Foreign Property Considerations In Estate Planning and Probate

In our practice, we have a significant number of clients who own real property or have bank account in a foreign country whether China, Mexico, England, Costa Rica, England, Canada or France or other countries. Our clients are becoming more global and mobile, especially when buying properties abroad for retirement, vacation or for their families.

One issue that arises with foreign property is the risk of double taxation. It is possible that when foreign property is transferred, U.S. estate tax will apply, but so will the tax of the foreign country. When a citizen of the United States dies and owns property in a foreign country, the property in the foreign country will be subject to U.S. estate tax if the estate is subject to taxation at all. There are treaties with certain countries which prevent the double taxation and give credit.

Another issue that comes up is multiple wills in different jurisdictions. Somestimes one last will and testament may ultimately revoke another. When ttwo wills are needed, it is important that attorneys from each country work and coordinate the estate planing and wills.

If there is no will or trust, in civil law countries, such as France, the property vests in the decedent’s heirs immediately upon the death of the decedent. This is unlike the United States and other common law countries, where there generally must be a personal representative or executor to transfer title or, at a minimum, some sort of court recognition of the death and transfer of property. 

For example, if a client owning property in France desired that property vest in a long time companion and there was no will or trust, the property would immediately vest as set forth under French succession laws. On the other hand, if the client wanted the property to vest in their heirs, then drafting a will in France to deal with the French property would be not be needed.  

We work with attorneys in other countries while advising clients with foreign property during the estate planning or probate phase. It is always best to address these issues during estate planning rather than going through the difficult and expensive process of dealing with them after death through the probate process. As we live in a more global society and smaller world, these issues are becoming more common. Don't forget to prepare for all your estate planning and probate issues, particularly when foreign real property is involved. 

Posted by Henry (Hank) Moravec III
Email: hm@moravecslaw.com
Office: 626-793-3210

A Candidate for the Longest Estate Administration - over 60 years!

An Epic Story of Procrastination?  Or an Epic Story of a Distaste for English Weather?

The U.K.'s Daily Mail has a story about, a long (very, very long) Probate dispute.

Incredibly, an English estate with a manor house and (at one time) 3,000 acres of farmland, and a steady rental income went unclaimed for decades.  The case is both interesting in a "Downton Abbey" kid of way, and a procedural way:  what is the result if a beneficiary refuses to accept property?

The estate is known as the Figg-Hoblyn estate, named after the family who first lived there beginning in the 1600s.   The saga which recently ended began with the estate plan set up in 1856.  As was the custom at the time, the estate was left to the oldest surviving male heir.  For those interested in what happened as a technical matter (well, let's not count how many of you make up that category, shall we?) the "estate plan" in question was not a Will or a Trust, but a deed, which contained trust-like provisions for ownership of the property and its income.  

Squire William Hoblyn had one son and four daughters.  When his son, Ernest, died shortly after William's death, the downside of the "eldest male heir system" was  brought into full relief.  None of the other Hoblyn daughters had yet married.  When one of them finally did marry, she first moved to Canada and then California (as, presumably, she did not have a legal right to the "family" estate).

Her oldest son, Francis Figg-Hoblyn, visited the estate in 1947 (after presumably becoming aware that he was now the oldest male heir), but was daunted by the amount of work needed to be done, and never took possession.  When Francis died in 1965 his eldest son, John, a former college professor with what reads as a fairly unconventional lifestyle, also refused to accept the estate, citing an unwillingness to pay taxes as a reason.  In the various articles you see from a Google search, it not entirely clear why John did not want to formally take possession of the property.,  "Taxes" do not seem to be the actual reason, since John would have owed no U.S. tax to accept the property, and  any UK tax could be paid by selling some of the property or through the collection of rental income.

Finally, when John died in 2011, the English Court was able to entertain a motion to amend the original Will to allow John's sisters to inherit the property.  This ruling was disappointing to William, a male cousin, but is welcomed by the local residents who now know the estate, which has been vacant since at least the 1940s, may now be rehabilitated by the new owner.

