country, but the US taxes all people who are entitled to live in the US, even if they have never lived there.

This would include any child born in the US, including those whose parents aren't US citizens, and usually the children of US citizens, even if they were born in another country and have never visited the US.

What it means for US-UK families

If you or a family member has a US connection, then there are additional considerations which need to be taken into account when dealing with your affairs. In this issue, we deal with estate planning on death. In the next issue, we will highlight the lifetime compliance issues that affect all those with a US connection.

Estate planning

All US citizens are subject to US estate tax on their death, regardless of where their assets are situated.

If you or your spouse are also subject to UK tax (either because you are domiciled here or have assets in the UK), then careful thought will need to be given to how your affairs are structured to maximise reliefs. This is particularly the case where one spouse is a US citizen and the other is not.

For example, assets passing from a US citizen to their non-US spouse would be free of inheritance tax in the UK (provided both consider the UK to be their permanent home). However, the assets would be subject to US estate tax to the extent they exceed the US exempt amount (currently $5million but due to fall to $1million on 1 January 2013).

It is often possible in these circumstances to postpone the payment of the estate tax until the death of the surviving spouse by leaving assets on a special US trust, known as a qualifying domestic trust (or QDOT). However, standard QDOT planning will often not be suitable for a US-UK married couple, because such planning commonly leaves the full US exempt amount on trust for children, with only the excess passing to the QDOT.

This would be chargeable to inheritance tax in the UK on the amount above the nil rate band (currently £325,000).

Similarly, it is common in the UK to leave assets that benefit from agricultural or business property relief on a discretionary trust for children and grandchildren, to maximise the efficiency of the reliefs. These assets would not be exempt from estate tax in the US, and may result in a tax charge there.

The Collyer Bristow team has extensive experience of advising US citizens and their families on their UK affairs, and works closely with US advisers, both here and in the US, to ensure maximum tax efficiency in both countries.

Daniel Simon, Partner 

Additional information