Protecting Your Estate from an Uncertain Future: The $4m Quandary
Where will you be in five years? Ten years? Twenty years? Perhaps the answers to these questions are straightforward, but for many expatriates, there is tremendous uncertainty in longer-term planning. Job changes, family obligations and retirement goals can affect not only one’s physical trajectory, but also tax residency and domicile situation. Additionally, what starts as a two-year job secondment can turn into 20+ years in residence outside of the US. Given the fluid nature of such circumstances, many people avoid planning altogether and put it in the “too complicated” or “deal with later” mental buckets.
Unfortunately, taking no action can be a costly mistake. An individual’s domicile can have a significant impact on the complexity of one’s estate planning. Even if your plan is to return to the US in retirement, if you’ve been in the UK for many years or maintain your primary home here, you may be considered deemed domicile in the UK for inheritance tax purposes and thus have a large potential UK liability. In the US, one’s estate can grow to $5.45m USD ($10.9m for married filing jointly taxpayers) before estate tax is assessed. In the UK, however, the limit is much lower, currently £325,000 per individual or £650,000 for a married couple. The difference between the two tax regimes is nearly $10m USD (depending on the exchange rate). Therefore, for those who are currently deemed domicile in the UK but who intend to leave in the future to break these ties, there is approximately $4m USD at risk which could be lost to tax if death occurs in the interim.
One solution is to use insurance to help protect against this potential liability. For example, term insurance can be a low-cost strategy (depending on age and health) to bridge the gap until the domicile ties have been broken. There are also hybrid plans that can have lower initial premiums renewed every ten years on a guaranteed basis. These plans are often attractive for those who don’t know exactly when they may break their domicile ties. This type of planning is complex and may require legal counsel to ensure the policy is not includable in the gross estate. It is certainly worth pursuing advice to ensure beneficiaries aren’t surprised with an extra $4m tax bill.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.