Personal Shopper Comparative Information – Household and Matrimonial

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1 Legislative framework

1.1 Which legislative provisions govern private client matters in your jurisdiction?

Many different bodies of law interact to govern private client matters in the United States. Some of these laws are promulgated at the federal level, while others are promulgated at the state or local level. At the federal level, the Internal Revenue Code sets forth the foundations of the US tax system. States and localities also impose taxes, which in many cases are patterned after the federal law. At the state law level, a mix of common and statutory law governs wills and estate planning, matrimonial issues and the creation and administration of trusts, as well as the ownership and acquisition of property more generally. Localities also impose laws regarding the ownership and acquisition of property subject to their jurisdiction.

1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?

The US federal tax law applies differently to US citizens and residents than it does to non-residents. See question 2.1.

1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?

To apportion tax revenues and avoid double taxation, the United States has bilateral income tax treaties with 65 countries (Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, the Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine, the United Kingdom, Uzbekistan and Venezuela).

The United States has bilateral treaties with 15 countries (Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Switzerland and the United Kingdom) addressing estate, gift and/or generation-skipping transfer taxes. Additionally, the US-Canada income tax treaty addresses US estate tax and the Canadian tax on capital gains at death (Canada does not impose an estate tax). These treaties aim to prevent double taxation of wealth transfers by assigning primary taxing jurisdiction to one country on the basis of either the transferor’s domicile or the situs of the transferred property.

2 Taxation

2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?

US citizens and residents are taxed differently from non-residents; the definition of a ‘resident’ varies for purposes of income taxes as opposed to transfer taxes (ie, estate, gift and generation-skipping transfer (GST) taxes).

For US income tax purposes, US citizens and residents are taxed on worldwide income and capital gains, while non-residents are subject to US tax only on certain US-source income or income that is connected with a US trade or business. An individual is considered a US citizen regardless of physical residency, and is considered a resident if he or she:

  • is a lawful permanent resident (ie, a ‘Green Card’ holder); or
  • meets the ‘substantial presence test’, determined by the following formula:
    • days (including partial) present in the United States in the current tax year (which must be at least 31); plus
    • days present in the prior tax year, divided by three; plus
    • days present in the United States in the second year before the current year, divided by six.

Non-residents (ie, those who are not US citizens or lawful permanent residents and who do not meet the substantial presence test) are generally subject to US income tax only on:

  • income from the sale of US real property;
  • income from a US trade or business; and
  • most interest, dividend, rental and royalty income from US sources (although interest on US bank deposits is not subject to income tax for non-residents).

For US transfer tax purposes, US citizens or residents are also taxed differently from non-residents, but the definition of ‘residency’ differs. A ‘resident’ is an individual who is domiciled in the United States. A person becomes domiciled in the United States by living there, for even a brief period of time, with no definite present intention of later moving therefrom. US citizens and residents are subject to tax on the value of their worldwide estates and on their gifts (regardless of the physical situs of the gifted property), while non-residents (ie, those who are not US citizens and are not domiciled in the United States) are generally subject to estate or gift tax only on property deemed situated in the United States at death or at the time of the gift. GST tax is generally imposed only on transfers that are subject to estate or gift tax (or resulting from transfers that were subject to gift or estate tax).

Tax treaties entered into between the United States and certain countries can ameliorate the effect of US taxes for non-residents, dual citizens and dual residents.

2.2 When does the personal tax year start and end in your jurisdiction?

Generally, individuals and most trusts must use the calendar year as their tax year, although certain self-employed individuals may adopt a fiscal year (ie, any 12 consecutive months ending on the last day of any month except 31 December) if they maintain their books and records on the basis of the adopted fiscal year. Estates (and qualified revocable trusts following the death of the settlor thereof and during the administration of the settlor’s estate) may adopt a fiscal year as their tax year.

