Global families need global estate plans

Claudia Caffuzzi: Welcome to our Wealth Advisory series, where we discuss topics related to Life and Legacy. In this episode, we are going to talk about how to make sure your succession plan addresses the full array of your global assets and takes into consideration the global dispersion of your family members. As Wealth Advisors, we see firsthand how the complexity around planning increases, as the family assets and members expand into other countries. Making sure that your estate plan will be effective and efficient for assets that are located in different countries, and for family members who live in different locations, can be a challenge. I am Claudia Caffuzzi, and my colleague Diego Fagundes and I are going to share with you some tips to make sure that you have it all covered. Diego, how should someone get started?

Diego Fagundes:  Thanks, Claudia. As a first step, you should make sure you know what you have. The easiest way to go about it is to prepare an inventory, including three data points: what are your assets, how they are held, and where they are held. For the first data point, what are your assets, you should consider:

a.            All your bank, investment, pension or retirement accounts

b.            Real estate. Not only your houses and condos, but also any commercial and undeveloped land

c.            Your insurance policies and beneficiary designations

d.            Tangible valuable property like antiques, artwork, car collections

e.            Safe deposit boxes, and their contents – this is very important

f.             Interests in businesses, joint ventures, private partnerships

g.            One thing that is often overlooked is digital accounts and ways of accessing them, such as usernames and tokens

h.            And finally, loans and other liabilities

CC: After you list your assets, you should note where they are located, and how are they held.  These are key points for your planning because location and ownership methods will determine how the assets pass to your heirs.  To help you fully realize what this means, you should actually walk through what would happen to each asset on your inventory, based on your current plan, and see what you need to tweak. 

Diego, what happens with assets in personal name?

DF: For assets held in your personal name, you may have a will governing how those assets are going to be disposed, but you may also be subject to forced heirship rules in your home jurisdiction. Also, it might be that your local will cannot control how your offshore assets are going to pass. That is why it is important to know where your assets are held and what law governs their disposition;

CC: That also applies to jointly held assets, like an investment account or real estate.  For these assets, generally speaking, despite what your local law or your will may provide, the succession will be governed by the law that applies to the account or property – and if you have named beneficiaries or joint owners, they will become the legal owners –but you need to make sure this is your true intention.

I have an example that perfectly illustrates this point. We worked with a family where the father had an account in NY held in joint name with his oldest son –his true intention was for all his children to become the owners of the account after his death, but the others were minors at the time the account was set up.  When the father died, the son wanted to do the right thing and share with his sibling–but discovered that under the law of his tax residence, he would be making a very expensive taxable gift to his brothers and sisters if he followed his father’s intentions. 

DF: With regards to trusts, you may have multiple trusts holding different assets classes. If so, do the trusts have overlapping provisions?  You should make sure that you have not unintentionally duplicated provisions for any beneficiary. On the opposite end, you may have inadvertently left out of those provisions a given beneficiary or asset class. So it is important to make sure that your trust documents reflect your intentions.

CC: Multiple trusts can be tricky, and you need to make sure the provisions in the trust match the types of assets you will put in the trust.  For example, we worked with one client who wanted his children to receive a certain amount of cash per year for their living expenses, and larger amounts when they reached certain ages – but the trust was going to be funded with shares of an operating company that did not typically pay dividends. When discussing the trust provisions, and knowing the asset the client was contributing, we were able to avoid a situation where the law governing the trust required the trustee to somehow generate income from an illiquid asset, in order to comply with the terms of the trust.

DF: Another important consideration is whether or not your estate is subject to any inheritance or estate tax on assets located in a specific country. If so, you may need to think about how these taxes will be paid – what is the source of the funds? Will the person who inherits something illiquid, like a business or real estate have funds to pay the taxes, or will someone else’s inheritance be reduced, and is that fair? For example, I remember the case of a family that had a very significant part of their wealth invested in real estate in Madrid, Spain, and other illiquid assets. Their children, who resided in Spain, had to reach to their own pockets to come up with the liquidity needed to pay for the inheritance taxes, which was not ideal.

