12 Estate Planning Mistakes to Avoid For Multinational Families

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Proper estate planning is one of life’s most important, yet often overlooked responsibilities. Estate planning encompasses ensuring that decades of hard work is properly passed on to family and friends – securing your legacy and protecting wealth for future generations. This process is especially critical for families or individuals with multinational interests. With that in mind, let’s explore 12 common mistakes that multinational families make during the estate planning process.

What is Estate Planning?

Estate planning is the process of naming the people or organizations that you want to receive your assets after you die. This process can be time intensive even for a person with modest possessions. However, for individuals with business interests that span multiple countries, the estate planning process is downright strenuous.

The best way to navigate the estate planning process is to work with an international tax expert who can help expedite the estate planning process, ensure that it’s done correctly, and leverage their network of professionals to get the job done.

1. Failing to Plan

There are tons of reasons why people don’t take the time to properly plan their estate. Most often,

  1. They don’t know who to trust.
  2. They don’t know who’s capable of doing a good job.
  3. They don’t know how to find an international tax expert.
  4. They believe planning might make them die faster (We’ve seriously heard this before).

These roadblocks are really just excuses to continue kicking the can down the road. But, minimizing your tax burden with proper estate planning is like getting a good grade in school. You can’t show up on the last day of class, hoping to ace the final test and get a passing grade. Instead, it requires careful planning throughout the semester.

Unfortunately, we see many people who fail to take the necessary steps and ultimately see their hard-earned wealth fall into unscrupulous hands. Failing to create a plan (or waiting till the last minute) can cause you to miss out on potential tax advantages/opportunities that may not be available forever. 

2. Ignoring Future Tax Law Changes

Estate planning is a long-term game. For example, someone who is 60 years old might be considering stepping back from the workforce and putting their affairs in order. However, with the average life expectancy just under 80 years old, this person will have at least 20 more years to plan for. With this in mind, individuals need to consider how tax codes might change during the remainder of their lifetime, and plan accordingly.

This is especially true as many countries around the world are in the process of increasing taxes on the wealthy. For example, over the past few years, several countries in Europe have explored the following tax changes:

  1. Increasing tax rates for higher-income individuals
  2. Raising or implementing wealth taxes
  3. Raising recurrent taxes on immovable property
  4. Introducing temporary windfall profits taxes
  5. Indexing the income tax for inflation

It’s important to know which countries could become less tax-friendly in the coming years so that you can avoid tying down all of your assets there. Or, on the flip side, it’s good to know which countries are emerging as tax-advantaged. Again, this is where working with an international tax professional is crucial.

3. Creating a Plan on Your Own

Another common mistake that we frequently see, is people trying to do their own estate planning. We strongly recommend resisting this temptation, as it can lead to an unoptimized plan that inadvertently sends your cash to government coffers around the world or into the arms of heirs that you didn’t intend. Instead of trying to create your own plan, leave it to a professional. 

4. Not Understanding the Difference Between Estate and Inheritance Taxes

There is a key difference between estate and inheritance taxes that is particularly important for multinational families.

  • The Estate Tax is a tax on the estate of the decedent. The estate pays the tax and the heirs receive the inheritance net tax.
  • The Inheritance Tax is a tax imposed on beneficiaries who inherit assets from an estate

The issue is that some countries tax the estate itself (estate tax), while other countries tax the recipients (inheritance tax) who receive the estate. For example, the United States has an estate tax of 40% on estates worth over $1,000,000 (which the estate pays). However, Spain has an inheritance tax of 36.5% for €797,555 or higher, which is paid by the recipients. If you are based in the U.S. with recipients in Spain then your estate will get double-taxed after you pass  – your estate would be taxed in the U.S. and the recipients in Spain – without proper planning of course.

This scenario is not unique to the US and Spain. It is widely applicable throughout the world.

5. Relying Too Heavily on Trusts

Trusts can be an effective way to pass down wealth. If you’re not familiar, trusts are a fiduciary arrangement that allows a third-party trustee to hold and manage assets on behalf of beneficiaries. Trusts are commonly used in common law jurisdictions, like the United Kingdom, Australia, or Singapore. 

In civil law countries (such as Germany, France, or Italy) private foundations are generally used. Unlike trusts, which are contracts, foundations are incorporated entities designed to hold and manage assets transferred by the founder for the benefit of the beneficiaries. 

