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Estate Planning for US/Australia cross border tax issues

Estate Planning for US/Australia cross border tax issues

In an increasingly global economy, the economic ties between Australia and the US are ever growing.  There are an estimated 130,000 working age Americans living in Australia, and only a slightly lower number of Australians working in the US (primarily California)[i].  While many of these individuals engage in significant tax planning during their lifetimes, there may not be such careful planning about the impact of shifting wealth upon death.

At the time of this article (November 2021), the US imposes a federal estate tax calculated at 40% of the value of a gross estate of the deceased person[ii].  There are no ‘estate taxes’ in Australia, so no foreign tax credits would be applied where the deceased has cross border interests limited to Australia and the US.  It is important to note that, in Australia (with the possible exception of NSW), a person’s ‘Estate’ is limited to assets held in their sole personal name.  The US, however, will calculate the value of assets held by the deceased personally, jointly, and also property transferred during their lifetime if they have retained a power or right over the property, and otherwise within three years prior to their death.

If the deceased is neither a US citizen nor resident, the US estate tax will be limited to assets situated in the US, which may include intangible assets (such as shares in US public or private companies, and even cash accounts with US brokerage firms). Generally, if the total value of US assets exceeds $60,000, their executor must file a Form 706-NA for the estate and the 40% estate tax is likely to apply, although this can be impacted by deductions and gifts to charities or a spouse (noting significant differences between a US citizen spouse and a non-citizen spouse).

If the deceased is either a US citizen or a US resident (so, for our purposes, a US citizen living in Australia, or an Australian citizen living in the US), they will be subject to US estate taxes on the value of their assets worldwide, subject to an exemption of USD 11,700,000.  Although it is not clear whether proposed changes to this figure will pass through Congress, it is worth noting that President Biden proposed the reduction of this amount to USD 5,800,000 in 2016.

For Australians living in the US, it is important to distinguish US ‘residence’ from an estate perspective to a resident for income tax purposes.  In order for US estate taxes to apply, the person needs to be considered ‘domiciled’ in the US[iii].  Domicile is determined on an individual basis, but it should be noted that depending on the circumstances it is possible to be domiciled in both Australia and the US (depending on how each country determines domicile).

In the course of estate planning, the team at Burke & Associates Lawyers frequently consider the ownership structure of assets.  In Australia, assets held in superannuation and trusts fall outside of the ‘Estate’ and it is important to address the succession of wealth separately.  In the course of the estate plan, accounting advice should be obtained in relation to the operation of the trust or superannuation fund if there is any relationship to the US (for example, there are assets in the trust classed as US situs assets, or there is a US beneficiary).  Issues may arise if a US citizen contributes to an Australian based superannuation fund, so specialist advice is important in order to avoid significant issues in this area.

When considering estate planning / the succession of wealth with Australian and US interests, it is important to be aware of the potential issues, and to be informed of the possible solutions.  There are, for example, some types of trust structures that may assist (such as a Qualified Domestic Trust[iv] in the US), however what works in one country may not be the solution for another.

Many estate planning specialists in Australia recommend the inclusion of testamentary trusts within Wills for asset protection and tax effectiveness, however these may also pose issues if the intended beneficiary is a US resident or citizen.  It is important, in the course of estate planning for people with links between Australia and the US to be mindful of the asset limits and potential tax effects, and to obtain specialist advice, both in Australia and the US to ensure the global estate plan is tax effective.

At Burke & Associates Lawyers our dedicated Wills & Estates Division are able to assist with any estate planning queries you may have.  Please don’t hesitate to reach out to our Special Counsel, Rohani Bixler or Associate, Luke Palmer via email or contact our office on +61 3 9822 8588 for any assistance you may require.  Burke & Associates Lawyers is a member of the American Chamber of Commerce.


[i] Australian Consulate General (San Francisco)

[ii] United States Code: Estate Tax, 26 USC 2001-2210

[iii] Code of Federal Regulations, Part 20 (Estate Tax)

[iv] United States Code 2056

Contacts

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Rohani Bixler

Special Counsel

Rohani Bixler

Special Counsel
LL.B (Hons) BA (PSYCH)
Rohani holds a Bachelor of Arts (Psychology) and a Bachelor of Laws (Honours) from Monash University, and has practiced exclusively in the areas of estate planning, deceased estate administration and estate litigation and disputes since...

Luke Palmer

Associate

Luke Palmer

Associate
LL.B BA
Luke is passionate about making things as simple as possible for people who are dealing with the loss of a loved one.

Eleni (Helen) Andreou

Paralegal
LL.B BSc
Helen has over eight years of experience providing support for lawyers and assisting clients.

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