2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

The United States imposes a federal individual income tax. Additionally, 42 US states (all except Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming), the District of Columbia and many localities impose an individual income tax. State and local taxes and rules vary by jurisdiction, although many are based on federal concepts and definitions.

The federal individual income tax rates vary depending on the filing status of the taxpayer (single, married filing separately, married filing jointly or head of household). Head of household filing status is available only to individuals who are considered unmarried and have a qualifying dependant whom they support, such as a child or elderly parent. For 2021, the individual tax rates on ordinary income are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The income tax brackets to which those rates apply vary depending on the taxpayer’s filing status.

The US individual income tax also applies to estates and trusts, with certain modifications. The tax rates applicable to estates and trusts are very compressed, with the top 37% rate applying to all taxable income of trusts and estates that exceeds $13,050 (compared to $523,600 for single filers or $628,300 for married couples filing jointly).

(b) How is the taxable base determined?

The federal income tax base is generally composed of all income from any source that is not specifically exempted by the Internal Revenue Code. Thus, an individual’s income typically includes:

  • wages and compensation;
  • earnings from operating a business;
  • gains from sales of property; and
  • other investment income (eg, interest, rents, royalties and dividends).

(c) What are the relevant tax return requirements?

Individuals file annual tax returns on Form 1040 (or Form 1040-NR for non-residents). Trusts and estates file annual tax returns on Form 1041. Typically, tax returns are due on 15 April for calendar year taxpayers and, for fiscal year taxpayers, on the 15th day of the fourth month after the close of the taxpayer’s fiscal year (although a six-month extension of time to file a Form 1040 and a five-month extension of time to file a Form 1041 is automatically granted on request).

(d) What exemptions, deductions and other forms of relief are available?

The items specifically excluded from gross income are listed in Sections 101–140 of the Internal Revenue Code. Some of the most significant exclusions are those applying to:

  • the receipt of life insurance proceeds;
  • the receipt of gifts and inheritances;
  • interest on state and local bonds;
  • amounts paid by an employer on behalf of an employee for accident and health insurance; and
  • gains from the sale of a primary residence (up to certain thresholds).

Individuals automatically receive deductions for certain items, including:

  • trade and business expenses (although these are very limited if the taxpayer’s business is that of serving as an employee); and
  • certain contributions to qualified retirement plans.

Additionally, individuals may elect either:

  • to take an inflation-adjusted ‘standard deduction’; or
  • to add up various ‘itemised’ deductions and take their sum as a deduction.

For 2021, the standard deduction is:

  • $12,550 for single taxpayers and married taxpayers filing separately;
  • $18,800 for head of household taxpayers; and
  • $25,100 for married taxpayers filing jointly.

Some of the most significant itemised deductions include deductions for:

  • charitable contributions;
  • certain interest expenses;
  • state and local taxes;
  • medical and dental expenses; and
  • casualty and theft losses.

(For tax years prior to 2026, itemised deductions for state and local income or sales taxes and property taxes are limited to a combined total of $10,000, or $5,000 for taxpayers who are married filing separately.)

2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Capital gains may be imposed on the disposition of certain kinds of property. Income from long-term capital gains is generally taxed at lower rates than those which apply to other kinds of income. A capital gain is generally considered long term if the taxpayer held the asset for more than one year prior to its disposition. If the taxpayer held the property for one year or less, any gain on disposition is subject to the ordinary income tax rates described above.

Long-term gains are generally subject to a maximum rate of 20%; although to the extent the taxpayer’s taxable income does not exceed certain thresholds, long-term gains may be subject to a tax rate of 0% or 15%. Certain long-term gains from the disposition of real estate are subject to a 25% rate; and certain other long-term gains (eg, gains from the sale of collectibles, including jewellery, antiques and fine art) are subject to a 28% rate.

(b) How is the taxable base determined?

