Article - International Estate Planning for U.S. Citizens: An Integrated

Article - International Estate Planning for U.S. Citizens: An

Integrated Approach (Estate Planning, a Thomson Reuters

publication)

by Michael W. Galligan

This article advocates the creation of integrated international estate plans for U.S.citizens, particularly through the

use of U.S.LLCs to hold the non-U.S. property of U.S.citizens.

Author: MICHAEL W. GALLIGAN, ATTORNEY

MICHAEL W. GALLIGAN is a partner in the law firm of Phillips Nizer LLP, in the New York City office. He is a

Fellow of the American College of Trust and Estate Counsel, an Academician of the International Academy of

Estate and Trust Law, and a member of the Society of Trust and Estate Practitioners. Mr. Galligan is the

Immediate Past Chair of the International Section of the New York State Bar Association and also a member

of the American Immigration Lawyers Association. He is a frequent author and lecturer.

For decades, if not for almost a century, it was widely assumed that any U.S. citizen who owned property outside the

U.S. or who resided outside the U.S. should have a separate will for each jurisdiction in which the U.S. citizen resided

or owned property. This assumption made sense in an era when each national legal system operated in apparent

sovereign separation from other countries, with full discretion whether to enforce the judgments of other nations'

courts and full liberty to decline to enforce other nations' tax laws.

But the landscape has changed, especially after the end of the Cold War in 1989 and after the terrorist attacks of

9/11/01. As the European Union ("EU") encompasses more and more countries, the respect generally granted to the

judicial judgments and decisions of other countries, especially within Europe, continues to increase;

similar

developments are afoot in Latin America.

Perhaps, even more importantly, countries seem increasingly willing to

bind themselves to a mutual exchange of information and even assist in enforcing each other's tax laws as well as

participate in multilateral security initiatives for which "tax evasion" ranks almost equally with money laundering and

terrorism as an evil to be defeated.

Why a unified estate plan is necessary

Even before these recent changes in the international climate, there were—and are now—good practical reasons to

organize an international estate plan to ensure that all property of a U.S. citizen could pass, directly or indirectly,

under one comprehensive will or will substitute. To rely, without good reason, on multiple wills is to court disaster: one

will may accidentally revoke another; the proper formalities for each relevant jurisdiction may not be followed; lack of

clarity about the situs of particular properties may leave it unclear as to which will governs what property. Even

practitioners who focus mainly on domestic planning advise their clients to hold property outside the state of their

domicile through limited liability companies ("LLCs") or revocable trusts. This commonsense approach does not

cease to apply when one crosses the borders of the United States!

But even more important reasons exist for seeking to integrate an international estate plan than the dangers of faulty

drafting and duplicative estate proceedings.

The need to be able to use trusts. The trust is the workhorse of U.S. estate planning. Most applicable exclusion,

marital deduction, and charitable deduction planning is unthinkable without trusts. Lifetime planning transfers such as

qualified personal residence trusts ("QPRTs"), grantor retained annuity trusts ("GRATs"), and grantor retained income

trusts ("GRITs"), as well as sales to grantor trusts depend self-evidently on the law of trusts. But many of the most

important countries in the world view trusts differently. For example, under German law, transfers to trusts under

German wills violate public policy, while transfers to non-German trusts under non-German instruments incur gift and

inheritance tax at the highest marginal tax rates. Switzerland recognizes trusts but looks through the trust to the

underlying grantor or beneficiary for income tax purposes. The trust is not an institution fully incorporated in the

internal law of any country in continental Europe, save Liechtenstein; in none of these countries can transfers to a

trust be credited toward the share that a surviving spouse and children are required to inherit from their deceased

spouse or parent.

Japan has trusts, but trusts still do not satisfy mandatory inheritance requirements for surviving spouses and children.

England, the birthplace of modern trusts, does not have mandatory inheritance in the tradition of the civil law codes;

nonetheless, the tax treatment of transfers to trusts under the Finance Act of 2006 does not accord with U.S. tax

concepts. For instance, transfers of English property to a revocable trust may trigger an inheritance tax charge of

20%.

But the problems do not stop with the uncertain status of the trust throughout much of the world.

Discordance between U. S. law and non-U.S. law. Most countries in the world (including many common law

countries as well as most civil and Sharia law countries) think very differently from the United States about inter-

generational wealth transfers, inheritance, family and creditor protection, and how wills are made and implemented.

Here are some resulting areas of concern.

Community property. To prepare an estate plan, one must know the nature and extent of the property for which one is

planning. Under the law of China, South Africa and Taiwan, as well as most countries in continental Europe and

virtually all countries in Latin America, spouses own property "in community" unless they have expressly adopted

another marital property regime such as separation of property. This means that a married U.S. citizen client may not

have as much property to dispose of as the client thought!

Moreover, a married U.S. citizen from a non-community property U.S. state who purchases a residence or a business

in a community property country might effectively be making a gift of one-half of the property to the non-purchasing

spouse at the time of the acquisition. This could create significant U.S. gift and estate tax issues if the non-purchasing

spouse is not a U.S. citizen. Conversely, there may also be significant planning opportunities when the purchasing

spouse is neither a U.S. citizen nor a U.S. domiciliary.

Mandatory inheritance. Virtually every country in Latin America, continental Europe, the Middle East (except Israel),

and important countries in Asia (including Japan, Korea and Taiwan) require that spouses, descendants, and

sometimes parents inherit—or have a claim to—a portion of or interest in their decedent's property, regardless of

what the decedent's will may provide. In countries where Sharia law applies, this requirement can even extend to

siblings. These shares can apply to as much as three-fourths of a decedent's property. Furthermore, lifetime transfers

must often be added back for purposes of determining the value of the putative "reserve" for division among

mandatory heirs.

Sharia law, at least as applied in the United Arab Emirates, forbids a testator from leaving the

"free" portion (one-third) of an estate to beneficiaries entitled to a share of the two-thirds mandatory portion. Although

Indian inheritance law honors testamentary freedom, Sharia law restrictions are considered enforceable against

estates of Indians of Moslem faith and certain restrictions on the disposition of "Hindu Undivided Property" also have

legal sanction.

Mandatory or "forced" heirship rules perhaps have the greatest potential for playing havoc with a U.S. estate plan.

Few circumstances can deal a more devastating blow to a typical plan for a U.S. married couple to defer estate taxes

until the death of the surviving spouse than a provision of a non-U.S. jurisdiction that requires a non-U.S. citizen

spouse or child (whether a U.S. citizen or not) to inherit large amounts of property outright upon the death of the first

spouse to die.

At the same time, most of the major common law countries, such as England (only in the case of English

domiciliaries), Ireland, Canada, Australia and New Zealand, allow a will to be reformed after a decedent's death to

provide for the support of family members and care providers who can establish need for postmortem support or an

equitable share in a decedent's property, while China provides that family members who were supported by the

decedent should share in the estate. While not as likely to ruin a proper U.S. estate plan as mandatory inheritance

rules of "civilian" countries, the risks are still there.

Unlimited liability. Under the law of Japan, Korea and Taiwan, as well as many countries in Europe and Latin America,

heirs are deemed to inherit property from a deceased person immediately upon death, without a common law estate

administration (thus the distinction between common law "probate" and civil law "succession"), but the corollary is that

heirs assume liability to creditors of their decedent even if the liabilities exceed the value of the inherited property.

