Introduction:
One aspect of the global economy is that more and more business people have more international contacts and travel abroad, often working months or years in a foreign country, and this in turn has led to more Americans considering ownership of real property in other nations. Prices are often very attractive, and it is a common fantasy for Americans to consider living in these locales once they retire.
Aggressive real estate agents in those areas encourage the Americans to buy the property and too many Americans assume that the various excellent tools for ownership, transfer and inheritance of property that exist in the United States will apply in other nations.
Usually not. Indeed, such an assumption can lead to troublesome and expensive complications and can even result in loss of rights to property upon the death of the initial buyer. Before signing that purchase agreement, it is vital for you to understand what tools are available and unavailable for the ownership and transfer of the property.
Basic Problems for Death Transfer of Foreign Owned Property:
The trust method of ownership and transfer at death of real property saves most Americans tens of thousands of dollars in probate fees and the average American now uses a revocable living trust to both hold and transfer property to the next generation. The property is normally seamlessly transferred to the named beneficiary without the need for executor and attorney fees required for a formal probate.
It is vital to understand that the concept of the trust is unique to the United States. A few other nations such as England, are familiar with them, though their use is far more limited there. Most nations do not recognize the trust as we do in the United States and will not necessarily follow the dictates of the trust instrument…or even recognize that the trust entity can own anything.
Indeed, the simple Will may not work to transfer the property. If real property is involved, wills created in the United States are not recognized in the majority of nations in the world, including some of the most common nations that people seek to own property in. For example, United States wills are not enforced in Switzerland, France, New Zealand, Japan, and the United Arab Emirates.
The solution? You must work with local legal counsel to create the structure that will allow the property to transfer to the heirs and that foreign structure will be in addition to any United States estate plan that you may create. Your American estate planning attorney can normally connect you with legal counsel abroad (some nations use notaries abroad to create estate plans) and those two working in tandem should create your estate plan.
Note that the problems with real estate ownership and transfer abroad are not confined to what happens upon your death. A common problem is that a group of friends want to purchase property jointly but do not consult local counsel as to how to achieve that correctly. This writer knows of three people who purchased property in Mexico but only one was a citizen. Since in Mexico only citizens are allowed to own property adjacent to the ocean, only one of the three was put on title. Under the relevant law, only one owned the land. When he, sadly, died his family claimed full ownership of the property and the other two were locked into an impossible position. If they claimed defacto ownership, they were admitting fraud and criminal activity to the Mexican government. If they did not so claim, they could not advance their ownership rights.
They could have created a Mexican Land Trust which can last up to one hundred years and could have its own rules, fully enforceable, to transfer property. They could have created a business entity to own the property with shares to be transferable, including at death.
Why didn’t they? As one told the writer, when sitting on a beach in the sun, with cool drinks in hand, the lovely condo a few hundred feet away, friends enjoying the scene and planning for their joint ownership…the idea of calling a lawyer seemed completely inappropriate.
The result was a legal conflict that lasted years, destroyed the friendships and made a dream into a horror.
Another example? One client failed to draft an Italian will for his dream property in Tuscany since he already had a United States will that mentioned the property. The United States will was a nullity in Italy, so when he passed away, his Italian property was divided among extended family members he disliked because Italian law provides that in the absence of an Italian will, an inheritance is divided among surviving family members. He could have drafted an Italian will that accomplished his goals easily.
Tax Issues:
Each nation taxes inheritance in its own way and while most nations give credit for taxes paid abroad, such credit does one no good if taxes that would not be paid in the United States must be paid in full abroad. For example, a spouse inheriting real property in the United States pays no estate tax. That is not the case in many nations abroad, though if the land was placed in another entity, it might be.
Thus, putting the property into a holding entity can potentially cut estate or transfer taxes. Typically, countries charge a capital gains tax on the current value of the property when you pass away, which, in France, for example, can be more than thirty four percent. If the property is in a company, title to the property may not alter, only ownership of shares, and this may save those taxes.
And taxes in some nations are truly high when non-nationals transfer property, thus it is critical to get excellent tax advice as well as local legal advice.
Hits From Left Field:
There are numerous local laws that can void ownership if not anticipated. For example, individual foreigners cannot own property within one hundred kilometers of the coastline in Mexico. In Switzerland, one can only buy residential property if the purchase has been preauthorized by the local government for sale to any non-Swiss national. In Israel, attempts to own property in a Trust can result in the entire corpus being taxed to a person receiving only a portion of the trust allocated to him or her.
And the international situation can alter rapidly, changing the attractiveness of the property and locking the offshore owner into an ownership that is of dubious value. For example, imagine owning property in the Ukraine at this time, with Russia threatening the continued existence of that nation. Consider Turkish ownership in a previously secular nation not only becoming a dictatorship but adopting pro-Islamic laws. Many island nations in the South Pacific face catastrophic futures from ocean levels rising, with some islands already no long habitable. None of the above conditions existed even ten years ago. What will happen in the nation of your choice in ten years? These are key factors to consider.
And many of our Chinese clients are extremely worried as to their holdings in the United States if the relations between the nations continue to deteriorate. Are they overreacting? It was only seventy years ago that Japanese property was seized by the United States government due to hostilities between the nations. For Iranian nationals, they lost property only twenty years ago.
Such risks must be factored into the value of the property prior to purchase. And if purchase has already been made, plans for transfer both before and after death must be vetted by local attorneys and accountants.
Conclusion:
While all the complications above may make ownership of foreign property unattractive, in reality one simply must add an additional layer of preparation to assure that what one expects of ownership in the United States works abroad. The use of local experts, the need to coordinate your ownership rights with local law and inheritance rights with appropriate local wills (or trusts or other entities) is required and should not be an insurmountable barrier if the desire to own the property is strong enough.
A client once put it well to the author as he worked his way through a long Italian deed document: “The difference between fantasy and real ownership is having the gumption to read this deed…it makes it real.”
If you want it, it can be done. But it is going to take a higher level of care than buying a house down the block.