Generally, capital gains tax applies to assets held for investment or business use, although gains on the sale of personal items such as an automobile or home are also subject to capital gains treatment. Certain assets are not generally not subject to capital gains treatment, such as:

  • business inventory and property held for sale to customers; and
  • certain property created by the taxpayer’s personal efforts or acquired as a gift from someone whose personal efforts created the property (including copyrights, literary or musical compositions, letters, memoranda and other similar property; although the taxpayer may make an election to treat musical compositions and copyright in musical works as being subject to capital gains treatment).

Generally, losses on the disposition of property that is subject to capital gains treatment may be deducted from gains of such property to arrive at the taxpayer’s net capital gains (although no deduction is available for losses on the sale of real or personal property not used for business or investment purposes). If losses exceed gains, the excess may be deducted from ordinary income to the extent of $3,000 per year and any excess may be carried forward indefinitely to offset future capital gains.

(c) What are the relevant tax return requirements?

Capital gains are reported on Form 1040 (or Form 1040-NR for non-residents), and on Form 1041 for trusts and estates.

(d) What exemptions, deductions and other forms of relief are available?

Capital gains are taxed as part of the general income tax, so there are no exemptions, deductions or forms of relief specific to capital gains.

2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

The United States does not impose a federal inheritance tax (although six states do – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania). Instead, the United States imposes transfer taxes on transfers of wealth. The US transfer tax system is three pronged:

  • A gift tax applies to certain transfers made during life;
  • An estate tax applies to certain transfers taking effect at death; and
  • A GST tax is imposed on certain transfers made during life or at death (or at the time of distribution in the case of a transfer from a trust) to a person (a ‘skip person’) more than one generation below the transferor.

Twelve states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington) and the District of Columbia impose an estate tax. Only one state (Connecticut) currently imposes a gift tax on transfers made during life.

US gift tax is imposed at a flat 40% rate on cumulative taxable gifts (other than annual exclusion gifts, described in question 2.5(d)) in excess of the gift tax exemption (which is adjusted annually for inflation and is $11.7 million in 2021). There is no gift tax exemption for non-residents, except as may be provided by treaty.

US estate tax is imposed at a flat 40% rate on a taxable estate above the estate tax exemption (which for US citizens and residents is the same amount as the gift tax exemption, and which is reduced by cumulative lifetime taxable gifts).

The United States imposes a GST tax on:

  • outright transfers to skip persons (including trusts where all of the beneficiaries are skip persons);
  • distributions from certain trusts to skip persons; and
  • the assets of a trust where all of the remaining beneficiaries are skip persons upon the death of the last beneficiary who was not a skip person (collectively, ‘GST transfers’).

In addition to any US estate tax or gift tax applicable to the transfer, US GST tax is imposed at a flat 40% rate on cumulative GST transfers above the GST exemption amount (which is the same amount as the gift tax and estate tax exemptions).

Special rules apply to certain non-residents who previously expatriated from the United States (either by renouncing US citizenship or by relinquishing long-term lawful permanent resident status).

(b) How is the taxable base determined?

The United States imposes a gift tax on all donative transfers made by a US citizen or resident. The gift tax is also imposed on non-residents with respect to transfers of real and tangible personal property located in the United States.

The United States imposes estate tax on all property of a US citizen or resident, wherever the property is situated. This property is valued as of the decedent’s date of death (or the earlier of the date of disposal of the assets or the date that is six months after the date of death, if the effect of choosing this ‘alternate valuation date’ will be a decrease in estate tax due). Non-residents are also subject to US estate tax on certain US-situs property owned at death. US-situs property of a non-resident includes:

  • real or tangible personal property with a physical location within the United States;
  • shares of stock of a US corporation;
  • debt obligations of a US citizen or resident or a US government entity;
  • deferred compensation of a US citizen or resident; and
  • annuity contracts of a US obligor.

Bank deposits and life insurance proceeds (on the life of the decedent) are not considered US-situs property of a non-resident.