Usually, an election can be made to limit this liability to the value of the assets actually inherited, which then gives

rise to something akin to a common law estate administration. But the time limits for making this election are often

very short (one month in Switzerland, three months in Japan, Korea and Taiwan), and failure to make a timely

decision is not easily repaired.

Conflicts of laws. Wrapped around all these issues is the challenge of knowing with reasonable certainty the law that

will apply to a U.S. client's testamentary plan in the first place. The main options are nationality with regard to all

property (e.g., Austria, Germany, Italy, Japan, Poland, Spain, Sweden, Taiwan); residence with regard to all property

(e.g., Argentina, Brazil, Denmark, Finland, Switzerland); domicile with regard to all property (e.g., Chile, United Arab

Emirates

); situs for immoveable property and domicile/residence for moveables (e.g., Belgium, Canada, Costa Rica,

France, Israel, Russia, South Africa); situs for real property and domicile for personal property (e.g., Australia,

Canada, Ireland, New Zealand, and the United Kingdom); situs for real property and shares of companies and

domicile for other moveables (e.g., China and Ukraine); and situs for real property and nationality for everything else

(e.g., Monaco).

The diverse ways in which non-U.S. courts apply "foreign law" is a great source of uncertainty. Do they apply only the

"substantive law" or the "whole law?" If the whole law, do they accept a referral back ("remission") to their own laws

or a referral ("transmission") to the laws of a third country? To what extent will they entertain a "foreign court" or

"double remission" approach? The next worse thing to the derailment of a U.S. estate plan by discordant non-U.S.

property and inheritance rules is the derailment of the plan by a failure to correctly identify the proper law of the

country that will apply to estate property or an unforeseeable change in the "private international law" of the country

that has to make that decision.

Inheritance taxes. Many countries have inheritance taxes, sometimes with rates of tax that approach, and in certain

cases even exceed, U.S. rates: Belgium, Chile, Dominican Republic, Finland, France, Germany, Greece, Ireland,

Italy, Japan, Korea, Netherlands, Norway, Poland, South Africa, Taiwan, Ukraine, United Kingdom, and Venezuela.

Canada and Peru each have income taxes that serve as an inheritance tax substitute. Some Brazilian states and

Swiss cantons also impose inheritance tax.

In most cases, these taxes would be applied on a worldwide basis if a U.S. citizen died a domiciliary or resident of the

relevant jurisdiction. Interesting exceptions are Chile, which taxes non-Chilean property of a U.S. citizen resident in

Chile if the non-Chilean property was acquired with Chilean source funds, and Taiwan, which taxes the non-

Taiwanese property of a Taiwanese national. While having no Mexican inheritance tax, Mexican states have transfer

taxes that would apply to transfers of real property by reason of death.

The estate tax credit for "foreign death taxes" under IRC Section 2014 covers "foreign" inheritance taxes imposed on

"foreign" property. The rules for determining if property is "foreign" for credit purposes generally follow the IRC

Section 2105 rules for determining if U.S. property owned by a non-U.S. person is exempt from U.S. estate tax

because it is deemed located outside the United States. But reliance on the credit is not always satisfactory because

the United States credits only taxes paid to the United States on the property taxed abroad, while the country abroad

may tax property eligible for the U.S. marital or charitable deductions. Moreover, the Section 2014 credit does not

apply to "foreign" taxes on property located in the U.S.

Some relief for U.S. citizens or beneficiaries in this situation is provided by "modern" U.S. estate tax treaties with such

countries as France, Germany, Netherlands and the United Kingdom and by the U.S. income tax treaty with Canada.

The "older" estate tax treaties with Finland, Greece, Ireland, Italy, Japan, South Africa, and Switzerland may also

afford protection depending on the circumstances. But there is no such treaty protection for U.S. citizens who reside

in such countries with significant worldwide inheritance taxes as Belgium, Chile, Korea, Philippines, Poland, Turkey,

Ukraine, and Venezuela.

How to create a unified estate plan

This article focuses on a strategy of converting a client's non-U.S. property into U.S. property by using a U.S. entity—

particularly a U.S. LLC—to hold all non-U.S. property owned by a U.S. citizen domiciled in the United States and, in

some instances, all U.S. as well as non-U.S. property owned by a U.S. person domiciled abroad. The purpose is to

unify a U.S. citizen's estate plan so that U.S. planning documents will govern all non-U.S. property and minimize as

much as possible the ability of discordant non-U.S. property and tax rules to undermine the integrity of the U.S. estate

plan. As discussed below, the first step in international planning for U.S. citizens should be to consider this "holding

company" approach and then to supplement it with other measures to the extent that it cannot stand on its own.

Characteristics of the limited liability company. An LLC has great legal and tax flexibility under U.S. law. From a

tax perspective, a single-owner LLC is completely disregarded for U.S. tax purposes (absent an election to be treated

as a corporation) and, if there are two or more owners, is treated as a partnership (in the absence of an election to be

treated as a corporation). Thus, one can avoid the two-tiered system of taxation associated with C corporations and

also the exclusion of the underlying assets from cost basis "step-up" at a shareholder's death, which, absent careful

planning, may preclude underlying assets of an S corporation as well as assets of a C corporation from this important

benefit. In the case of a multi-member LLC, the ability to make a basis step-up election under IRC Section 754 also

allows persons who inherit membership interests a measure of tax savings with respect to sales of LLC assets after a

decedent's death.

Effect of a unified plan: Results from international estate planning survey

In preparation for this article, a survey was conducted among leading non-U.S. succession and tax law counsel in

many countries where U.S. citizens own property or live, including Argentina, Australia, Austria, Belgium, Brazil,

Canada, Chile, China, Costa Rica, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy,

Japan, Korea, Mexico, Monaco, Netherlands, New Zealand, Panama, Philippines, Poland, Russia, Singapore, South

Africa, Spain, Sweden, Switzerland, Taiwan, Ukraine, the United Arab Emirates, and the United Kingdom.

On the

basis of this survey, it appears that effectively converting the non-U.S. assets of a U.S. citizen to U.S. assets by

interposing a U.S. LLC between the U.S. citizen and the non-U.S. assets often reduces or even eliminates the

applicability of non-U.S. property, succession and tax law principles that would otherwise interfere with the smooth

application of the U.S. citizen's estate plan.

When the use of a U.S. holding company does not afford complete protection from discordant non-U.S. property and

tax rules, the U.S. estate plan can still be protected by assuring that favorable non-U.S. choice of law principles are

fully exploited, using pre-mortem and postmortem renunciations in the non-U.S. jurisdictions, having all heirs join in

an inheritance or succession agreement enforceable in the United States, and/or carefully drafting the dispositions

under the U.S. planning documents to encourage maximum cooperation by the heirs with the U.S. citizen's estate

plan.

Permissibility of transfers of non-U. S. assets to U.S. LLC. Of the jurisdictions surveyed, Australia, Belgium,

Brazil, Canada, Chile, Costa Rica, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan,

Korea, Mexico, Monaco, Netherlands, New Zealand, Panama, Russia, Spain, Sweden, the United Kingdom, Ukraine,

and the United Arab Emirates generally permit a home owned by a U.S. citizen to be transferred to a U.S. LLC.

