Estate Planning for Families With Multi-Country Tax Residency

How Tax Residency Shapes Your Estate Plan

Tax residency decides which country has the right to tax your income, property, and what you leave behind when you pass away. If you or your family are considered tax residents in more than one country, different laws may apply at the same time. This can affect inheritance taxes, rules on passing down assets, reporting requirements, and which country’s courts handle your estate.

Tax residency is not the same as regular residency. It is based on laws and treaties between countries. Sometimes, a person can be a tax resident in two countries in the same year. If this happens and there is no coordination between the two countries, the same assets can be taxed twice. A good estate plan will figure out where you are a tax resident, how each country taxes assets after death, and how those rules work with U.S. laws.

How Countries Decide Tax Residency

Every country has its own rules for tax residency. In the U.S., you are a tax resident if you have a green card or meet the substantial presence test. This test looks at how many days you were physically in the U.S. over a three-year period.

Other countries use different rules, such as:

• Physical presence rules, like spending 183 days or more in the country
• Permanent home tests, which check if you have a home available to you
• Center of vital interests, which looks at where your family, work, and personal ties are the strongest

It is common for families who move around a lot to meet the tax residency rules for multiple countries at the same time, even by accident.

What Happens With Dual Tax Residency

If two countries see you as a tax resident, both can claim the right to tax your assets when you die. One country might tax all of your assets, while the other taxes only certain assets, like property within its borders. This can lead to the same property being taxed twice.

In the U.S., federal law taxes all of your assets worldwide, even if they include foreign real estate, businesses, or bank accounts. If a second country also taxes those assets, your estate plan needs to address how these systems work together.

How Tax Treaties Help

Tax treaties between countries can reduce conflicts, but don’t completely solve them. The U.S. has treaties with many countries, and some include rules for estate and inheritance taxes. These treaties often have tie-breaker rules to decide which country has the main right to tax you.

Tie-breaker rules typically look at these factors in order:

1. Where you have a permanent home
2. Where your personal and economic ties are stronger
3. Where you live the most
4. Your citizenship

Even if a treaty picks one country as your main tax residence, you might still have to report taxes and file paperwork in both countries. International estate planning must handle these requirements to avoid problems and delays for your family.

Choose a Main Framework for the Estate

Most cross-border estate plans are based in one main legal system. For families in Washington, D.C., a will made under D.C. Code §18-103 can outline how U.S. assets are handled. This will usually cover local assets and name a personal representative to manage the estate in D.C. probate court.

However, foreign property and financial accounts may need separate processes in other countries. Choosing a main framework doesn’t replace foreign laws; it provides a structure that other documents can work with.

Use Specific Documents for Foreign Assets

To avoid problems, estate planners often create separate, focused documents:

• A main U.S. will covering assets in the U.S. and general instructions for global distribution

• A limited will for real estate in the country where it is located

• Local powers of attorney for places where U.S. legal documents aren’t accepted

Many countries won’t transfer real estate ownership based on a U.S. probate order. They may require a locally valid will or a separate legal process. Using country-specific documents helps avoid delays and lowers costs for heirs.

Match Ownership Types With Local Laws

How property is owned affects which laws apply to its transfer.

For example:

• U.S. real estate held in a trust avoids probate but is still subject to federal estate tax.

• Foreign real estate owned directly is transferred under that country’s laws, even if a U.S. trust exists.

• Shares in a foreign company are usually governed by the laws of the company’s home country.

U.S. residents must also follow reporting rules. For instance, foreign financial accounts totaling over $10,000 must be reported using an FBAR under 31 U.S.C. §5314. Other disclosures may apply for foreign entities or trusts. Estate planning must consider these rules to help fiduciaries follow the law without issues.

Manage Taxes Across Countries

Federal estate tax applies to all assets owned by U.S. citizens and residents worldwide. Amounts over the federal exemption are taxed at a top rate of 40%. If another country also taxes the estate, a tax treaty or foreign tax credit may help avoid double taxation. However, the estate must still file tax returns in all relevant countries.

For example:

• The U.S.–U.K. estate tax treaty provides credits for taxes paid in either country.

• Countries like France tax inheritances based on the heir’s relationship to the deceased and the location of the property.

• Some countries tax unrealized gains at death instead of having a formal estate tax.

Carefully planning ownership and the timing of transfers can help reduce double taxation and claim credits where available.

Keep the Plan Up to Date

The laws that apply to an estate depend on where the person lives and intends to stay. Domicile, which is used for estate tax purposes, is based on physical presence and intent, not just citizenship. Moving to another country without updating estate documents can change tax rules and probate requirements.

A solid cross-border estate plan should include:

• A list of assets showing where they are located and how they are owned

• Wills and legal documents that don’t cancel each other out

• Executors or representatives who are legally recognized in each country

• Clear instructions for filing taxes in multiple places

For families with connections to Washington, D.C., and other countries, following the right laws for asset transfer and taxation is key to making sure wishes are followed and the process goes smoothly.