GST is generally imposed only on transfers that are subject to estate or gift tax (or resulting from transfers that were subject to gift or estate tax).

(c) What are the relevant tax return requirements?

Individuals file Form 709 regarding gift and GST tax, and estates file Form 706 regarding estate tax. Form 709 is due on 15 April of the year following the gift (although a six-month extension is automatically granted on request). Form 706 is due nine months after the decedent’s death (although a six-month extension is automatically granted on request).

(d) What exemptions, deductions and other forms of relief are available?

For 2021, the exemption amount for estate, gift and GST tax is $11.7 million per individual for US citizens and residents. A deceased spouse’s unused exemption can be transferred to his or her surviving spouse (through a concept referred to as ‘portability’) to avoid wastage of the predeceased spouse’s estate tax exemption. Portability is not available with respect to a deceased spouse’s unused GST exemption.

The taxable estate of a non-resident is allowed an estate tax exemption of only $60,000. There is no gift tax exemption for non-residents.

‘Annual exclusion gifts’ are excluded from the gift tax base. These are gifts:

  • of a present interest from a US citizen or resident to a donee other than a US citizen spouse or charity; and
  • that do not exceed $15,000 (for 2021) per donee (or $30,000 per donee if made by a married donor whose spouse consents on a US gift tax return to having such gifts treated as having come one-half from him or her).

Outright gifts are considered to be gifts of a present interest. Gifts made in trust may be gifts of a present interest if certain withdrawal powers or termination provisions are present in the trust; the absence of such entitlements will cause a gift made in trust to not qualify as an annual exclusion gift. Gifts to a spouse who is not a US citizen that do not exceed $159,000 (for 2021) qualify for the annual gift tax exclusion. Also excluded from the gift tax base are certain transfers for a donee’s education or healthcare. Additionally, a number of deductions apply for purposes of the gift tax, the most significant of which are the unlimited marital deduction for transfers to a US-citizen spouse and the unlimited charitable deduction for transfers to qualifying charities.

The estate tax base is reduced by various:

  • deductions (eg, state death taxes, debts, administration expenses and qualified distributions made to or for the benefit of a surviving US citizen spouse or charity); and
  • credits (eg, the credit for foreign death taxes).

As in the case of the gift tax, the most significant estate tax deductions are:

  • the unlimited marital deduction for transfers to a US-citizen spouse; and
  • the unlimited charitable deduction for transfers to qualifying charities.

Transfers to a non-citizen spouse are eligible for the unlimited marital deduction only if the transfer is to a trust that satisfies certain requirements (known as a ‘QDOT’).

2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

In addition to the capital gains taxes described above, the United States imposes a 3.8% tax on net investment income of citizens and residents, but only to the extent that the taxpayer’s income exceeds certain thresholds (generally $200,000 for a single taxpayer and $250,000 for a married couple).

(b) How is the taxable base determined?

For the purposes of this tax, the definition of ‘net investment’ includes, without limitation:

  • interest, dividends, certain annuities, royalties and rents (unless derived in a trade or business to which the net investment income tax does not apply);
  • income derived from a trade or business in which the taxpayer does not materially participate, or which involves trading in financial instruments or commodities; and
  • net gains from the disposition of property (to the extent constituting income), other than property held in connection with a trade or business to which the net investment income tax does not apply.

(c) What are the relevant tax return requirements?

Net investment income is reported on Form 1040, and on Form 1041 for trusts and estates. Non-residents are not subject to the net investment income tax.

(d) What exemptions, deductions and other forms of relief are available?

As described in question 2.6(b), the net investment income tax applies only to certain kinds of income, and applies only to the extent that the taxpayer’s income exceeds certain threshold amounts.

2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

The United States does not impose a federal tax on real estate (although many states and localities impose taxes with respect to the acquisition and holding of real estate).

(b) How is the taxable base determined?

