With the number of blended families rising and their heirs increasingly spread around the globe, determining the best way to organise their estate and support them can be perplexing. Families that cross numerous international boundaries and have complex family relationships must follow the legal and tax rules of their home country, as well as the countries where their family members live.
One example of cross-jurisdictional wealth planning involved family members and professional advisors in Switzerland, Costa Rica, Canada, and the U.S.
The family originally built its wealth in Switzerland and the son inherited the wealth, then significantly grew his inheritance through astute investing whilst living in Canada, before then moving to Costa Rica, says Gerard Chinniah, managing director, sales and relationship management with RBC Wealth Management in Jersey, British Isles. As he had a daughter in the U.S. from his first marriage, his second marriage created a global blended family.
When his health started deteriorating he wanted to ensure his succession plan was put in place to fairly distribute his assets, says Chinniah. He wanted to discuss settling a trust with assets held with RBC Dominion Securities for the benefit of his daughter in New York. His plan was to leave all other assets to his second wife in Costa Rica. Chinniah coordinated the solution, which required settling the Canadian assets onto the trust for the daughter.
“We had to involve legal and tax experts in the U.S., Costa Rica and Canada", says Chinniah. "It was important to ensure we were compliant in each of these jurisdictions. For this case, we engaged a British law firm with offices across the U.S., Europe and Asia-Pacific to coordinate the required advice across the jurisdictions"
The growth of global families
“The Costa Rican situation wasn't atypical", says Chinniah, “since most families need financial arrangements in several countries." His office works with close to 1,000 global blended families.
It's common for families to send their children to the U.S. for college, following which many children establish careers and residency in the U.S. In such cases, a U.S. domestic trust can be set up making the assets available to family members in different parts of the world. This is often necessary for blended families with children from different branches of the family in the U.S. and elsewhere.
For estate planning purposes, the older generation wants their wealth to be accessible to family members around the globe, yet maintain the funds in their country of origin. “If the money is transferred directly to the heirs, when the heir dies the funds would be subject to an estate tax. For instance, an inheritance of US$20 million could be subject to an estate tax in excess of $3.5 million," says Chris McCallum, trust specialist, Client and Business Development at RBC Wealth Management .
When does a trust make sense?
The trust structure is preferred for several reasons, particularly preserving assets.
“A trust can be set up to control spending by heirs and avoid any issues with spendthrifts," says McCallum.
Similarly, trusts can be used to direct assets to specific family members and protect them in case of a divorce. Assets in a trust can also provide protection from becoming part of an individual's estate in the event of a bankruptcy.
“Trusts work well as a planning technique for generational wealth transfer and for U.S. residents, for tax purposes," says McCallum.
Using multiple trusts
When family members are in multiple countries, says McCallum, it often makes sense to establish multiple trusts.
“You always want to separate out the U.S. beneficiary and establish a domestic trust to meet U.S. rules," he says. “Establishing a separate foreign trust for non-U.S. residents allows for greater flexibility in the types of investments you can make."
McCallum says the countries with the most complicated rules for establishing trusts are the UK, Canada and the U.S.
“No matter which countries are involved, we're experienced in understanding each country's rules," says McCallum. “But we have all our clients engage legal advice and tax advice in their country and the country where they want to establish a trust."
Managing the complexities of estate planning for blended families can be a challenge. When family members reside in a variety of countries, that extra layer of complication requires creative solutions while also meeting each person's needs.
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