Investing off the beaten track

PORTFOLIO POINT: When it comes to buying assets overseas, there are three main wealth traps awaiting the unprepared investor.

With the rise in the Australian dollar, many of my clients are being tempted by the apparent 'value’ of overseas assets. Being a sensible lawyer, I steer well clear of any discussion that could amount to me giving financial advice.

But I do inform clients that owning overseas assets brings into play three wealth traps:

• The possibility that some form of estate duty/death duty (inheritance tax) is payable upon their death;
• The possibility that their right to dispose of the asset on their death will be hindered by succession laws in the jurisdiction where the asset is located; and
• The likelihood that additional costs will be incurred in dealing with these assets.

Inheritance tax

Some readers will remember the days when Australian states and territories levied death duties and the Commonwealth levied an estate duty. These inheritance taxes were all quickly disbanded once Queensland (under Joh Bjelke-Petersen’s government) became the first jurisdiction to abolish death duties in 1977.

However, inheritance taxes in one form or another remain in several overseas jurisdictions, including the United States of America and the United Kingdom. This means that if you die owning shares in either of these jurisdictions, your estate may have to pay inheritance tax. The amount of tax paid can vary significantly between countries and states, and is complicated by tiered structures similar to our own income tax rate scales.

Limit on your right to choose your beneficiary

The laws in some jurisdictions, such as France, limit your right to choose who is to receive your asset located in that jurisdiction.

Example
After doing some online research on French cottages over a glass or three of Château Lafite Rothschild, Phillip acquired a cottage in Pauillac. Although Phillip’s research confirmed that France had abolished inheritance taxes in 2007, he failed to appreciate that he is not able to make a will disposing of French real estate to, say, his spouse to the exclusion of his children, or to one child to the exclusion of other children. Instead, French law directs how the cottage will be dealt with upon Phillip’s death.

A lawyer specialising in succession planning could have informed Phillip that these restrictions do not apply to other forms of property, such as shares. It may, therefore, have been preferable for Phillip to have acquired the property via a Société Civile Immobilière (a type of company) which would have enabled him to leave the shares in the company to whomever he wished.

Muslim societies also limit a person’s ability to make testamentary dispositions. They do this via compulsory Islamic succession laws which, in very general terms, require two-thirds of a person’s estate to be distributed according to fixed rules among a class of heirs, and one-third by optional bequests. Westerners often think these compulsory laws to be unfair, such as the notion of sons receiving twice the amount of that received by daughters. As with many religious codes, the reality is sometimes more complicated – for example, often Muslim men take on an obligation to provide for broader family members if the need arises.

The recent Australian Capital Territory case of Omari v Omari received publicity because it involved a Muslim woman who purportedly made a will disposing of her assets in a way which reflected Islamic succession laws. While the decision has been widely reported as the court rejecting a person’s ability to dispose of their assets in accordance with Sharia law, this was not really what happened. The key issue was whether the deceased had capacity when she signed the will. The Court held that she did not. Accordingly, the will (which reflected Sharia law) was held to be invalid for the reason that the deceased lacked capacity. The deceased would have been allowed to make a will that reflected Sharia law, if she had capacity. However, Sharia law would not have applied so as to deny a child the right to make a family provision claim against the estate.

Additional costs

Regardless of whether inheritance taxes apply or local laws affect your succession wishes, holding overseas assets will invariably result in additional costs being incurred when your estate is administered.

So while a modest shareholding in a NYSE-listed company might seem like a good idea, don’t forget to factor in the costs of dealing with the asset upon your death (or incapacity). This may require the appointment of a US-based lawyer or notary to attend to probate matters, and could amount to several thousands of dollars in administration costs on top of any inheritance taxes.

With proper advice, you should be guided through various options to help minimise costs when dealing with your overseas assets. These may include making separate wills dealing with assets in certain jurisdictions, or simply instructing your attorney to dispose of overseas assets before your death (if possible) to simplify the administration of your estate.

For completeness, I note that in 2010 all Australian state and territory ministers agreed to implement legislation to allow Australians to make 'international wills’. On November 8 2011, Victoria became the first Australian jurisdiction to act to give effect to the agreement by introducing legislation into the Victorian parliament. The remaining states and territories are expected to follow course in the near future, although past experience with succession law harmonisation suggests that it is unwise to assume all jurisdictions will actually implement these laws, or do so in the near future.

The laws will not become operational until every Australian state and territory jurisdiction has implemented them. International wills may become an important tool for clients with assets in multiple jurisdictions who wish to maximise certainty in regard to their estate planning.

Purchasing an overseas asset may, at face value, appear to be a prudent investment decision. However, remember to take into account the impact any purchase will have on your succession planning in terms of inheritance taxes, your right to dispose of the asset and the administration costs that might be incurred. Obtaining structuring advice from a professional before the purchase can save fees and expenses in the longer term.

Bernie O’Sullivan is a lawyer specialising in private client matters, including family trusts. He founded Bernie O’Sullivan Lawyers and is the lead author of Estate and Business Succession Planning (now in its fourth edition), published by The Tax Institute.