Estate planning and foreign assets: A primer

Does your estate plan account for foreign assets?

Estate planning provides an opportunity to organize and account for all of one's assets. For some, this may include foreign accounts. Planning for these assets can be more complicated than others, as the Internal Revenue Service (IRS) or Treasury Department may require those who have ownership or interest in foreign assets to disclose the assets through the use of specific paperwork.

As a result, those looking to get everything in order can benefit from a basic understanding of these expectations.

Lesson #1: What not to do.

A family out of New York provides an example of what not to do in this situation. The case began when the patriarch of the family passed away and left his heirs with a number of foreign, undisclosed assets. It became clear to the heirs that their father had structured these assets to avoid tax obligations. The heirs were forced to make a difficult decision: report the asset and lose a large chunk to penalty fees and tax obligations or continue their father's alleged tax evasion scheme.

According to court filings, the family chose to funnel the money through illegal shell companies. Heirs would take annual trips to Switzerland and withdrawal just under $10,000. This amount was important, as a withdrawal over $10,000 could trigger government attention. The heir would then hide the cash and bring it back, undisclosed, to the United States.

The family believed the plan was working. However, in 2009 the government investigated of the Swiss bank. This led to the finding of their names and an additional investigation. Ultimately, the heirs took a plea deal with the government. The terms of the deal include a $4 million restitution payment and prison sentences that range from four to six months.

Upon announcing the prison sentences, the court highlighted the importance of deterring similar action.

Lesson #2: Tips to help protect foreign assets.

Now that we know the penalties that can come with attempting to avoid tax obligations for foreign accounts, we can move on to proactive steps that can be taken to protect foreign assets. When used wisely, these assets are not just legal but can provide a means to diversify one's financial holdings.

Three examples include:

  • Come into compliance. Do not leave your heirs with an undisclosed asset. If disclosure is required, it is often best to take care of it before transferring it to your heirs.
  • Consider more than one plan. In some cases, it is best to have an estate plan that addresses domestic assets and a separate for foreign accounts. Discuss this option with your legal counsel to determine the best plan for your situation.
  • Account for foreign taxes. The United States is not the only country with tax obligations. The assets held in other countries may also have tax obligations. Determine these requirements and plan accordingly.

Whether planning for bank accounts in foreign countries, business interests or real estate, it is wise to account for the assets and tax obligations within your estate plan. An attorney experienced in both estate planning and foreign asset tax compliance issues can help to draft a plan to meet your needs.