State and local governments use a variety of methods to calculate their real property tax base. A taxing jurisdiction typically assesses the real property value by estimating the property’s market value. Some jurisdictions base assessments on the last sale price of the property; others consider the property’s most valuable use (eg, an empty lot that could be turned into a housing complex); and still others base the assessment solely on the size or physical attributes (eg, the location) of the property. There is also variation in the timing of assessments, with some jurisdictions assessing property values annually and others less frequently.

(c) What are the relevant tax return requirements?

These requirements are state specific.

(d) What exemptions, deductions and other forms of relief are available?

States and local governments often use limits, exemptions, deductions and credits to lower real estate tax liabilities. These forms of relief are state or locality specific.

2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

Many states and localities impose taxes personal property (eg, motor vehicles, boats, equipment and machinery) in addition to real estate.

(b) How is the taxable base determined?

Generally, these taxes are based on the value of the personal property on which they are imposed. Since all personal property taxes are imposed by states or localities, each jurisdiction may include different types of property in the tax assessment.

(c) What are the relevant tax return requirements?

These requirements are state specific.

(d) What exemptions, deductions and other forms of relief are available?

These forms of relief are state and locality specific.

2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

Most states and many localities impose a sales tax on goods purchased or services provided in the jurisdiction (which is charged in addition to the posted price for the goods or services). Many states also impose a use tax on goods or services purchased out of the state if they are later brought into the state for use therein (although there are often credits for sales/use taxes paid in another jurisdiction).

The United States and some states impose excise taxes on certain goods, such as gasoline, tobacco, alcohol and airline tickets. The United States also imposes customs duty on goods brought into the United States subject to certain personal allowances/exemptions.

(b) How is the taxable base determined?

Sales and use taxes are generally based on the sale price of the item subject to the tax.

Excise taxes can be either:

  • a per unit tax (eg, a specified tax per gallon of gasoline); or
  • a percentage of price (eg, a percentage of the price of an airline ticket).

Similarly, customs duties may be imposed either as a specific cost per unit or as a percentage of value.

(c) What are the relevant tax return requirements?

These requirements are state specific.

(d) What exemptions, deductions and other forms of relief are available?

These requirements are state or locality specific.

3 Succession

3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?

The rules of succession in the United States are determined at the state, not federal, level. Two main factors determine which state’s succession or intestacy laws control the disposition of a decedent’s estate:

  • the property classification or type of each item of property; and
  • the state of a person’s domicile at the time of death.

Generally, there are three types of property:

  • real estate;
  • intangible personal property (eg, cash and stock); and
  • tangible personal property.

‘Domicile’ is the geographic location of a person’s permanent legal residence. A person’s domicile is the place that he or she intends to use as his or her dwelling for an indefinite period. It is the place to which the person intends to return. A person’s intention regarding domicile is determined by his or her actions, such as where he or she votes and pays state income taxes. An individual can have only one domicile at a time.

The law of a person’s domicile generally determines the disposition of intangible and tangible personal property, even if located in different states. The disposition of directly owned real estate, however, is controlled by the jurisdiction in which it is physically located. Accordingly, ancillary probate or administration will be required if a decedent dies directly owning real property outside of his or her state of domicile.

3.2 How is any conflict of laws resolved?

The doctrine of renvoi is a legal doctrine under which a court adopts the rules of a foreign jurisdiction with respect to any conflict of laws that arises. The United States does not accept the doctrine of renvoi. Rather, the United States treats choice of law in matters of inheritance based upon the location and domicile of the decedent. For real property, the law of the location of real property governs. For intangible and tangible property, the law of the decedent’s domicile applies.

Some states have a comprehensive choice of law statute that considers issues such as revocation and interpretation of testamentary dispositions and the exercise of powers of appointment. Principles of conflict of laws provide guidelines to determine whether a court of the forum jurisdiction will apply its own laws or the laws of another jurisdiction.