Transfers of a home in Australia require the approval of the Treasurer (easily granted). Transfers of real property in

areas near the borders of Argentina and Brazil require administrative approval. Neither individuals nor non-Chilean

entities can own real property near Chilean borders. In Costa Rica, the LLC would need to appoint a legal

representative to act for and represent the LLC before the Costa Rican public registry, and all other Costa Rican

legislation related to real property must be duly followed. Administrative approval is also required for transfers of real

property near Mexican borders or the Mexican coast, which must generally be held in the first instance by a Mexican

trust or, if for commercial purposes, by a Mexican entity whose corporate parent can be a U.S. LLC.

Transfers of homes in Austria require provincial approval, which are reviewed more intensively in the Alpine regions.

Denmark imposes some restrictions on transfers of homes to non-EU entities. Transfers of homes in Korea require a

report to a government bureau. In Poland, an official permit would be required, with evidence of the LLC's owner's

ties to Poland. A U.S. LLC, like any other non-Philippine person, may effectively hold only an interest in a

condominium, as long as Philippine persons own at least 60% of the property. To own real property in South Africa, a

U.S. LLC must interpose a South African company.

A U.S. LLC cannot generally own a home in China without establishing a representative office in China, a relatively

easy hurdle to overcome; interposition of a Hong Kong or a Singapore company could also be considered. As to

Singapore, the approval of the Minister of Law is required other than for apartments in buildings governed by specific

Planning Act schemes. For Taiwan, the ability of a U.S. citizen to own non-agricultural real property—and, thus the

ability to transfer it to a U.S. LLC—depends on whether the U.S. citizen's home state permits Taiwan citizens to own

property in that state (apparently the case in 43 states). Transfers of homes in Switzerland and India to a U.S. LLC

are currently more difficult because of general limitations on foreign ownership of real estate.

All the surveyed countries permit transfers of tangible property owned by a U.S. citizen to a U.S. LLC, on the

condition that works of art are not "national patrimony" (Italy), "of historical significance" (Poland), or subject to a state

option to purchase unique works of art (Denmark). A U.S. LLC may own works of "cultural value" located in Russia or

Ukraine but may not be able to move the works permanently outside either country.

The great majority of the surveyed jurisdictions permit transfers of business interests owned by a U.S. citizen to a U.S.

LLC. In Argentina, Brazil, Japan, Korea and Ukraine, a U.S. LLC owning a local company would have to register the

U.S. ownership with local authorities, and a government permit is often required in the case of Poland. If a U.S.

citizen resides in South Africa, transfers of South African business interests would be subject to approval by the

foreign exchange authority ("ExCon"). Transfers of shares of certain commercial and professional Monaco companies

require government consent. While there are no express provisions of Russian law prohibiting non-Russian

ownership of Russian business entities, the September 1999 legislation on foreign investment must be followed.

Taiwan permits the transfer of Taiwanese companies upon approval of a business plan by Taiwan's Investment

Commission.

Impact on non-U.S. community property. Of the surveyed countries, Belgium, Brazil, Chile, China, Costa Rica,

Denmark, France, Italy, Mexico, Netherlands, Philippines, Russia, South Africa, Spain, Sweden, Switzerland, and

Ukraine have some form of community property as the default regime for regulating property ownership by

spouses.

However, in some countries such as Belgium, Sweden and Switzerland, local community property rules

generally apply only when at least the U.S. citizen spouse and sometimes both spouses resided in the country at the

time of marriage or when the property was acquired. In the Philippines, the rules do not apply if both spouses are

non-Philippine citizens even if they are Philippine residents.

In a number of countries, including Chile (real estate only), Italy, Russia, South Africa, Sweden (real estate only) and

Taiwan, the consent of both spouses appears to be required to effect the transfer of community property to an LLC.

Even with such consent, the community property regime may simply adhere to the U.S. LLC interests for which the

non-U.S. property was exchanged, at least in community property states like California, New Mexico or Texas and

states such as New York that have adopted the Uniform Disposition of Community Property Rights at Death Act.

Impact on non-U.S. inheritance regimes. Of the surveyed countries, all but Israel and South Africa (save for an

exception for spousal maintenance) have at least some rules regarding inheritance that are inconsistent with U.S.

inheritance rules. Here, one must carefully consider whether the U.S. citizen will be considered by a U.S. jurisdiction

to be its domiciliary and whether any non-U.S. jurisdiction might consider the U.S. citizen to be its domiciliary or

resident. One must also consider whether the non-U.S. property was first acquired by the U.S. citizen personally or

by the LLC.

Effectiveness of transfers to U.S. LLC. A transfer to a U.S. LLC of property with a situs in a non-U.S. jurisdiction

owned by a U.S. citizen considered by that same jurisdiction to be domiciled or resident in the United States appears

to afford protection from the application of discordant inheritance rules in the following jurisdictions: Australia, Belgium,

Brazil, China (excepting real property and business interests), Costa Rica, Denmark, France, Germany, Ireland

(possibly excepting real property), England and Wales, Mexico, Monaco, Netherlands, Panama, Poland (as long as

the transfer is a sale and not a gift), Russia, Switzerland (except for real property), Taiwan, and the United Arab

Emirates.

In addition to the protection afforded by all the countries just mentioned above, protection appears to be afforded as

well in the following jurisdictions when the property is first acquired by the LLC rather than by the U.S. citizen:

Canada, Finland, Ireland (for real property as well), Italy, Japan, Philippines, Poland and Sweden. As a practical

matter, transfers of property with a situs in other jurisdictions that have mandatory inheritance rules to a U.S. LLC

may still afford protection in these jurisdictions because judicial proceedings, which are not common in the

administration of a succession, may be required to enforce these rules on property not owned in the decedent's own

name.

In the case of a U.S. citizen domiciled or resident in a non-U.S. jurisdiction, the protection afforded by a U.S. LLC is

often less, especially if the situs country applies the law of domicile or residence to the inheritance of intangible

assets, because the inheritance of the U.S. citizen's LLC interest would then be governed by the law of the non-U.S.

country where the U.S. citizen is considered most likely domiciled or resident. But here, local "private international

law" may help: Switzerland allows a non-Swiss national, even if a Swiss resident, to elect to have national law apply

to Swiss as well as non-Swiss property.

Each of Poland, Spain and Sweden applies nationality law to its residents but does not necessarily apply its own law

even when nationality law would defer to the law of residency (technically, "accept remission" or "renvoi"), so that U.S.

law could still apply to all property of a Spanish or Swedish national, even with respect to Spanish or Swedish real

property.

In the case of Italy, which follows the nationality principle but accepts remission, a U.S. citizen may be

able to achieve the same result by directing in his or her will that remission should not apply.

Transfer of Brazilian

property owned by a U.S. citizen residing in Brazil to a U.S. LLC would cause Brazilian rules not to apply to it.

Supplemental measures. In cases where a transfer of local assets to a U.S. LLC does not completely exempt the

property from local inheritance rules, the transfer may still help accomplish the desired result. In some jurisdictions,

transfers of "reserve" property to a U.S. LLC would be voidable but not void. In many jurisdictions, an heir who claims

to be disadvantaged by a pre-mortem transfer must take affirmative steps to assert claims against transferred

property in the courts of that jurisdiction.

In Argentina, for example, a court may consider such circumstances as whether the transfer to the LLC was for

adequate and full consideration. When the assets were directly acquired by the LLC, an Argentine court is less likely

to set aside the transfer. In some jurisdictions, a court may also take into account the degree to which, as a practical

matter, the disposition of the assets of the LLC according to a U.S. citizen's testamentary plan would be as generous

to an heir as the satisfaction of a mandatory heirship share.

