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Tuesday, October 23, 2012

Cross-Border Estate Planning and the Perils of the Two-Will Strategy

Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses.

A knowledgeable international estate planning attorney will generally provide in-depth analysis and guidance on U.S. income and wealth transfer taxes affecting cross-border planning, foreign death taxes, including:

-          Planning techniques for the U.S. estate, gift and generation-skipping transfer taxes;

-          The impact of U.S. estate and gift tax treaties;

-          Structuring of cross-border charitable planning;

-          Transnational entity structuring in foreign countries;

-          Marital planning;

-          Pre-immigration planning;

-          Conflict of law issues;

-          Forced heirship statutes;

-          The use of domestic and offshore trusts;

-          Asset protection; and

-          U.S. information reporting requirements.
The uninitiated international estate planning attorney, and seldom some “experienced” professionals, recommend the use of two wills – one for each country in which the assets are located.  So, for example, if the testator lives in the U.S. but has a vacation home in Los Cabos, Mexico, these attorneys would recommend one will in the U.S. and another will in Mexico, with the second one covering solely the Mexico assets.  The alleged benefit of this strategy is that it results in less paperwork and avoids the need to enforce a foreign judgment (i.e., the judgment issued in by the probate court in the U.S.).
Despite the apparent benefits, the two-will strategy has tremendous downsides and should be avoided if at all possible.  For instance, the issues that may arise from a two-will strategy are:
-          Having to go through probate in the U.S. and in the foreign country;
-          Conflicting judgments (e.g., one declaring A as the heir and another declaring B, perhaps a pretermitted heir or an ex-wife, as a sole or co-heir);
-          Service of process and court hearings in more than one country;
-          Translation costs and delays;
-          Language, legal and cultural barriers;
-          Potential for having the prior will voided due to the existence of a subsequent will;
-          Unnecessary attorney fees and court costs; and
-          Unwanted tax liabilities.
Furthermore, most countries would recognize and enforce a judgment entered by a U.S. probate court. For instance, Mexican courts have ruled that (a) as long as the will has not been rendered void, it is to be enforced in Mexico and (b) a foreign judgment recognizing the will as valid is presumed valid in Mexico, just as if it had been recognized as valid by another Mexican court, unless the plaintiff or appellant proves otherwise.  While the recognition proceeding may not be a quick and simple proceeding, it is generally more so than having an additional, perhaps adversarial, probate proceeding.
There are much more efficient and effective strategies for clients in need of cross-border estate planning solutions.  There is no boilerplate solution. The ideal strategy is subject to the nature and location of the assets, the domicile of the testator, the legal systems involved, and, more than anything, the intent of the testator.       

Mauricio Leon de la Barra is an international law attorney licensed to practice law in Mexico and California, and has more than 15 years of experience representing clients in cross-border matters involving international, U.S. and Mexican laws.