Articles Posted in Estate Planning

U.S. citizens currently residing and working abroad and foreign residing in the United States who are participating in a foreign retirement contribution plan, should evaluate the most recent federal Internal Revenue Service (“IRS”) tax reporting requirements to avoid penalties on those assets or future estate transfer. Foreign pension fund contributions made in the interest of retirement and trust formation in preparation of an estate, may be subject to taxation without the professional assistance of an estate law attorney.

Tax Exemption and Treaty

U.S.-based participants contributing to foreign pension funds in some jurisdictions such as Canada, the United Kingdom and Belgium, are not required to file tax reporting with the IRS due to treaty. An example of tax-free treaty is Article 18 of the U.S./U.K. Income Tax Treaty, which allows for transfer without taxation by either jurisdiction. The U.S. also allows for a U.K. national assignee to be temporarily employed in the country while continuing participation in a 401k pension plan abroad with limited tax obligation under IRC section 402(g) covering tax treatment of earnings in a foreign plan. Pension funds located in non-treaty host countries are subject to taxation if a fund is not considered a “qualified plan” under IRS rules.   

By 2060, the population of the United States 65 years and older will more than double, increasing to over 98 million from 46 million in 2016. Coinciding with this demographic change will be the estimated 14 million elders diagnosed with Alzheimer’s disease and other related disorders associated with the onset of old age. The presence of dementia in older family members presents a challenge in the field of estate planning. Characterized as “diminished capacity” within U.S. law, an incapacitated party no longer has the mental ability to make routine and complex decisions, yet still holds legal rights to their own property and assets. To avoid risk, estate planning of a will, estate, or trust with the counsel of a licensed estate law attorney will protect an elder with diminished capacity from exploitation.  

Estate Planning and Financial Capacity

The mental capacity and self-efficacy required to exercise investment decision and management of finance and property assets must be present to plan a will, estate, or trust document. Financial capacity is essential for completion of the estate planning process. When signs of Alzheimer’s emerge, an elderly client may not entirely understand their investment options, or the implications of designated asset distribution. This includes tax implications for heirs and beneficiaries. If a loved one is experiencing diminished mental capacity it is likely they lack sufficient financial capacity to make estate planning decisions. If a family member has already been deemed the trustee of an elderly family member’s estate, they have the power-of-attorney to administer a will, estate, or trust, yet not the power to resolve controversy.

When planning a will, estate, or trust, protecting assets from taxation is a primary concern. Today, U.S.-based estate planning investors have the option of offshore or onshore trust formation. Rooted in the English common law traditions of wealth and property protections, the offshore tax-exempt Foreign Asset Protection Trust (“FAPT”) of trusts in Belize, the Cayman Islands, Cook Islands, Isle of Man, or Luxembourg is a customary “institution” dating several centuries. For U.S. high net worth investors, offshore trusts remain an option for the protection of vital financial assets, yet the benefits of offshore tax-exemption can also be found domestically, in the statutory trust provisions of some states.

Offshore Protections, Still Reporting Obligation

There have been rule changes to offshore investment since President Trump’s tax reforms of 2017 insofar that failure to file a Foreign Bank Account Report (“FABR”) with the Internal Revenue Service (“IRS”) on a foreign bank account or $10,000 or more, is no longer subject to “delinquency” penalties. Transfer of wealth to a FAPT account for purposes of tax-exemption, does not entitle the account holder universal immunities from legal penalty, however. If an offshore trust account is called into question by a court, the establishment and transfer of assets to the account will be reviewed to determine if the amount qualifies for sentencing under federal fraudulent conveyance rules.

Divorce can be an interpersonally challenging life-change, and complex legal matter. With two Department of Defense (“DoD”) appropriations bills currently before the House and Senate, the rules to pension fund distribution to U.S. federal Air Force, Army, Navy or Military Reserve ex-spouses at time of divorce will be revised in favor of fixed allocations. If enacted, the new rules would revoke state legislative rules for dividing military retirement contribution funds; effectively reducing apportionment to former spouses. Exception to the proposed federal military pension fund apportionment rule, would be any statutory provision for intestate succession within the jurisdiction of the decedent’s residence at time of death.

Federal Rule Reform of Spousal Entitlements

Military pension apportionment and divorce under the proposed law will effectively entitle spouses apportionment according to a military spouse’s rank and duration of enlistment. For example, a spouse of an Army sergeant first class (E-7) with thirty years of service would be accorded 50 percent of 20/30 or two-thirds of actual pension fund pay at time of retirement. No cost of living adjustments will be accorded spouses under the DoD’s new rules.

New York estate owners can avoid probate with stipulation of transfer-on-death (“TOD”) designation of assets within their will or estate testamentary documents. The state presently prohibits TOD deeds for real estate and automobile registration transfer, yet properties held in joint tenancy, bank accounts, and other cash convertible assets like bonds and securities are eligible for payable-on-death (“POD”) or transfer at time of an estate owner’s death.  

Designation of POD bank accounts

The law allows for POD designation of estate owner bank accounts, including certificates of

Rules of required minimum distribution (“RMD”) within defined contribution plan retirement funds, are usually relatively little while a participant is still alive. Previously, the rules to RMD were less favorable depending on the terms and conditions of the plan, and form of distribution elected, as well as the relationship between the participant and the beneficiary, and the beneficiary’s age. Now, surviving spouses can benefit from transfer of defined benefits from pension fund accounts to a spousal rollover independent retirement account (“IRA”). The latest rule treatment of RMD payout, surviving spouses and designated beneficiaries can now extend the distribution period.

Calculation of RMDs at Time of Death

When a defined contribution plan participant dies calculation of RMDs (and proxy for beneficiaries 10 years or fewer years younger than the participant) no longer coincides with the Uniform Lifetime Table. The Single Life Table applied to RMDs accorded surviving spouses and beneficiaries of participants, has traditionally afforded a shorter distribution period. Without adequate transfer option, designated beneficiaries have been forced to accept double-sized distributions after the participant’s death. The former rules also prevented surviving spouses from remarrying due to Joint and Last Survivor Table distribution restrictions.