When a transfer of non-U.S. assets to a U.S. LLC does not afford unquestionable protection from local inheritance

rules, a second and even a third "line of defense" should be applied, such as an agreement by the beneficiaries of the

U.S. estate, as a condition to their inheriting under the U.S. plan, not to challenge any of the transfers to the U.S. LLC

nor to require that the transfers be added back in any local "reserve" calculation and to sign any local instruments of

renunciation that may be necessary to fulfill this purpose.

Most countries surveyed have provisions for postmortem

renunciation of statutory shares, and several countries—Austria, Denmark, Finland, Germany, Poland, Sweden,

Switzerland, and Taiwan—even allow pre-mortem renunciations of forced or mandatory inheritance shares.

An even stronger line of defense would be to include an in terrorem clause in the U.S. will that would disinherit any

beneficiary who chose to try to enforce rights under non-U.S. law that violate the estate plan. An alternative,

especially in states that disfavor in terrorem clauses, would be to condition legacies under a U.S. will, whether

outright or in trust, on cooperation in the postmortem implementation of the U.S. plan. Such conditions should be

enforceable in any U.S. jurisdiction (except possibly Louisiana) on the basis that a beneficiary would have no legal

right to compel a legacy from the decedent and therefore the decedent can impose any condition that does not violate

public policy. Conditional bequests are not generally contrary to public policy in the United States, and it is to U.S.

courts that estate fiduciaries as well as beneficiaries of a U.S. citizen would look to enforce the terms of a U.S. will or

will substitute.

Impact on unlimited liability. Of the surveyed countries, the following provide that persons who inherit property from

a decedent generally inherit unlimited personal liability for their decedent's unsatisfied debts: Argentina, Austria,

Belgium, Chile, France, Germany, Italy, Japan, Korea, Netherlands, Poland, Spain, Switzerland, and Taiwan. Some

countries—including Belgium, Germany, Italy, Spain, Switzerland, and Taiwan—do not apply this principle if, under

their choice of law rules, their own law does not apply to a decedent's succession. Thus, the efficacy of a transfer of

assets in any of these jurisdictions to a U.S. LLC would depend on the extent to which such a transfer would protect

the assets from the reach of the inheritance rules of that jurisdiction.

Impact on inheritance taxes. Of the surveyed countries, the following impose meaningful inheritance or inheritance-

related taxes: Belgium (regional), Brazil (state level), Canada, (deemed capital gains tax), Chile, Denmark, Finland,

France, Germany, Ireland, Italy, Japan, Korea, Monaco (not on transfers to spouses, descendants and ascendants),

Netherlands, Philippines ("estate tax"), Poland, South Africa, Spain, Switzerland (cantonal with total exemption for

spouses and exemptions or low rates for descendants), Taiwan, Ukraine, and the United Kingdom.

U.S. citizen `domiciled' or `resident' in the United States. It appears that transfers by a U.S. citizen of assets located

in the following jurisdictions to a U.S. LLC should cause the assets not to be subject to that jurisdiction's inheritance

taxes, at least if the U.S. citizen is not considered by that jurisdiction to be its domiciliary or resident (or, in the case of

Taiwan, a national): Belgium, Brazil (unless an heir is a Brazilian resident or the transferred assets are mainly real

estate), Canada, Chile, Denmark, Finland (unless an heir is a Finnish resident or an asset is Finnish real estate or a

Finnish real estate company interest), France (only for moveable assets), Germany (as long as the LLC qualifies as a

corporation for German tax purposes and an heir is not a German resident), Ireland (as long as an heir is not an Irish

resident), Italy (if interests in the LLC are not solely owned by the decedent), Japan (unless an heir is a Japanese

resident), Korea (but subject to a "clawback" for some transfers made within the previous five years), Monaco,

Netherlands (as long as the assets of the LLC do not consist principally of Netherlands real property), Philippines,

Poland, South Africa, Spain (in certain cases for immoveable assets only as long as an heir is not a Spanish resident),

Taiwan, Ukraine (as long as an heir is not a Ukrainian resident), and the United Kingdom. The same exclusion

appears to apply to local real property transfer taxes on the inheritance of Mexican real property.

One must keep in mind that the U.S. estate tax credit under IRC Section 2014 may be useless if there is no U.S. tax

against which to apply the non-U.S. tax payment and when there is a U.S. tax, the effective non-U.S. tax rate on the

non-U.S. property may be higher than the effective U.S. rate. Therefore, by removing the property from taxation in the

non-U.S. country, one may be able to avoid any non-creditable non-U.S. tax entirely.

U.S. citizen residing abroad. The estate of a U.S. citizen residing in one of the above-mentioned countries could be

subject to that country's inheritance tax on all property, including U.S. property. A beneficiary of that U.S. citizen who

resides in one of these countries other than Brazil could be subject to inheritance tax on inherited U.S. property as

well as inherited property located in that country.

The Section 2014 credit does not cover non-U.S. taxes on U.S. property and the United States does not have estate

tax treaties with many countries, including, of the surveyed countries that tax inheritances, Belgium, Chile, Denmark,

Korea, Philippines, and Ukraine. Denmark, Chile, Korea, and the Philippines have their own foreign death tax credits,

each of which appears to effectively provide a credit against local tax for the U.S. estate tax on U.S. property;

Belgium gives a credit for non-Belgian taxes on non-Belgian real property. For countries like the Ukraine, to claim the

benefit of the Section 2014 credit for non-U.S inheritance/estate taxes on U.S. property, one may have to consider

placing the U.S. assets in a special holding company organized under the laws of the country where a U.S. citizen

resides in order to convert the U.S. assets into non-U.S. assets eligible for the credit.

The special holding company

could still be owned by the U.S. LLC, at least as long as the U.S. citizen is the only member of the LLC, thus

preserving the unity of the estate plan and the jurisdiction of a U.S. court over the administration of all estate assets.

Income tax issues

A decision to adopt a strategy of organizing all non-U.S. assets of a U.S. citizen to a U.S. LLC can be made only after

taking into account all U.S. as well as non-U.S. tax consequences of the transfers and the tax treatment of the U.S.

LLC once the transfers have been completed. From a U.S. tax point of view, the U.S. LLC would be disregarded as

long as the U.S. citizen is the sole owner or treated as a partnership if there are two or more owners, absent a check-

the-box election to the contrary.

Among the surveyed countries, the LLC would or could be treated as a pass-through entity in France and Switzerland,

much as in the United States. Germany looks to several different factors to determine if an entity should be taxed as

a corporation or as a partnership: The limited liability feature of the LLC makes it more likely to be treated as a

corporation but placing a limit on the duration of the LLC might help avoid that result.

Similar considerations may

apply for Austria and Korea.

When applicable tax treaty addresses treatment of LLC with U. S. owners. The Fifth Protocol to the United

States-Canada Income Tax Treaty—not yet in force—provides for LLCs to be treated by Canada as pass-through

entities rather than as corporations. The Canadian Protocol evidences a significant recent policy trend of the U.S.

Treasury to expand the number of jurisdictions that confer treaty benefits for the owners of U.S. pass-through entities

so that non-U.S. jurisdictions will treat U.S. partners, members or shareholders of such entities, for treaty purposes, in

a manner consistent with their treatment under U.S. tax law. Thus, if an income tax treaty between the United States

and Country X provides an exception from gains tax on the sale of property located in Country X that belongs to a

U.S. resident, that exemption should be available to the U.S. tax resident even if the property is not directly owned by

the U.S. tax resident but owned through a pass-through entity of which a U.S. tax resident is a family member or

beneficiary.

