Practicing in an area with numerous multinational corporate offices, it is helpful for DuPage attorneys to know some basic estate planning concerns for international families, at least at an issue-spotting level. Below, I present a hypothetical expatriate family living in DuPage County, and their unique estate planning challenges relating to guardianship, property disposition, and estate tax.
Scenario. Helmut and Katrin Schmidt head the American sales division of a technology firm in Oak Brook, and live with their two children in Naperville. The rest of their family is in Germany. The Schmidts have $7,000,000 in Illinois assets and EUR 1,000,000 invested in German real estate. Below are some of the unique challenges involved in their estate planning.
Guardianship. Like most parents, the Schmidts’ top estate planning priority is ensuring that if they both pass away, their children be raised by relatives of their choosing. Specifically, they would like Helmut’s parents, Karl and Olga Schmidt of Hamburg, Germany, to serve as guardians.
Nationally, the case law is sparse, but at least one state has explicitly permitted non-US residents to obtain guardianship of US children. In Ramirez v. Garcia De Bretado, a Texas appellate court upheld a trial court’s determination to grant guardianship of two Texas children to their grandmother, a resident of Ciudad Juárez, Mexico. The appellate court found the children could be removed from Texas to Mexico, beyond the jurisdiction of the court, when it found that the grandmother was the “best qualified” person to serve as guardian.1
However, The Illinois Probate Act of 1975, on its face, is more restrictive than Texas law, explicitly requiring that the guardian of a minor be a “resident of the United States.”2 Note that the statute does not require the guardian to be a US Citizen or an Illinois resident, so, for example, a German Citizen-US Green Card holder in Montana could qualify. However, none of the Schmidts’ relatives reside in the US, leaving them without an ideal option. Fortunately, there is some hope that their parental intent may trump the Illinois statute under (i) the US Constitution, and/or (ii) through an international adoption.
The Supreme Court has recognized protections for parental rights concerning custody and care of children. In Prince v.
Massachusetts, the court said, “The custody, care and nurture of the child reside first in the parents, whose primary function and freedom include preparation for obligations the state can neither supply nor hinder.”3 In Stanley v. Illinois, the court found, “The interest of a parent in the companionship, care, custody, and management of his or her children ‘come[s] to this Court with a momentum for respect lacking when appeal is made to liberties which derive merely from shifting economic arrangements.’ ”4 Justice O’Connor, announcing the judgment of the court in a plurality opinion, went further in Troxel v. Granville, stating, “The Due Process Clause of the Fourteenth Amendment protects the fundamental right of parents to make decisions concerning the care, custody, and control of their children.”5 It seems that the right of parent to appoint relatives (as opposed to state-selected non-relatives) would be a “care” and “custody” interest protected by these decisions.
In spite of this promising Supreme Court language, there is no guarantee an Illinois court would ultimately side with Helmut and Katrin’s wishes, given the statutory prohibition on non-US resident guardians and the fact that the Supreme Court language is not conclusive. However, they can take steps now to position their family to make the Constitutional arguments to uphold their intent in the event of their untimely deaths. Helmut and Katrin should clearly state in their wills (i) that they are exercising their Constitutional rights as parents to make decisions regarding the care and custody of their children (perhaps even citing cases), and (ii) that it is their express intent that their children be raised by their German grandparents in Germany.
While Helmut and Katrin have strong feelings that Karl and Olga should serve as guardians, it may be prudent to put contingency plans in their wills. For example, each could say, “Though it is my strong parental preference that my children be raised by their grandparents in Germany, if a court rules that I do not have the Constitutional right to effectuate this desire, then I appoint [a US resident] as Guardian.” Helmut and Katrin should also execute statutory guardianship short forms, stating that upon their deaths, a US resident friend will be appointed as temporary guardian of each child.6 This way, for 365 days, the children can be cared for in the US while more permanent arrangements are made.
In the event of Helmut and Katrin’s deaths, in addition to pursuing guardianship, the children’s German grandparents should consider pursuing an international adoption. By adopting the children, they would arrange to patriate them to Germany through diplomatic channels. While an Illinois court may have difficulty assigning guardianship to non-US residents, particularly when it relies only on Constitutional authority, an international adoption may seem to a court like a more clear-cut way of establishing the children’s new home.