What is sometimes glossed over in the articles (since the thought of any "unclaimed" estate is so entertaining to those of us who will never inherit an estate in the first place) is that the court appointed administrator  in England had actually been renting the land out and collecting the rents during this time period.  This is what would happen in a California court if any heir could not be located -- the administration of the estate would continue, and distributions would be postponed until the heir was able to accept them. What makes the Figg-Hoblyn story so unusual is the length of time that a known heir refuses an inheritance.

The full article can be found here: http://www.dailymail.co.uk/news/article-2293296/The-5million-Cornwall-estate-left-ruins-rightful-male-heir-claim-40-years.html, or simply Google "Hoblyn estate" for further reading.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership.
For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is www.moravecslaw.com

The firm's office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.  There is ample free parking.

The Swiss Connection and FBAR

At the top of the list of current events in Washington these days is the just announced UBS settlement, where some 4,000 names of U.S. citizens with Swiss bank accounts will be disclosed to the Internal Revenue Service. This settlement raises some fascinating issues of public policy and how it is always what you don't know about the Internal Revenue Code that hurts you.

As the comments to yesterday's New York Times article on the settlement revealed, there is quite a bit of anger among people who think that others may be evading taxes. However, I suspect that a good number of the people who have these Swiss accounts are not captains of industry but relatively ordinary people seeking some international diversification who may now be caught up in the enforcement plan described below. As you will see, although taxpayers are in theory offered a break if they engage in voluntary disclosure, the penalties, like many in the international trust and account area, are fairly severe.

As a bit of background, it is common for clients who engage in estate planning to inquire about foreign accounts and foreign trusts. After all, who has not seen The Bourne Identity and imagined himself or herself showing up in Zurich with money already waiting? However, the reality is that the United States is not Belgium or some other small member of the European Union, where the majority of citizens may have business dealings in other countries. U.S. tax law has never approved of U.S. taxpayers moving money or assets offshore, and because of the size of the United States it is not common for people to need to do so.

Somewhat less common are clients with foreign business interests or dual citizenship, who maintain residences in foreign countries and bank accounts there. Typically, these clients already have good accounting advice which helps them navigate filing obligations in two countries. In some cases, we even have to examine the applicable Estate Tax Treaties while drafting their documents.

Set against this background of a country where the vast majority of citizens have no foreign financial interests at all, you can see why the initial reaction to the UBS settlement might be "track down every last one of those rich guys!" But some people, who are not actually very rich, may be in for a big shock.

Most people don't give it much though when they get their annual Form 1099s from their banks and financial institutions. You simply attach them to your tax return and file it. However, those forms are of course also disclosed to the IRS, and it then uses them to cross check the income reported on the return. U.S. banks however, would usually have no way of knowing whether a customer was a dual citizen or resident and had a filing requirement in another country, or what that filing requirement would be.

This is why a knee jerk reaction to the "secretive Swiss banks" is a bit off the mark. Even though a large amount of the money in Swiss banks is from people or companies who are not Swiss, its not up to the Swiss to report to the IRS, is up to the taxpayers.

If a taxpayer reported the income from their Swiss accounts on their form 1040, they are sleeping through the night these days. They may even have gotten a credit for taxes paid in Switzerland.

However, many ordinary, non-sophisticated-secret-agent-types might not have known about the U.S.'s foreign account equivalent to the 1099, the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (the "FBAR" for short). Its a simple form, but because it does not apply to the vast majority of U.S. filers, it is not filed with a Form 1040 income tax return, but is filed separately to a separate IRS department dealing with foreign accounts.

Perhaps the worse case to be in is if you had a foreign account, did not disclose the earnings (because perhaps you thought the foreign withholding was the only tax owed) and did not file the FBAR.

Then, you have until September 23, to file the FBAR and pay the tax, an extra 20% of the tax, interest on both, and another penalty of 20% of the largest account balance over the last six years. For a $50,000 account, which have netted the client three figures of interest income per year (hardly Bourne territory) the penalty could near $15,000. The alternative could be even higher penalties and theoretical criminal prosecution.

Of course, in my example the U.S. treasury might not actually be out any money. Perhaps a couple of hundred dollars. Fifteen thousand for failing to report a few hundred. This is all you need to know about the U.S. view of foreign accounts -- be careful!

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/