advice on inheritance planning

Hi,

Me and my wife are both US citizens, and we have two kids also US citizens. We are living in London since 2013, and purchase a house in UK couple years back. We would like to plan for inheritance to kids in case something happens to both of us. We dont have a house in US, but I have 401k, IRA accounts and investment accounts in US. Me and my wife have defined contribution plans in UK since we came here, and some amount of money in the bank accounts.

Since the accounts are distributed to many companies, it is getting harder to track, consolidating is not an option since I need to keep the retirement accounts in US and UK separately, UK one is still accumulating.

I would like to create a will so that;
- All of my and my wife's accounts are listed in the will, so that in case something happens, my kids will get access to the accounts quickly
- Need advice about tax consequences of my UK (house + retirement + cash accounts) and US assets (retirement + brokerage) transfer to my kids/spouse in case of own of us death

Can you advice me some advisors in UK/US who can help with the creation of the will?

Thanks
Erdem

You need to add your wife and children as beneficiaries to your 401k accounts and bank accounts.  Any bank accounts where they are not listed as beneficiaries will have to go through probate. 

401k accounts are subject to federal and possibly state taxes income tax plus federal and state estate tax. 

At death, any assets including UK assets that are inherited by US citizens would be considered income which is taxable by the US.  US citizens are suppose to pay taxes on their worldwide income no matter where they live. 

You may want to consider a living trust over a will.  There are tax advantages to it over a will.

You need to add your wife and children as beneficiaries to your 401k accounts and bank accounts.  Any bank accounts where they are not listed as beneficiaries will have to go through probate. 

401k accounts are subject to federal and possibly state taxes income tax plus federal and state estate tax. 

At death, any assets including UK assets that are inherited by US citizens would be considered income which is taxable by the US.  US citizens are suppose to pay taxes on their worldwide income no matter where they live. 

You may want to consider a living trust over a will.  There are tax advantages to it over a will.

A US domestic living will is generally considered a disaster for all UK tax purposes. Anyone with a typical California, New York, Florida, Georgia or other US living trust is always best advised to remove that structure well before moving to the UK.  It would never be suitable to create for a UK resident, unless the trust owner wants to pay additional UK inheritance tax.

The 401(k) and IRA may be subject to UK inheritance tax at death plus income tax when monies are withdrawn.  The OP would do best with a dually US/UK qualified lawyer to draft suitable wills.

Depending on how long you live outside the US, and if your intention was that the move be only temporary, not permanent, you maybe protected by the US tax treaty the US has with the country you live in.  You would be subjected to US tax rules and not the other countries.  I have a living trust and our tax consultant had no issue with it when I moved to the UK.  However, banking and investment accounts set-up after our move are not held in the trust.  They are held in joint-tenancy with my spouse given UK tax rules.

Depending on how long you live outside the US, and if your intention was that the move be only temporary, not permanent, you maybe protected by the US tax treaty the US has with the country you live in.  You would be subjected to US tax rules and not the other countries.  I have a living trust and our tax consultant had no issue with it when I moved to the UK.  However, banking and investment accounts set-up after our move are not held in the trust.  They are held in joint-tenancy with my spouse given UK tax rules.

A US domestic living trust could easily significantly increase the amount of UK IHT payable on the first and/or second death.  It would never be suitable to create for a UK resident.

It sounds however as if you have been sensibly cautious and have leading UK counsel's opinion on the UK IHT/ income tax & CGT treatment of the existing US living trust. Depending on the exact wording of your trust, some barristers are indeed willing to argue that such structures are either a bare trust or not a trust at all. What opinion did your barrister provide? To what extent is this opinion being disclosed to HMRC?

A treaty has no effect on trust residence.  The huge risk you describe for others in similar circumstances but with a different counsel's opinion is that other existing US trusts could be imported into the UK.

I realise that these issues can get complicated and the right answer is dependent on each individual's circumstances.  For example, as mentioned a US living trust is not the solution for a UK resident / citizen (as well I assume) if your life is in the UK. 

In my case, this is a temporary assignment in the UK and my family's intention is to move back to the US - probably within 10 years.   Also, my living trust was created over 10 years ago before I moved abroad to any country. 