This principle of consistency is now enshrined in the 2001 U.K. Treaty,

the most recent Protocols to the French,

Japanese and Swedish Treaties, and recent Competent Authority Agreements under the Mexican, Spanish and New

Zealand Treaties. This principle would seem to dictate, in instances where Country X is permitted to impose a gains

tax on transfers of real property in Country X, that any transfer of real property in Country X to or from an entity

considered by Country X to be a separate entity but considered by the United States to be a pass-through should be

disregarded as to any U.S. owner of the pass-through and therefore be exempt from Country X's gains tax to the

extent of such U.S. ownership. If this argument is valid and this principle continues to be incorporated in upcoming

U.S. income tax treaties and related agreements, one of the most important tax obstacles to the planning for which

this article advocates may be removed.

When LLC is treated as corporation under non-U.S. tax rules. In the following countries to which no treaty

protection for the pass-through characteristics of U.S. LLCs currently applies, it appears the LLC would be taxed as

(or like) a permanent establishment at corporate tax rates: Argentina (for income from Argentine real estate),

Australia, Austria (for income from Austrian real estate), Belgium, Brazil, Costa Rica, Denmark, Germany,

Netherlands, Ireland, Israel, Russia, South Africa (with respect to South African business interests), Spain (depending

on nature of activities in Spain), Sweden, and Ukraine.

In the case of a solely-owned LLC classified as a corporation by the non-U.S. jurisdiction, the United States

disregards the foreign characterization of the LLC as much as it does its U.S. status as a separate legal entity. As a

result, the taxes paid by the LLC to the non-U.S. jurisdictions should be treated as paid by the U.S. citizen owner and

therefore fully creditable against the U.S. citizen's taxes on the same income. If the LLC had more than one member,

the non-U.S. taxes should be similarly allocated to the LLC members for credit purposes.

However, other issues

need to be considered. For example, if a country taxes the U.S. LLC at a higher rate of taxation than that to which a

U.S. citizen or the members of an LLC are subject, there could be an additional cost. Corporate rates of tax in most of

the surveyed countries do not exceed 35% but withholding or similar taxes on dividends and distributions imposed by

jurisdictions such as Germany, South Africa and Spain could push the effective tax rate above U.S. rates, unless, as

is the case with Chile, the corporate tax is credited against the withholding tax. Excess foreign tax will generally not

be creditable against U.S. income tax unless the U.S. citizen has other non-U.S. source income that is taxed at a

lower rate than the U.S. tax in the same year or in an eligible carryover year.

The imposition of a value-added tax

("VAT tax") by a jurisdiction such as the Ukraine could also push the effective tax rate above 35% and, in any event,

VAT tax is not generally creditable for U.S. income tax purposes.

Coping with possible non-U.S. capital gains taxes. Some countries may impose a capital gains tax on the transfer

to a U.S. LLC of real property that the U.S. citizen acquired in his or her own name before transferring the assets to

the LLC. These countries include Argentina (nominal rate of 1.5%), Australia (but not if U.S. citizen is only

shareholder), Canada (if the LLC is treated as a corporation), China, Denmark (except for a home), Finland, France,

Germany, Ireland, Japan, Philippines, Poland, Russia, South Africa, Spain, Sweden, Switzerland (cantonal), and

Taiwan.

A transfer of real property in Italy or Monaco would incur various registration or transfer taxes and duties but no gains

tax. A transfer of Spanish real property would be subject to transfer and stamp duties of 7%. A transfer of Brazilian

real property would incur a transfer tax of 2% to 6% but no capital gains tax as long as the property transferred to the

LLC is capitalized at cost rather than market value. Netherlands imposes 6% transfer tax and Singapore and Hong

Kong impose stamp duties of up to 3% and 3.75% respectively. It cannot be emphasized too much that in virtually all

these instances no such capital gains or transfer taxes would be imposed if the non-U.S. real property were

purchased directly by the LLC.

The transfer of business assets of some countries to a U.S. LLC may also incur gains or transfer taxes, including

business interests in Canada, Denmark, Philippines, and Sweden. Contribution of retail or industrial real property in

Mexico, even if no capital gain taxes were incurred by virtue of the United States-Mexico Competent Authority

Agreement, may still give rise to a 15% value added tax, which, with proper planning, may be eligible for a

subsequent Mexican credit or refund. Again, initial acquisition of such non-U.S. business interests by the U.S. LLC

would avoid these taxes.

If one is dealing with a jurisdiction with which the United States does not have an income tax treaty or the relevant

treaty does not adequately address the tax treatment of pass-through entities owned by U.S. persons, any transfer of

non-U.S. assets to a U.S. LLC by a U.S. citizen that triggers a non-U.S. gains tax will not be a recognition event for

U.S. income tax purposes and, therefore, no U.S. income tax credit for the foreign tax would be currently available.

In that event, one could consider having the U.S. LLC form a wholly-owned subsidiary in the non-U.S. country. Since

the LLC is a disregarded or pass-through entity, the contribution of the non-U.S. assets to the non-U.S. subsidiary

would trigger U.S. capital gains tax against which the capital gains tax paid to the non-U.S. country could be claimed

as an income tax credit. The cost basis for gains tax purposes would presumably be "stepped up" in both countries to

the value on the date of the transfer. Once the transfer was complete, the U.S. citizen or LLC could make an election

to have the subsidiary treated for U.S. income tax purposes as a partnership, and any subsequent sale of the

property could then be taxed in both countries at the same time with a parallel increase in basis and a U.S. credit for

the tax paid to the other country.

Alternative holding entities

If it is determined that using a wholly-owned U.S. LLC as a holding entity would have adverse capital gains or other

tax consequences, serious inquiry should be made about the utility of a partnership, including a limited partnership,

as a holding entity to accomplish the unitary estate planning objectives that this article advocates. The use of a

partnership to accomplish this result appears to have some promise in Austria, Ireland and the United Kingdom and

may, with appropriate adjustments, work in other jurisdictions as well.

For property located in a common law jurisdiction, a trust may be another alternative, but, at least in the United

Kingdom, there may be a mismatch between U.S. and U.K. tax rules even more serious than with an LLC. The status

of trusts in China, Japan, and Korea deserves monitoring. A U.S. trust might be able to act as an owner of property in

civil law jurisdictions that have ratified or are expected to ratify the Hague Convention on the Recognition of Trusts

(Italy, Luxemburg, Monaco, Netherlands, and Switzerland) as well as countries such as Austria, Belgium and France,

which, in their internal law, now recognize trusts organized in common law countries as having legal status.

Final word—When more than one will must be used

In some cases, organizing the disposition of all the non-U.S. assets of a U.S. citizen under one will or as part of a U.S.

holding entity may not be feasible. Take real property in Italy: heirs of Italian real property are exempt from Italian

capital gains tax on the sale of the property.

If the heirs are U.S. persons, there will be no U.S. gains tax on pre-

mortem appreciation. Transferring the Italian real property to a U.S. LLC might jeopardize the Italian gains tax

exclusion. In this case, the U.S. will could still direct the disposition of the Italian property, even if Italian court

proceedings would be required to enforce the will. As already noted, Italy is one of the few "civilian" countries that

have ratified the Hague Convention on the Recognition of Trusts; transfer of Italian real property to a testamentary

trust under a U.S. will may be feasible if the U.S. will directs that U.S. law should apply and that Italy should not

"accept remission."