States without choice of law statutes apply a reasonableness or fundamental fairness analysis, which generally involves analysing factors such as length of residence, physical location of assets, domicile and intention. The traditional conflict of law approach turns to the law of the domicile to determine succession to immoveable property and tangible personal property and the law of the situs of real property. A choice of law analysis requires the court to weigh and balance the policies of the competing jurisdictions and the interests that those jurisdictions have in the application of their respective laws at issue.

3.3 Do rules of forced heirship apply in your jurisdiction?

In almost every state, an individual is free to choose the beneficiaries of his or her estate by executing a will (or will substitute) detailing his or her wishes. However, almost all separate property states (Georgia being the exception) have elective share statutes that prohibit the disinheritance of a spouse, instead requiring that some portion of a person’s estate (usually about one-third) pass to his or her surviving spouse. Seven community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) generally provide protection for surviving spouses from disinheritance by treating income earned during the marriage, and property acquired with such earnings, as owned one-half by each spouse. Louisiana is the only state with forced heirship, requiring that some portion of a person’s estate be left to his or her children if such children are under the age of 24 or permanently incapable of taking care of their persons. (In Louisiana, the forced portion is typically:

  • one-quarter of the estate if there is only one forced heir; and
  • one-half of the estate if there are two or more forced heirs.

However, the fraction may be smaller where the testator has five or more children and only one or two of them are under age 24 or otherwise forced heirs, as well as in certain instances where disabled grandchildren are forced heirs.)

3.4 Do the rules of succession rules apply if the deceased is intestate?

If an individual should die without a will (ie, in intestacy), the distribution of his or her estate will be subject to the intestacy laws of the state of his or her residence (except for real property, whose disposition under intestacy is determined by the laws of the jurisdiction in which the property is physically located). Each state has its own set of intestacy laws, but the surviving spouse and children are generally favoured.

3.5 Can the rules of succession be challenged? If so, how?

No.

4 Wills and probate

4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?

Probate or administration occurs in the state where the decedent was domiciled at death, as well as in any states in which the decedent owned real or tangible personal property. Generally, the law of the state where the decedent was domiciled at death governs the disposition of intangible property. The disposition of real or tangible personal property, however, is governed by the law of the state in which such property is located.

Where such property is located in multiple states, ancillary probate or administration may be required. Most states have provisions that permit the probate of a will if it was validly executed pursuant to the laws of either:

  • that state;
  • the jurisdiction in which the will was executed; or
  • the jurisdiction in which the decedent was domiciled at death.

4.2 How is any conflict of laws resolved?

See question 3.2.

4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?

Most states have provisions that permit the probate of a will if it was validly executed pursuant to the laws of the jurisdiction in which the will was executed. As discussed above, generally, the law of the state where the decedent was domiciled at death governs the disposition of intangible property. The disposition of real or tangible personal property, however, is governed by the law of the state in which such property is located.

4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?

The rule against perpetuities is a common law rule which generally provides that all interests created in a will (or by any other instrument, such as a trust deed) must vest no later than 21 years after some life in being at the creation of the interest (ie, in the case of a will, at the decedent’s death). Many states have modified this rule and some have abolished it altogether.

4.5 What formal requirements must be observed when drafting a will?

The formal requirements applicable to US wills typically apply to their execution, not their drafting. These rules vary from state to state, but in general, to be validly executed, a will must be in writing and must be signed by the testator in the presence of disinterested witnesses.

4.6 What best practices should be observed when drafting a will to ensure its validity?

See question 4.5.

4.7 Can a will be amended after the death of the testator?

Generally, no.

4.8 How are wills challenged in your jurisdiction?

The laws governing will contests are state specific. Generally, only those persons who are related to the decedent and who would have received the decedent’s estate in the absence of the will, or who were named in a previous will, have standing to contest a will. In most cases, to have a will overturned, contestants must prove that:

  • the decedent was coerced or defrauded into signing the will or had diminished mental capacity at the time of signing; or
  • the will was improperly executed.