Its best to find a tax consultant to discuss your circumstances and figure out the best solution.  With international implications involved, what is right for one individual may not be for another. 

I realise that these issues can get complicated and the right answer is dependent on each individual's circumstances.  For example, as mentioned a US living trust is not the solution for a UK resident / citizen (as well I assume) if your life is in the UK. 

In my case, this is a temporary assignment in the UK and my family's intention is to move back to the US - probably within 10 years.   Also, my living trust was created over 10 years ago before I moved abroad to any country.

From a UK perspective; the key question is whether that trust (created 10 yeas ago) might have now (accidentally) become UK resident because the trustees have become UK resident. 

Inheritance tax is affected by whether you are UK domiciled or not. You can be a UK resident but not UK-domiciled.
 

Inheritance tax is affected by whether you are UK domiciled or not. You can be a UK resident but not UK-domiciled.

Correct provided the individual will be leaving in less than 15 years (such as yourself), but concerning residency (father's domicile aside), someone who has been resident in the UK for 15 of the past 20 years will be "deemed domiciled" in the UK for IHT purposes.

Inheritance tax is affected by whether you are UK domiciled or not. You can be a UK resident but not UK-domiciled.
 

Correct. However, a UK resident trust is subject to 10 yearly charges to UK inheritance tax plus an exit charge if the trust is exported. It is a common misconception that inheritance tax is only charged at death (although it is mainly). 

I would like to add some observations about trust related matters.

I am not familiar with US living trusts. Are these trusts where the settlor is the main beneficiary?

I would agree with the comments about trust residence. If these are created by a US individual when he is US resident and has no UK connection, then the danger is that the trust becomes UK resident. There are specific rules relating to trust residence applying from 6 April 2007. The implications of becoming UK resident (and also later becoming non-resident at a later time) could be unpleasant.

As regards inheritance tax, the tax residence of the trusts is generally not important. Rather it is the situs of the trust assets. Any initial settlement of US assets should be within the “excluded property” rules. It would be quite different if UK assets were added. There could be IHT entry charges, as well as ten yearly and exit charges.

A US living trust is a legal document that  like a will indicates how you desire to distribute your assets (heirs) and if you have children (custody - to who).  A living trust bypasses probate and enables the trustee to carry out the wishes of the will. 

The trustee, which I think in the UK you would call the settlor, maybe a beneficiary.  In many cases the trustee maybe a child, or with couples the other spouse. 

Our tax consultant indicated our US living trust would not be an issue if anything happened while we lived in the US because we are not not UK-domiciled. Issue would arise if we lived in the UK for a certain amount of time which was more than we have planned for.

A US living trust is a legal document that  like a will indicates how you desire to distribute your assets (heirs) and if you have children (custody - to who).  A living trust bypasses probate and enables the trustee to carry out the wishes of the will. 

The trustee, which I think in the UK you would call the settlor, maybe a beneficiary.  In many cases the trustee maybe a child, or with couples the other spouse. 

Our tax consultant indicated our US living trust would not be an issue if anything happened while we lived in the US because we are not not UK-domiciled. Issue would arise if we lived in the UK for a certain amount of time which was more than we have planned for.

I concur with Dunedin. The main problem here is that the trust you are describing may be considered a trust for UK purposes and could have been been imported into the UK. If the trust has been imported, the trust (unlike you) cannot elect to claim the remittance basis. I would suggest checking with your tax adviser that you have counsel's opinion on the UK position of your specific trust.

I'm not sure what you mean by the trust has been "imported" into the UK.  Before my family's move, we consulted with top firm tax consultants which including their legal department.  They have many international clients that deal with this all the time. 

The reason my assets are in a US living trust is to ensure my assets do not go through probate which is an expense and are inherited by the heirs I have designated. 

I probably should add that all my assets are in the US except for a few bank accounts in the foreign countries I have lived in and the UK.  No investments outside the US. 

I believe the rule on where an individual is domiciled is what impacts inheritance tax rules.  I have one friend who is reaching the max to be still deemed non-UK domiciled and plans to move back to the US. 

Depending whether the UK is your domicile, what US state you have assets in, what nationality your heirs are, as well as how much assets you have, impact the right decision on how to plan your estate.  Thus, seeking legal and tax counsel is a wise thing to do.