If recognition of a U.S. will in a non-U.S. jurisdiction would be difficult or a non-U.S. jurisdiction would apply its own

law and thereby endanger the dispositions under the U.S. will, the measures identified above as "second lines of

defense" such as inheritance agreements, non-U.S. inheritance renunciations, in terrorem clauses, and conditional

bequests must play a primary role, even if resort to a non-U.S. will must still be had.

Great care must be taken to ensure that any non-U.S. will is properly coordinated with the U.S. will. U.S. clients need

to understand clearly that U.S. counsel must be consulted when any property is acquired abroad and when any non-

U.S. testamentary instruments are executed. As emphasized above, the effectiveness of a U.S. holding company

strategy is often greater when the U.S. entity has made the initial acquisition of non-U.S. property and, in such cases,

resort to a non-U.S. will should not be necessary. But, whatever the circumstances, any acquisition of non-U.S.

property and any execution of a non-U.S. will must always invite review of the U.S. will as well as revision and re-

execution of the U.S. estate planning documents after the non-U.S. transactions are complete.

PRACTICE NOTES

The first step in international planning for U.S. citizens should be to consider a `holding company' approach and then

to supplement it with other measures to the extent that it cannot stand on its own.

Exhibit 1. Consultants' Contact Information

ARGENTINA:

Diego Fissore

G. BREUER

25 de May 460, 4 Piso

C 1002 ABJ, Buenos Aires

Argentina

T: 54

-11 4313-8100

F: 54

-11 4313-8180

-MAIL: dfissore@gbreuer.com.ar

www.gbreuer.com.ar

AUSTRALIA:

David Russell QC

Ground Floor Wentworth Chambers

174-180 Phillip Street

Sydney NSW 2000

Australia

T: 61 7 3236 2943

F: 61 7 3236 2047

EMAIL:

Russell@gibbschambers.com

www.wentworthchambers.com.au

AUSTRIA:

Law Offices of Dr. F. Schwank

Stock Exchange Building

Wipplingerstrasse 34

A-1010 Vienna

Austria

T: 43 1 533 57 04

F: 43 1 533 57 06

EMAIL: offices@schwank.com

BELGIUM:

Jacques Malherbe

Liedekerke Wolters Waelbroeck

Kirkpatrick Bd de l'Empereur, 3

Brussels, B-1000

Belgium

T: 32 2 551 1691

F: 32 2 790 1032

EMAIL: j.malherbe@liedekerke.com

BRAZIL:

Alexandre Lindenbojm

Velloza, Girotto e Lindenbojm

Advogados Associados

Avenida Paulista, 901 - 17° e 18°

andaras

Sao Paulo -SP - CEP 01311-100,

Brazil

T: 55 11 3145

-0465

F: 55 11 3145

-0052

EMAIL:

alexandre.lindenboj[email protected]

www.vgladv.com.br

CANADA:

Timothy G. Youdan

Davies, Ward Phillips & Vineberg LLP

P.O. Box 63

Toronto, Ontario M5X 1B1

Canada

T: 416 367 6904

F: 416 863 0871

EMAIL: ty[email protected]

Carl MacArthur

c/o Davies, Ward Phillips & Vineberg LLP

P.O. Box 63

Toronto, Ontario M5X 1B1

Canada

T: 416 367 6904

F: 416 863 0871

EMAIL: ty[email protected]

CHILE:

Dr. Jose Maria Eyzaguirre Garcia

Claro y Cia

Apoquindo 3721, floor 13, Las Condes

Santiago

Chile

T: 562 367 3000

F: 562 367 3003

EMAIL: jmeyzaguirreg@claro.cl

CHINA:

Hao Wang

RayYin & Partners P.R.C. Lawyers

Room 02 15/F, Office Tower 15

39 Dongsanhuan Zhonglu, Chaoyang

District

Beijing 100022, P.R. China

T: 0086

-10-58693072

F: 0086

-10-58693073

EMAIL: wh@rayyinlawyer.com

www.rayyinlawyer.com

COSTA RICA:

Alejandro Antillon, LL.M.

Managing Partner

PACHECO COTO

Edificio Pacheco.Coto, Forum 2

Lindora

San Jose, Costa Rica

T: 506 2505 0900

F: 506 2505 0907

EMAIL:

alejandro.antillon@pachecocoto.com

www.pachecocoto.com

DENMARK:

Jorn Qviste

Johan Schluter Law Offices

10 Hojbro Plads

T: 45 32 71 20 00

45 33 91 33 63

EMAIL: jq@jslaw.dk

DK-1200 Copenhagen K

Denmark

www.jslaw.dk

FINLAND:

Sami Tuominen

Borenius & Kemppinen Ltd.

Yrjonakatu 13 A

FI-00120 Helsinki

Finland

T: 358 9 6153 3585

F: 358 9 6153 3499

MOBILE: 358 50 331 1901

EMAIL: sami.tuominen@borenius.com

FRANCE:

Maitre Jean-Marc Tirard

Avocat a la Cour

Tirard Naudin

10 rue Clement Marot

75008 Paris, France

T: 33 (0) 1 53 57 36 00

F: 33 (0) 1 47 23 63 31

EMAIL: tirard.naudin@online.fr

GERMANY:

Dr. Christian von Oertzen

Flick Goeke Schaumburg

Platz der Einheit 1

Frankfurt am Main, 60327

Germany

T: 0 69 71 703

-0

F: 0 69 71 703 100

EMAIL: Christian.von

-oertzen@fgs.de

HONG KONG:

Thomas Lee

Thomas Lee & Partners Limited

3201-02, 32/F., Alexandra House,

18 Chater Road, Central, Hong Kong

T: 852 3103 4678

852 3106 4629

EMAIL: thomaslee@tlandpartners.com

Website: www.tlandpartners.com

INDIA:

Vibhu Bakru

Advocate

W-129

Greater Kailash-II

New Delhi

India

EMAIL: vibhu@lawconsult.org

Bijal Ajinkya

Hanisha Amesur

Nishith Desai Associates

93 B. Mittal Court, Nariman Point

Mumbai 400 021

India

T: 91 22 6669 5000

F: 91 22 6669 5001

EMAIL: bijal@nishithdesai.com

EMAIL: hanisha@nishithdesai.com

IRELAND:

Paraic Madigan

Matheson Ormsby Prentice

70 Sir John Rogerson's Quay

Dublin, 2

Ireland

T: 353 1 232 2187

F: 353 1 232 3333

EMAIL: paraic.madigan@mop.ie

ISRAEL:

Alon Kaplan

Alon Kaplan Law Firm

1 King David Blvd.

Tel Aviv. 64953

Israel

T: 972 3 695 4463

F: 972 3 695 5575

EMAIL: alon@kaplex.com

Shai Dover

c/o Alon Kaplan

Alon Kaplan Law Firm

1 King David Blvd.

T: 972 3 695 4463

F: 972 3 695 5575

EMAIL: alon@kaplex.com

Tel Aviv. 64953

Israel

ITALY:

Avvocato Antonia Marsaglia,

LLB TEP

Studio Legale Marsaglia -

PLG Milan

Milan, Italy

T: 39 02 5518 7569

F: 39

02 5518 7570

EMAIL: amarsaglia@marsaglialex.it

www.marsaglialex.it

JAPAN:

Masatami Otsuka

Jones Day

Kamiyacho Prime Place

1-17, Toranomon 4-chome

Minato-ku, Tokyo 105-0001, Japan

T: 81 3 6800 1818

F: 81 3 5401 2725

EMAIL: motsuka@jonesday.com

KOREA:

Woo Taik Kim

Kim & Chang

Seyang Building

223 Naeja-dong, Jongno-gu

110-720 Seoul, Korea

T: 82 2 3703 1020

F: 82 2 723 3287

EMAIL: wtkim@kimchang.com

MEXICO:

Luis Gerardo del Valle Torres

Edificio Omega

Campos Eliseos 345-501B

Chapultepec Polanco

11560 Mexico, D.I.

T: 52 55 9126 1561

F: 52 55 9126 1573

EMAIL: lvalle@dvtmx.com

MONACO:

William Easun

Lawrence Graham

Est-Quest

24 bd Princesse Charlotte

MC 98000 Monaco

T: 377 93 10 55 10

F: 377 93 10 55 11

EMAIL: William.Easun@lg.legal.

com

www.lg

-legal.com

NETHERLANDS:

Ineke A. Koele, PhD

Benvalor Attorneys-at-Law -

Tax Lawyers

Wilhelminapark 60-61

3581 NP Utrecht

The Netherlands

T: 31 (0) 88 30 300 30

F: 31 (0) 88 30 300 33

EMAIL: koele@Benvalor.com

www.benvalor.com

NEW ZEALAND:

John W. Hart

John W. Hart Limited -

Tax & Trust Law

PO Box 6011

Level 6, 36 Kitchener Street

Auckland 1141, New Zealand

T: 64 9 307 3327

F: 64 9 307 3326

MOB: 64 21 980 920

EMAIL: John.Hart@tax

-trusts.com

PANAMA:

Alvaro J. Aguilar

Fabrega, Molino & Mulino

Ave. Samuel Lewis y Calle 53

Edif. Omega, Mezzanine

Panama City, Rep. de Panama Apdo

4493 Zona 5

T. 507 263 5333

F. 507 264 0181

EMAIL: aguilara_5389@yahoo.fr

PHILIPPINES:

Grace Marie Tan

Tan Venturanza Valdez

2704 East Tower

Philippine Stock Exchange Center

Ortigas Center, Pasig City,

Metro Manila, Philippines

T: 632 6374066

F: 632 635 4793

EMAIL: umgpt@yahoo.com

POLAND:

Szymon Gostynski

Kancelaria Adwokacka Szymon

Gostynski

ul. Sarego 2, II p.

PL-31047 Krakow

Poland

T: 48 12-429 20 25

F: 48 12

-429 20 26

EMAIL: kancelaria@gostynski.net

EMAIL: szymon@gostynski.net

Jerzy Gawel

Kancelaria Adwokacka Szymon

Gostynski

ul. Sarego 2, II p.

PL-31047 Krakow

Poland

T: 48 12

-429 20 25

F: 48 12

-429 20 26

MOBILE: 48 515 18 18 77

EMAIL: jerzy.gawel@gostynski.net

www.gostynski.net

RUSSIA:

Maksim Barashev

Barabashev & Partners

2-27 Michurinsky prospect

Moscow

119607 Russia

T: 7 495 695 3579

F: 7 495 695 9445

EMAIL: barashev@barabashev.com

EMAIL: max@

barabashev.com

Kirill Shcherbakov

Barabashev & Partners

2-27 Michurinsky Prospect

Moscow

119607 Russia

T: 7 495 695 3579

F: 7 495 695 9445

EMAIL: kirill@barabashev.com

SINGAPORE:

Ong Sim Ho

Drew & Napier LLC

20 Raffles Place

#17-00 Ocean Towers

Singapore 048620

T. 65 6531 2250

F. 65 6535 4906

EMAIL: simho.ong@drewnapier.com

SOUTH AFRICA:

Hymie Reuvin Levin

PO Box 52235

Saxonwold, 2132 Johannesburg,

Transvaal

South Africa

T: (011) 788

-1625

F: (011) 8803439

EMAIL: info@hrlevin.co.za

Gwynneth Rowe

c/o Hymie Reuvin Levin

PO Box 52235

Saxonwold, 2132 Johannesburg,

Transvaal

South Africa

T: (011) 788

-1625

F: (011) 880

-3439

EMAIL: info@hrlevin.co.za

SPAIN:

Florentino Carreno

Jorge Hernandez

CUATRECASAS

Velazquez 63

T: 34 915247111

F: 34 915247709

EMAIL: florentino.carreno

@cuatrecasas.com

Madrid 28001

Spain

jorge.hernandez@cuatrecasas.com

www.cuatrecasas.com

SWEDEN:

Roger Persson Osterman

Advokatfirman Andreasson & Co.

Normalmstorg 14

SE-11 46 Stockholm,

Sweden

T: 46 8 678 05 60

F: 46 8 611 46 05

MOBILE: 46 709 50 72 16

EMAIL: roger.persson.osterman

@andreasson-co.com

SWITZERLAND:

Dr. Edgar H. Paltzer, LL.M. and TEP

Niederer Kraft & Frey AG

Rechtsanwalt

Bahnhofstrasse 13

CH-8001 Zurich

Switzerland

T: 41

-58-800 8000

F: 41

-58-800 8080

Dir. T: 41

-58-800 8327

EMAIL: edgar.h.paltzer@nkf.ch

www.nkf.ch

TAIWAN:

Nigel N.T. Li, Josephine Peng

& J.C. Liu

Lee and Li, Attorneys-at-Law

9F, No. 201, Tun Hua N. Road

Taipei 105, Taiwan, R.O.C.

DID: 886

-2183-2108

866-2-2713-3966

F: 866

-2-2713-3966

EMAIL: jcliu@leeandli.com

UKRAINE:

Dmitri E. Seletski

Choate & Seletski

c/o Nataliya Kravchenko, Esq.

Prospect Geroyev Stalingrada,

16-D, Suite 203

Kiev 04210, Ukraine

Dmitri E. Seletski

Choate & Seletski

100 Prospect Ave, Suite 3B

Hackensack, NJ 07601

T: 201

-488-3817

EMAIL: kievone@yahoo.com

EMAIL: dmitri@choateseletski.com

www.choateseletski.com

UNITED ARAB EMIRATES:

Daniel J. Greenwald, III

Chadbourne & Parke LLC

City Tower 1

Sheikh Zayed Road

P.O. Box 23927, Dubai

United Arab Emirates

T: 971 4 331 6123

F: 971 4 331 0844

EMAIL: dgreenwald@chadbourne.com

www.chadbourne.com

Rasha Haloub

Chadbourne & Parke LLC

City Tower 1

Sheikh Zayed Road

P.O. Box 23927, Dubai

United Arab Emirates

T: 971 4

331 6123

F: 971 4 331 0844

EMAIL: rhaloub@chadbourne.com

www.chadbourne.com

UNITED KINGDOM:

Mark Summers

Speechly Bircham LLP

6 New Street Square

London ECA4 3LX

United Kingdom

DID: 44 (0) 20 7427 6740

F: 44 (0) 20 7427 6700

MOB: 44 (0) 7876 342260

EMAIL: Mark.Summers@speechlys.com

www.speechlys.com

The author prepared this article in consultation with the following international group of estate planning

experts: Argentina: Diego Fissore; Australia: David Russell; Austria: Friedrich Schwank; Belgium: Jacques