Understanding the difference between these two entities is crucial, as forming the wrong entity could hold you back when trying to move money between countries.

6. Not Understanding the Difference Between Residency and Domicile

Another common mistake that multinational families make when planning their estate is assuming that residency and domicile are the same thing. There is an important difference. This issue is especially important in places like the United States and the United Kingdom.

According to the Global Residence Index, domicile is a person’s permanent home (the place that they always intend to go back to). On the other hand, residency is where a person lives today (either temporarily or permanently). For example, if you moved from the UK to the US for a 3-year work assignment then your residence would be the US during that time but your domicile would be the UK.

For multinational families, understanding and establishing this difference is crucial for tax planning, as you could potentially be bound by the laws of both countries.

7. Overlooking Key Documents

Estate planning for multinational families is an extensive process that requires navigating the legal systems and requirements of multiple countries. Having a comprehensive estate plan goes beyond merely having a will or trust. It requires being prepared with a host of documents, including:

  • Last will and testament
  • Beneficiary designations
  • Durable power of attorney for medical care
  • Durable financial power of attorney
  • Funeral instructions
  • Proof of identity
  • Deeds or loans for large assets. 

This is a non-exhaustive list and there may be additional documents required, depending on the country. In some cases, it can take weeks to months to secure new documentation if you’re missing something. This is why it’s crucial to ensure you have copies of all necessary documents.

8. Not Taking Advantage of Gifts

A common estate planning mistake is failing to take advantage of yearly gifting to reduce the potential impact of future estate taxes. 

This strategy is especially effective in countries where you are legally allowed to send gifts tax-free, such as Austria. It can also be effective in countries where you can gift a certain amount each year for free, such as the United States which allows you to gift up to $18,000 per donee each year.  

Taking advantage of yearly gifting – especially over the course of a decade or two – is an effective way to reduce your tax bill while handing down money to friends/family. 

9. Forgetting to Update Your Plan

Most people have the foresight to at least draft up an estate plan. But, the issue is that circumstances can change incredibly quickly. For example, think of all the changes that have happened in your life over the last year. Since the last time you reviewed your estate plan, you could easily have:

  1. Acquired or sold a property
  2. Moved to a new location
  3. Got divorced/married
  4. Had additional children/grandchildren
  5. Made a strategic investment 

When your circumstances change, it’s critical to update your estate plan accordingly. The last thing you want is for a portion of your estate to wind up in the hands of an ex-wife/husband – all because you forgot to update your plan after a divorce. With this in mind, we typically recommend reviewing your plan at least once a year.

10. Not Assigning Power of Attorney

Power of attorney is a legal authorization for a designated person to make decisions on someone else’s behalf. These decisions could be related to property, finances, or medical care. 

It’s important to assign decision-making power to someone that you trust. This helps ensure that your estate is handled responsibly in the event that you’re unable to make decisions. In this sense, an estate plan helps to protect you while you’re still alive – not just after you pass on.

11. Working With a Single-Country Advisor

Another common mistake that multinationals make is choosing an advisor who is only an expert in one particular country. 

A single-country advisor might be an expert in the tax law of that country. But, for someone with multinational interests, it’s important to find someone with a global perspective and who has general tax knowledge of many different countries and jurisdictions. These types of tax professionals typically do high-level strategy and then engage their global network of professionals for specific local expertise. 

12. Not Thinking Creatively About Your Estate Planning

Multinational families with assets in various countries often have a lot of flexibility when it comes to optimizing their tax burden. In order to do this, they have to think creatively about how to structure their assets, transactions, businesses, and personal finances in the eyes of the law. 

With this in mind, choose a creative advisor with specific knowledge relevant to your situation. For example, if you are setting up a trust or foundation, the advisor should understand not only the difference between a trust and a foundation, but also recognize which is best for the countries that you operate in, if there are specific advantages of one over the other in your situation, and know when establishing both may be appropriate.

We hope that you’ve found this article valuable when it comes to learning about the most common estate planning mistakes to avoid for multinationals.

Esquire Group helps multinational high-net-worth individuals and their families secure their wealth by structuring their affairs to minimize taxes and protect their assets for the next generation. If you’re interested in learning more about planning your estate then please schedule a consultation to learn more.

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