By Norma Brenne Henning, J.D., Salvatori, Wood & Buckel, P.L. –
Second homes or investment properties in Florida are a good buy these days. Among foreign investors, the United States is still a favorite because of its stable and predictable legal system as compared to other destinations in the world. Southwest Florida has the added benefit of pristine beaches, safe communities and beautiful surroundings that are hard to find elsewhere.
To make ownership of a piece of paradise as worry free as possible, foreigners should be aware of what it means for them, their families and their heirs. Owners from Code-based Civil Law legal systems are often surprised at unforeseen tax or legal consequences or unnecessary expenses that could possibly be avoided with careful planning and preparation.
When in Rome (or Naples) …
No one likes to talk about death – so let’s talk about planning to protect your family from unnecessary stress and expense – in a way that Americans protect theirs. Here are some basic concepts:
When a person dies, all the assets that the person owns in their personal name that are not otherwise titled in joint name with right of survivorship, or pass by specific beneficiary designation are part of his/her probate estate. With respect to real estate, unless title is held joint with right of survivorship, or in the name of a trust or other entity, the real estate will be part of the decedent owner’s “Florida Probate Estate” and it’s distribution (even if designated in a Last Will and Testament) will be subject to Florida law, not the law of the foreigner’s home country. Further, under Florida law, spouses and minor children may have the right to claim a share of a decedent’s estate, irrespective of what the foreign decedent’s Will or home country’s laws may state.
Some choose to title their assets in such a manner to “avoid probate”. For example, married couples usually own their home jointly as tenants-by-the-entirety (with right of survivorship). Others who are not married may also choose to hold property with “right of survivorship”.
Occasionally, when appropriate, others choose to take title in a “revocable trust” – a legal entity that owns the property and can be administered by the initial owner (as Trustee) or anyone they nominate (as successor Trustee) – and ultimately distributed at the death of the grantor/settlor according to the terms of the trust.
From death … to taxes
First, a couple of definitions to keep in the back of your mind as you read further. There are three main classifications for purposes of taxation in the United States, namely United States Citizen, Resident Alien, and Non-Resident Alien.
The factors to determine whether someone is a Resident Alien for federal income tax purposes (generally based on the number of days one is present in the United States) are different than the factors to determine whether someone is a Resident Alien for federal estate and gift tax purposes (generally based on the intent of the person to permanently reside or become domiciled in the United States).
Generally speaking, for purposes of United States estate and gift tax, unless the foreign person establishes the United States as their permanent and primary residence, they will be considered a Non-Resident Alien.
Resident Aliens and United States citizens enjoy large estate tax exemptions, which do not apply to Non-Resident Alien owners of U.S. real property. Therefore, knowing your family’s potential U.S. estate tax exposure (before you invest) is very important. The exemption available to Non-Resident Alien owners of U.S. real property is only $60,000 – an amount that is easily surpassed. Depending on the decedent’s domiciliary country, additional relief may be provided by a tax treaty. However, each treaty is very different.
With respect to Non-Resident Aliens, taking title to real property in joint name, individual name or taking title in a revocable trust will not necessarily provide any protection from United States estate taxes. Even if all assets have been removed from the owner’s “probate estate” – an estate tax return may have to be filed at the death of a Non-Resident Alien owner of real property (even if jointly owned between husband and wife). Significant estate taxes may be due at the death of both the first spouse and at the death of the surviving spouse without proper planning to take advantage of benefits under a treaty or without additional postmortem estate planning.
Lastly it is also important to note that there is not a one-size fits all solution. Some owners prepare for their potential estate tax exposure by purchasing additional life insurance to cover the tax. For others, with proper planning some or all of the estate taxes can be avoided or deferred, but it is always best to engage in such planning in advance of taking title to U.S. real property.