Malherbe; Brazil: Alexandre Lindenbojm; Canada: Timothy G. Youdan and Carl MacArthur; Chile: José Maria

Eyzaguirre Garcia; China: Hao Wang; Costa Rica: Alejandro Antillon; Denmark: Jφrn Qviste; Finland: Sami

Tuominen; France: Jean-Marc Tirard; Germany: Christian von Oertzen; Hong Kong: Thomas Lee; India: Vibhu

Bakhru, Bijal Ajinkya, and Hanisha Amesur; Ireland: Paraic Madigan; Israel: Alon Kaplan and Shai Dover; Italy:

Antonia Marsaglia; Japan: Masatami Otsuka; Korea: Woo Taik Kim; Mexico: Luis Gerardo del Valle Torres; Monaco:

William Easun; Netherlands: Ineke Koele; New Zealand: John Hart; Panama: Alvaro Aguilar Alfu; Philippines: Grace

Marie Tan; Poland: Szymon Gostynski and Jerzy Gawel; Russia: Maksim Barashev and Kirill

Shcherbakov; Singapore: Ong Sim Ho; South Africa: Hymie Reuvin Levin and Gwynneth Rowe; Spain: Florentino

Carreño and Jorge Hernandez; Sweden: Roger Persson Österman; Switzerland: Edgar Paltzer; Taiwan: Nigel N.T. Li,

Josephine Peng, and J.C. Liu; Ukraine: Dmitri Seletski; United Arab Emirates: Daniel Greenwald and Rasha

Haloub; United Kingdom: Mark Summers. See Exhibit 1 for the consultants' contact information.

Commonly referred to as the "Brussels Regime," all members of the European Union are now subject to the

Brussels I Regulation (officially the Council Regulation (EC) No. 44/2001 of 12/22/00) on jurisdiction and the

recognition and enforcement of judgments in civil and commercial matters. The Brussels I Regulation follows and

incorporates the provisions of the 1968 Brussels Convention and the 1988 Lugano Convention dealing with the same

issues.

Major initiatives include the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral

Awards (Montevideo, 1979) and the Inter-American Convention on Jurisdiction in the International Sphere for the

Extraterritorial Validity of Foreign Judgments (La Paz, 1984), and, in addition with respect to the Mercosur countries

(Argentina, Brazil, Paraguay and Uruguay), the Protocol of Cooperation and Jurisdictional Assistance on Civil,

Commercial, Labor and Administrative Matters (Las Leñas, 1992).

The "Forty Recommendations" of the Financial Action Task Force (established by the G-7 Summit in Paris in 1989)

include "Measures to Be Taken by Financial Institutions and Non-Financial Businesses and Professions to Prevent

Money Laundering and Terrorist Financing" and "Institutional and Other Measures Necessary in Systems for

Combating Money Laundering and Terrorist Financing."

In Switzerland, for example, transfers made in the five years prior to death and transfers made with an intent to

deprive an heir of a reserve portion must be added back. Other countries have no necessary limit on the duration of

the "look-back" period.

That this article looks for ways to protect a U.S. citizen's estate plan from being defeated by mandatory inheritance

rules or other pre-emptive inheritance provisions does not in any way imply that these inheritance rules are wrong as

a matter of policy. Avoidance of the application of these rules, however, is generally required in order to construct an

estate plan consistent with current U.S. property and tax concepts. Wise estate planning, in the author's view, often

requires a judicious blend of outright dispositions with dispositions in trust.

China limits the liability of heirs to the assets of the succession but any renunciation of an inheritance governed by

Chinese law—whether for U.S. tax planning or other reasons—must be exercised within only two months of the

decedent's death.

In the United Arab Emirates, inheritance matters are subject to the jurisdiction of the religious (Sharia) courts, for

whom civil and common law choice-of-law concepts are relatively novel, and which therefore, in practice, generally

apply Sharia law across the board.

Copies of the survey, responses, and related correspondence are on file at the offices of Phillips Nizer LLP, the

author's law firm.

In Costa Rica, community property rules become effective only upon the dissolution of a marriage or civil union.

Jurisdiction over inheritance, in the UAE, is lodged in the Sharia courts, and these courts may be more easily

persuaded to ignore the formal rules of UAE "secular" law.

Belgium has a similar rule as long as the law of nationality cannot deprive an heir of a reserved portion.

For a helpful discussion of the relevant Spanish case law, see Hayton, European Succession Law, at pp. 456-457

(London).

See, Article 13, Law of May 31, 1995, No. 218, discussed by Hayton, supra note 13, at 331-332. This should be the

case where the relevant U.S. jurisdiction would not accept remission ("renvoi") or would otherwise honor such a

provision.

A renunciation of forced heirship rights generally serves a different purpose from a "qualified disclaimer" under U.S.

tax concepts. Presumably, in most instances, the consideration for renouncing a forced heirship right—usually asset

protection and the discharge of moral as well as legal obligations to family members—will satisfy the IRC requirement

of "full and adequate consideration" to avoid any U.S. gift tax liability.

Russia also allows renunciation but only of property inherited through the non-compulsory or "free" share, and

beneficiaries of a renunciation must generally be those eligible for mandatory shares from the renouncing party.

Under Article 25 of the U.S.-Ukraine Income Tax Treaty, which governs all types of taxes, Ukraine should not

impose higher inheritance taxes on a U.S. person holding Ukrainian property than it does on a Ukrainian person.

To avoid the application of Germany's forced heirship rules, however, it is advisable for the LLC to be treated as a

corporation.

See DT 19851A—United States of America: Scope: fiscally transparent persons from 2003

at www.hmrc.gov.uk/manuals/dtmanual/DT19851A.htm.

See Prop. Reg. 1.901-2(f)(3)(ii).

Some countries, such as Belgium, Germany, Ireland and the United Kingdom (when the owner is a U.K. resident)

may tax rent-free use of a home owned by a U.S. LLC that is treated as a corporation on an imputed income basis.

The mention of France and Italy in this sentence prescinds from the argument suggested above in the section

"Income tax issues—When applicable tax treaty addresses treatment of LLC with U.S. owners" (especially material to

which footnote 19 is attached) that, under such agreements as the recent Protocol to the United States-France

Income Tax Treaty and the recent United States-Spain Competent Authority Agreement, taxing a transfer by a U.S.

resident of an interest in French or Spanish real property to a U.S. LLC should not give rise to French or Spanish

capital gains tax because such a tax would be inconsistent with the "pass-through" nature of the U.S. LLC under U.S.

tax law.

I wish to acknowledge the contribution of my partner, Tiberio ("Tibi") Schwartz, to the thinking reflected in this

paragraph. In some cases, payment of the non-U.S. gains tax when no U.S. credit is available may still be tax-

efficient where a non-U.S. country has no special exemption for U.S. capital gains tax on real property passing at

death and no step-up in cost basis. The U.S. citizen would be effectively pre-paying the non-U.S. gains tax that heirs

would have to pay upon a sale of the property after the U.S. citizen's death, with funds that would otherwise be

subject to U.S. estate tax on the U.S. citizen's death.

Israel has a similar exemption for the sale of inherited Israeli real property interests used as a residence.

25 See note 14 and the accompanying text above.