The issues can indeed get thorny: Can an Australian deduct any business expenses in his home country if he and his wife live in Texas? Is a will written in Spain executable by a spouse in Greece? And don't even start on the thicket of prenup issues. "This whole area of international cross-border planning is an emerging area," says Suzanne Shier, director of wealth planning and tax strategy at Northern Trust, which manages more than $758 billion in assets.
All told, nearly five million Americans in 2010 were married to someone who was born in another country, twice as many as in 1960, according to the Minnesota Population Center. Other countries have had similar jumps. And the international mingling is only expected to continue, as more foreign-born business tycoons relocate to the U.S. from South Korea, China, Russia and fast-growing emerging markets to expand their ventures and scoop up local property.
It's not just tycoons driving this. The growing number of affluent people working overseas is a factor, as are changing tax codes, especially in some euro-stressed countries. After France announced plans last year to impose a 75 percent tax on citizens who earn above 1 million euros annually, many fled and found love elsewhere. Givner & Kaye's estate-planning law office in Los Angeles has netted so many new French clients that, to give them a warm welcome, the firm recently installed an espresso maker. "We are getting rave reviews for the cappuccino," says attorney Bruce Givner.
Tax experts say one of the biggest issues that comes up quickly among Americans is the so-called unlimited marital-deduction privilege. In the U.S., spouses can give or leave each other any amount of money, tax-free, as long as they're both U.S. citizens. But if one of them holds citizenship from another country, that could trigger an unexpected federal estate-tax hit—of as much as 39.6 percent for assets valued above $5.25 million. (That rate is up from 35 percent last year.) "This is a constant problem we have with our clients," says Steve Mindel, managing partner of the law firm Feinberg, Mindel, Brandt & Klein.
For many, part of the problem may just be more paperwork. In recent years, the Internal Revenue Service has tightened its global grip by raising penalties for tax evaders and rolling out new reporting requirements for wealthy expatriates to share more information about their foreign bank-account holdings. The U.S. is among one of the few countries that taxes global income, no matter where the American citizen lives. But tax experts say that normally softens when the country the citizen works in has a treaty with the U.S., because certain foreign tax credits may be allowed. When there is no treaty, some of those exceptions go out the window.
“Each country has its own twists on taxes that suddenly are part of the cross-border marriage experience.”
Of course, outside the U.S. each country has its own twists on taxes that suddenly are part of the cross-border marriage experience. According to Shomari Hearn, a financial adviser at Palisades Hudson Financial Group in Fort Lauderdale, Fla., one of his couples with a net worth of about $40 million spent three decades overpaying taxes. Here's how: The wife was born in Brazil, where the couple was married under a community-property regime. Under U.S. law, her Brazilian investment income shouldn't have counted toward her husband's income, but the couple kept paying tax on it. Hearn says he got some of the income back, but there was likely significant investment income he couldn't. "It's very possible he overpaid tens of thousands in taxes," says Hearn.
Inheritance is another tricker, and perhaps the most difficult when one spouse is European, advisers say. One of Givner's clients—an American physician—was set to inherit much of a $10 million estate when his German-born wife died in 2010. That is, until a rule known as "pflichtteil" (translation: forced heirship) meant their children in the U.S. were legally entitled to one-third of the inheritance under German law.
A global legal battle dragged on for two years, with the kids hiring attorneys in Deutschland, while the father used lawyers from both countries. An agreement was reached, but the details were undisclosed. The legal bill, however, came to $50,000 for the father alone. "Forced heirship rules are pretty common throughout Europe," says Givner.
Not surprising, one of the biggest complications for cross-border couples is dividing everything up if it all ends in divorce. Calculating the right tax deductions for spousal or child support, or enforcing custody rules, becomes increasingly difficult when one partner moves back to their country of origin. The enforceability of prenups varies across the globe, but such agreements can help when there are specifics about property division, advisers say. "You can imagine the complexity of dealing with this on an international level," says Mindel. There is one solution, though: Stay married.
Taxing Times
The number of cross-border marriages, where spouses hail from different countries, is rapidly rising—and so are their international tax and estate-planning issues.
Property Limits
Some countries have restrictions on joint ownership of property when one partner is from another country. That's particularly true in Switzerland, where some nonresidents can only buy vacation properties in designated areas, says Steve Mindel, managing partner of an L.A. law firm whose clients have struggled with this.
Inheritance Cuts
A German spouse may want to bequeath certain assets to his or her partner. But that doesn't mean everything will make it to the loved one. Thanks to "pflichtteil" in Germany, or a forced heirship rule that's also common in other European countries, children are normally entitled to a chunk of a parent's estate—usually a third of it.
Higher Taxes
France's president, François Hollande, triggered the exodus of some wealthy French citizens last year when he proposed a steep tax—75 percent for individuals who earn more than 1 million euros annually. A court later rejected the proposed tax, although the French government says it plans to try pushing it through again.
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