DF: A typical way of dealing with the liquidity needs for death taxes is buying life insurance, so that your children may have access to expedite liquidity to cover the taxes.

DF: You should not only consider liquidity needs for payment of eventual death taxes, but also consider your family needs: will anyone in your family have an immediate need for cash or other liquidity, and if so, where will it come from? From a local or offshore account, and does your way of owning it does it allow for immediate access.

CC: Speaking of liquidity, for any loans you have in place, your death may lead to a need to restructure the loan, or have it repaid.  Sometimes there can be a mismatch between the borrower and the pledger. 

CC: For example, a client’s local business took a loan to handle cash flow issues, and the client used his offshore trust portfolio to collateralize the loan.  In his local will, he was leaving the shares of the business to one child who worked for the company and was his successor, and planned to equalize the inheritance by leaving the offshore trust portfolio to his other child.  The potential problem is that if the collateral is used to repay the loan after the client’s death, one child inherits the company free of any debt, and the other child inherits a portfolio reduced by the debt pay off –not the fair disposition the client intends. 

DF: That is a very good example for why it is necessary to consider specific needs of your children and your family, so that you can make sure that assets are given in the most efficient way. For instance, your children may be living or doing business in another country, and as such might be considered tax residents of that jurisdiction. Your children may also be marrying or divorcing in another country, or are exposed to claims of creditors. That is why it is important to consider where your children reside, as tax laws of countries may require further consideration. For example, we worked with a family where some of the children were US permanent residents.  The matriarch was planning to leave her local real estate development company to her children in equal shares.  Even though there would be no US estate tax on the death of the matriarch, in the future, if a US child were to die, there would be a 40% US estate tax on the child’s shares of the company. Without any other liquidity to pay the taxes, the child’s share might have to be sold.  By leaving the shares for the US children in trust, the family was able to protect this legacy assets from a possible forced sale. 

CC: Another thing to keep in mind is that the people who have to manage your assets and actually execute your succession plan after your death need to know all the information you put in your inventory, and either have the experience themselves, or the ability to select advisors, who can deal with your global assets, and be thoughtful about the consequences to your global beneficiaries. 

DF:  Once you know who those key people are, you need to empower them with information. Make a list of your advisors in the different countries where you have assets, including your lawyers and accountants, as well as a list of your key family members. Make sure each group knows who to contact in the event of your death. 

CC: It is typical to have your children take on these responsibilities, but you need to undertake the difficult task of deciding the timing of when to discuss your wealth, and how much information about your wealth you want to share with your children. There are many considerations here, but making sure your children are prepared to take on this role can go a long way to making a terrible situation more manageable. 

CC: I remember a family where both parents died within a year of each other.  Their two children were adults with careers of their own, but having no financial management experience. The children had no idea of the extent of the parent’s wealth, which was all held in personal name. The personal and professional lives of the children got derailed for a year while they got up to speed on the various investment account providers in different countries, investment strategies, tax issues, and legal logistics in different jurisdictions, etc. One happy postscript is that these children have already established trusts for themselves so their children will not have to go through this!

DF:  Claudia, one can only imagine how the life of these children would have been made easier if a proper inventory and key person list was available to them.

DF: Finally, the education of the next generation on financial matters is key to ensure preservation of your wealth and legacy. If you have a trust, you may consider including your children in the investment committee so that they are exposed to financial decision making during your lifetime, empowering them to make the right calls when you are no longer around.

Your Wealth Advisors are here to help you develop a plan that considers your assets held across the globe, and that addresses the needs of your beneficiaries, wherever they may live.  We believe that this kind of thorough and thoughtful planning can help ensure the preservation of your legacy and pass your vision and wishes along multiple generations.

That’s it for this episode. Thank you for listening to our wealth advisory series on topics of life and legacy.