4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?

Intestacy rules are not subject to challenge. See question 3.4 for a discussion of intestacy laws.

5 Trusts

5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?

The laws governing the creation, interpretation and administration of trusts are state specific. Trusts may be governed by the laws of another jurisdiction if the document governing the trust so states (subject to the public policy limitation discussed in question 5.2).

5.2 How is any conflict of laws resolved?

Generally, the document governing a trust may direct that the law of any jurisdiction to govern the trust, and this governing law clause will be given effect except when contrary to the ‘strong public policy’ of the jurisdiction with the most significant relationship to the matter at issue.

5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?

Trusts may be either revocable or irrevocable. The primary advantage of the revocable trust is that the property in the trust is still entirely subject to the settlor’s control – he or she may amend or revoke the trust at any time and thereby return the trust property to his or her personal ownership. For this reason, revocable trusts are often used as will substitutes. The primary disadvantage of the revocable trust is that the settlor is still treated as the owner of the trust property for US income and transfer tax purposes, and therefore revocable trusts are not effective vehicles for tax minimisation during the settlor’s lifetime (although once they become irrevocable at the settlor’s death, they become, and are often used as, tax planning vehicles).

The primary advantage of irrevocable trusts is that they may be used for lifetime tax planning (eg, to make effective use of a taxpayer’s gift, estate and/or GST exemptions; to minimise the transfer taxes that will be due on the taxpayer’s death; and to allow for income tax planning). The primary disadvantage of irrevocable trusts is that, to qualify as irrevocable for tax purposes, the taxpayer must relinquish control of the trust assets.

5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?

Foreign trusts are recognised for US income tax and transfer tax purposes. For US income tax purposes, a ‘foreign trust’ is defined as a trust over which either:

  • no US court has primary jurisdiction; or
  • no US citizen or resident has the authority to control all substantial decisions.

Transfers to foreign trusts are subject to transfer taxes to the same extent as any other transfers. The income from foreign trusts is taxable to the settlor if:

  • the settlor is a US citizen or resident; and
  • the trust has or could have at least one beneficiary who is a US citizen or resident.

Foreign trusts that are not taxable to a US settlor are taxed only on certain US-source income and income that is connected with a US trade or business. However, US citizens or residents who receive distributions from foreign trusts are responsible for paying US income tax on current year trust income included in the distribution, and may be subject to an additional tax plus interest charge on prior year trust income included in the distribution. Computing the beneficiary’s tax in these situations involves a complicated process; accordingly, a tax adviser should be consulted any time that a US citizen or resident receives a distribution from a foreign trust.

5.5 How are trusts created and administered in your jurisdiction?

The laws governing the creation and administration of trusts are state specific (although 34 states have adopted a version of a model uniform law known as the Uniform Trust Code). Generally, for a trust to be created, there must be:

  • intent by the settlor to create a trust;
  • ascertainable beneficiaries who can enforce the trust; and
  • specific property to be held in trust.

Additionally, if the trust is a testamentary trust or will hold real estate, the trust generally will need to be in writing to satisfy the legal requirements relating to wills and land transfers; lifetime trusts holding personal property may generally be created orally (although that is not advisable).

5.6 What are the legal duties of trustees in your jurisdiction?

The legal duties imposed on trustees are state specific, but some of the most significant fiduciary duties generally imposed on trustees are:

  • the duty of loyalty (ie, the duty to administer the trust solely in the interests of the beneficiaries);
  • the duty of impartiality (ie, the duty to act impartially in investing, managing and distributing the trust property, giving due regard to the beneficiaries’ respective interests);
  • the duty of prudence (which imposes on the trustee an objective standard of care, such that the trustee is required to administer the trust as a prudent person would); and
  • other duties relating to the duty of prudence, such as:
    • the duty to collect and protect trust property and segregate the trust property from the trustee’s own funds;
    • the duty to keep adequate records of administration;
    • the duty to bring and defend claims; and
    • the duty to inform and account to the beneficiaries.

