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 provinces).
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 implemented.
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.
