The estates of high net-worth individuals often cross borders.
They might reside in one country, with assets in that country and
elsewhere, and possibly family members residing are in other
countries for work, education, or lifestyle reasons. The tax
resulting from death can be quite harsh to their estate or heirs.
The harsh results are due to differences in the legal and taxation
systems and lack of credit mechanisms or other means to eliminate
double taxation. Most major countries have a network of tax
treaties to prevent double taxation, but unfortunately most of
these treaties apply to income taxes and not the types of taxes
exacted on death.
The first issue is that legal systems treat the transmission of
a deceased's property differently. In common law countries (the
U.K., U.S., Canada, Australia, and others), the property passes to
an executor or trustee initially, who administers the estate and
conveys property to the heirs. The "estate" is often a
separate taxpayer. In many civil law countries (continental Europe
and several parts of Asia), the property "drops like a
rock," directly to the heirs. There is no "estate"
as a separate taxpayer. Taxpayer mismatches can easily lead to
double tax problems.
Compounding the issue is that the architecture of death taxes
may take different forms. The first form is an "estate
tax", levied on the deceased's estate, often computed as a
percentage of the value of the estate (the U.S., South Africa, and
parts of Switzerland). The second form is an "inheritance
tax", imposed on the heirs who inherit the deceased's
property (France, Italy, Netherlands, and most of Switzerland). The
third form is a tax on accrued capital gains on the deceased's
property (Canada). Another consideration is different political
subdivisions may levy different taxes (Belgium, the U.S.,
Switzerland, and "probate fees" in some Canadian
Consider, for example the situation of a Canadian resident with
property in the U.S. and heirs in France. Canada would tax the
deceased on the accrued capital gain, the U.S. would impose a tax
based on the fair market value of U.S. situs assets, and France
would proceed to tax the beneficiaries. Double or even triple
taxation could result.
Emigration to a favourable jurisdiction may be an option for
some. Death taxes may follow the migrant for a period of time
(Germany), or an exit tax may be charged upon leaving the country
(the U.S., Canada). Giving property away to heirs during the
person's lifetime might be worth considering, however most
countries that have inheritance tax or estate tax also have a
companion gift tax regime to neutralize any advantage.
Other highly-customized tax planning options may be available.
It is important to be proactive, however. The benefits of such tax
planning tend to be much greater the sooner in life it is
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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