5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?

The Internal Revenue Code contains income and transfer tax provisions applicable to trusts, as do the laws of many states. For income tax purposes, certain trusts (called grantor trusts) are taxed entirely to their settlors, while others are taxed according to a hybrid structure under which some trust income is taxed at the level of the trust, while other income is taxable to the beneficiaries. The distinction between grantor and non-grantor trusts depends on factors including:

  • the identity of the trustee;
  • the trustee’s distribution authority; and
  • the powers that the settlor retains over the trust.

Additionally, many states impose income taxes on trusts and beneficiaries, which may be imposed based on factors such as:

  • the residence of the settlor;
  • the residence of the trustee;
  • the residence of the beneficiaries; and/or
  • the situs of the trust property.

Thus, both federal and state income taxes must be considered upon the creation and during the administration of a trust.

Consideration must be given to transfer taxes upon the creation of a trust (as these transfer taxes are imposed on the settlor, or the settlor’s estate in the case of transfers at death); and transfer taxes must also be considered when distributions are made from trusts, as certain distributions may subject the beneficiary receiving the distribution to generation-skipping transfer tax.

See question 5.4 for a general discussion of the tax rules applicable to foreign trusts.

5.8 What reporting requirements apply to trusts in your jurisdiction?

Tax reporting requirements for trusts are state specific. Additionally, many irrevocable trusts are required to file Form 1041 to report their income on an annual basis. The tax items of grantor trusts are generally reported on the settlor’s Form 1040. Foreign trusts report their US income on Form 1040-NR.

Testamentary trusts may be required to periodically account with the probate court that administered the estate with respect to which the trust was created.

Regarding foreign trusts, a US citizen or resident who creates or transfers money or property to a foreign trust or makes a loan to a foreign trust, receives distributions from a foreign trust, receives the uncompensated use of property of a foreign trust, receives a loan from a foreign trust or is treated as the US owner of a foreign trust must file an annual information return on Form 3520. Additionally, foreign trusts that are treated as owned by US citizens or residents (ie, foreign grantor trusts) must file an annual information return on Form 3520-A.

5.9 What best practices should be observed in relation to the creation and administration of trusts?

The rules applicable to the creation of trusts should be followed, and trustees should be extremely vigilant about satisfying their fiduciary duties. Additionally, clients and advisers should give careful thought to the selection of fiduciaries, and to the tax consequences of the creation and administration of trusts in particular jurisdictions (which are discussed in question 5.7).

6 Trends and predictions

6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

From a transfer tax perspective, the current landscape may be the most legislatively favourable that has existed since the inception of the US federal transfer taxes approximately 100 years ago, given:

  • the high exemption amounts (which under current law are scheduled to be reduced significantly after 2025); and
  • the fact that tax rates are lower than they have been in the past.

Also, income tax rates are lower than they have been in recent years.

Under the new Biden administration, there may be an increased emphasis on raising tax rates and reforming the tax system to make it more progressive. As of the time of writing, a number of tax proposals have been put forward in the US Congress, but it remains to be seen whether any of them will gain the necessary traction to be enacted into law.

7 Tips and traps

7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?

The US taxation and trust regimes are complex, with a patchwork of different laws throughout the country and many traps for the unwary. It is very important when analysing tax considerations and planning trust structures to engage a professional who is conversant with and qualified to act under the laws of the particular state or locality you may be considering. For someone considering taking residence in the United States, considerable planning can be done beforehand to shelter income from tax during the period in which the individual is considered a US resident for income and/or gift and estate tax purposes. The creation of specialised trusts prior to entering the United States, the purchase of private placement life insurance and the transfer of wealth to individuals remaining outside the US tax net are all potential avenues to consider in your discussions with a competent adviser.

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