If you have roots in other countries, when you sit down to do your will, you may want to help those back home. Domenic Tagliola, Will and Estate Planner at TD Wealth discusses why that may be more complicated than it sounds.
You've built a life and a family.
When you sit down to plan your will, you may want to help those who are still back home.
But it's not as easy as it sounds, unfortunately.
And that presents some unique challenges around tax, currency, and even just logistics and legal issues.
Domenic Tagliola is a Tax and Estate Planner with TD Wealth.
He joins me here in studio to talk about foreign beneficiaries.
Thanks so much for coming in.
Thank you for having me, Kim.
OK, I want to start with a really simple example, because I know this gets complex fast.
I'm in Canada, you are not.
When I pass, I make a plan to pass on, let's say, $250,000 to you.
How does that actually mechanically work?
Well, the person that you're appointing to be the administrator of your state is going to have to follow your instructions.
On a cash legacy of $250,000, that I assume would come net of the taxes that are due by the estate.
If the person who is receiving those assets is an adult in that country, the requirements will be less strenuous or less imposing than if it was a larger part of your estate.
There might be some currency restrictions in that country.
There likely would be some provisions to report to comply with anti-terrorism and anti-money-laundering provisions in that country.
There might be a currency prohibition, import or export of currency.
And obviously, finding out when is the best time to transfer that money.
Now might be a good time to convert your Canadian dollars to US, for example.
So there might also be that logistically on dealing with that.
And then ultimately, if the person is subject to local domestic taxing laws, you have to be sensitive of that as well.
You know, it's funny, because I chose this example because it was the simplest example I could think of.
And I love all the caveats that come with it.
Let's start getting into complexities.
You said if I was bequeathing money to an adult.
What if you're not an adult?
Then you have to be aware that not every country will recognize the trust provisions that we are so used to here in Canada, that you can have assets put away for someone to be managed by someone else until the age that you allow them to receive those assets.
So you're going to have to satisfy yourself on what the local domestic laws are in that country.
I'll give you a perfect example.
Keep with the same scenario that the person is an adult.
But what happens if that adult beneficiary in that foreign country dies and you decide that you're going to leave those assets to his or her children?
So even though your beneficiary could be an adult, there is a possibility that that adult beneficiary dies before you, in which case it could still be an issue where there are minors in play.
So even if you're thinking, well, that doesn't apply to me because all my beneficiaries are adults, if an adult dies and leaves minor children, that is something that you'll need to address.
So it would be wise for you to seek out appropriate instructions from the local domestic country to figure out what needs to happen and at what age is that person going to receive.
OK, let's just rip off the Band-Aid here and just delve into all the complexities.
Let's say it's not just cash, it's real property, it's a business.
I've got people in, let's say, in the States, in China, in somewhere in the EU.
I mean, what are all the things one needs to think about when constructing an estate plan?
Well, the very first thing you're going to have to do before you look externally to your beneficiaries is you have to look at yourself or your spouse.
What happens if you were born in the United States or your spouse is a national of one of those countries?
So you yourselves may be subject to their domestic laws.
Leaving that for aside, what you're going to have to do is you're going to have to put your plan in place and say, who is going to come to receive from my estate?
What are the tax liabilities that could ensue both domestically here in Canada, externally in the countries that we have those assets?
Is it going to make sense, for example, to do wills compliant with the local domestic laws, especially if we're talking about real property in those countries so that we can have a document that is recognized in the country where the asset is located.
Makes the administration perhaps move better.
Also can take into account any local laws that are in place in that country that we don't have here in Canada.
We have talked about trusts, for example.
So you're going to have to kind of look at all of the implications, both domestically and externally in those receiving countries.
And you're going to have to keep up with the changes.
Because as much as you can put a plan in today that reflects the reality today-- It is a snapshot of today.
With a snapshot of today, the reality in the future could change dramatically.
Well, like what?
What do you mean?
Well, for example, the United States has a wealth transfer tax.
And right now there's a certain amount that you can shelter before you're subject or your heirs are subject to this tax.
There's an election happening in November, as we all know.
And the new president may impose a different taxing regime.
Another example is the European Union.
The European Union has provisions to deal with people that come to receive from an estate, an external or foreign estate.
Those rules are not static.
They do change.
The taxing amounts change, just as our taxing rates seem to creep up.
Same thing with those tax regimes.
They tax their people and they tax their estates.
And that tax regime can change.
So you have to keep up with the changes in the law both internally and externally.
Now on top of all that, because you and I were chatting earlier, you've got the legalities you need to deal with in terms of changing laws and changing tax provisions.
You've also got what the norms are in the countries.
So what are the other things you have to consider?
Well, the other things to consider is that not every country will allow you to deal with your assets the same way that you can do here in Canada.
We're very fortunate here in Canada that we have what's called testamentary freedom, which means unless we're looking to ignore a dependent beneficiary or a spouse, and very few others, or unless you're looking to sponsor some type of a terrorist organization, you're free to do whatever you want with your assets.
So if you want to favor just one of your three children, for whatever reason, you're allowed to do that.
Not every jurisdiction on the planet on the planet has the same provisions.
In fact, we're in the minority.
Most countries will impose restrictions on your ability to deal with your assets.
So if you've got three children and a spouse, you have to provide for all of them, unlike in Canada, as I said, where you don't.
There might also be jurisdictions on the planet that have-- and there are-- that have religious connotations to that as well.
And so you have to be sensitive to that as well.
So when you're saying that I'm going to have the ability to deal with my assets in a certain way, if all of your beneficiaries are here in Canada, you have the right to do whatever you want with them.
If a beneficiary happens to be in France or in China or elsewhere on this planet, that forces you to provide for heirs in a certain manner.
You have to be sensitive to that and understand that you don't want to leave a legacy of them challenging that asset.
Especially if the asset happens to be the place that you have in the south of France that you're looking to retire to.
Yes, you don't want challenges there.
And currency, I imagine on top of all this, too, just to add another layer onto this.
Is that right?
Currency is going to be an important consideration.
Cash is very easy to deal with.
You may find the best time to convert those Canadian dollars to whatever the foreign currency is.
But if you've got a beneficiary that is likely to receive the cottage in Muskoka, how are you going to equalize with the other child?
You can't take half of a cottage in Muskoka and transfer it to someone in France.
So you're going to have to come up with some mechanism to be fair and equitable with your children, bearing in mind that assets that are real property don't move, whereas liquid assets like currency can.
Now I want to try and land the plane here, because there is so much that's going on.
I think someone might be going, wow, there's a lot of complexity, and I would think a lot of cost that goes with complexity.
So how do you decide?
How do you make the decisions of what you should do?
The most important part of making that decision is to be informed on what the possible consequences are going to be.
What do you mean?
If you look at a tax liability that is facing you, and if it's something that you see is negligible in the grand scheme of things or something that you're prepared to deal with, then you may look at your estate planning and say, the cost doesn't justify the benefit.
But it's important to understand what that liability is.
So that if you've got assets in another country, or a child that is in another country, or maybe you're subject to US wealth transfer tax laws because you happen to be born in the United States, getting yourself educated on what those possible consequences are goes a long way for you to decide whether or not you should really make an issue about this and what that issue is going to be.
Because there is going to be a cost associated with proper tax planning, with having a document created in that local jurisdiction, with keeping up with the changes in the law.
And you may look at that and say, well, if at the end of it all, the tax liability or the entire cost liability is a negligible amount, then we at least can make the informed decision as to whether or not we want to make this an issue for us or not.
Well, thank you very much.
Illuminating as always.
Domenic Tagliola, a Tax and Estate Planner with TD Wealth.
I'm Kim Parlee.
Thanks for watching.
And a reminder, please talk to your advisor, lawyer, or accountant to figure out what works best for you.