In all cases, until they reach adulthood, the Schmidt children should maintain dual citizenship if possible. In the event of Helmut and Katrin’s death, dual citizenship could provide evidence to a court that their parents intended for the children to retain ties to the family in Germany. As a practical matter, dual citizenship also likely makes it easier for the children to be adopted by German relatives, or move or travel to Germany.
Germany has signed the Hague Convention on the Civil Aspects of International Child Abduction,7 meaning it has agreed to help discover the whereabouts of and return to another Convention country a child who has been kidnapped. An Illinois court may feel more comfortable allowing a child to visit or live in Germany than a non-Hague Convention Country, given Germany’s agreement to respect US judicial rulings on kidnapping.8 Even if the children are residing with a US guardian, Germany’s acceptance of the Hague Convention may make it easier for the guardian to request permission to take the children to see relatives in Germany, though a court may require the guardian to post bond.9
Finally, a word about costs: It may be expensive for the Helmut and Katrin’s surviving relatives to bear the costs of a guardianship or international adoption. Consider drafting provisions in Helmut and Katrin’s wills or trusts stating that guardianship or international adoption costs associated with patriating the children to Germany should be paid out of estate or trust funds.
Although Illinois statute presents challenges, Helmut and Katrin can endeavor to appeal to the Constitution and/or rely on an international adoption to carry out their parental intent to have their children raised by Karl and Olga.
Disposition of Foreign Property. Given that the Schmidts have German real estate and potential German tax domicile, it is important to counsel them that you are only licensed to practice law in Illinois, and cannot advise them on German law. They should consult a German international estate planning attorney, who can work closely with you throughout the process to ensure your plans are harmonized.
Unfortunately, Germany and other countries apply widely varying rules to testamentary documents. For example, Germany (but not the US) has adopted the Hague Convention on the Conflict of Laws Relating to the Form of Testamentary Dispositions.10 This convention provides for a Germany to accept a foreign will as valid if it was drafted in accordance with local (in this case Illinois) law. Potentially, this could be useful for German property disposed of in an Illinois will, but not vice/versa. Another international convention that may apply to some international estate plans is the Uniform International Wills Act,11 which attempts to standardize will execution requirements. Illinois has adopted the Act,12 but unfortunately for the Schmidts, Germany has not. Depending on the circumstances, German counsel could possibly advise (i) including German property in an Illinois estate plan that meets Hague Convention and German execution requirements, or (ii) using a separate German testamentary instrument for German property.
If German counsel advises using separate Illinois and German testamentary instruments, you should exercise caution in reviewing some of the more mundane language in the documents. For example, if an Illinois will is executed on December 1, 2016, and a German “last will and testament” is executed on December 2, 2016, “hereby revoking all prior wills,” the second (German) will could arguably nullify the first (Illinois) will. It may be prudent for German counsel to work with you to clarify in both documents that the Illinois will disposes only of Illinois assets, and that the German will disposes only of German assets, and that neither document revokes or amends the other. Documents should also contain choice of law provisions, keeping in mind that US jurisdictions typically allow much greater testamentary freedom than foreign jurisdictions, and are much less likely to impose forced heirship.13
Foreign counsel must be closely involved in the estate planning process to ensure proper disposition of foreign assets, whether that is through a separate foreign testamentary instrument or Illinois documents that are drafted in accordance with applicable laws and conventions.
Estate and Inheritance Tax. In general, the US imposes estate tax on US residents (whether citizens or not) on “all property, real or personal, tangible or intangible, wherever situated” (i.e. worldwide taxation).14 Similarly, Germany generally applies worldwide inheritance tax to German citizens residing overseas, depending, among other factors, on whether they resided in Germany within a certain number of years preceding death, whether they received German public funds through their employer, and whether they maintained a habitual second residence in Germany.15
In the case of the Schmidts, who have ties to both the US and Germany, tax domicile is governed by a complex 1979 bilateral treaty.16 However, not all countries have death tax treaties with the US, and each treaty is different. Note that even where no treaty exists, the IRS does offer a credit for foreign death taxes on foreign property against a decedent’s US estate tax bill up to the level of the US liability on such property.17 This credit avoids double taxation, but the net effect is that decedents end up paying the higher of the two (2) country’s rates for foreign-situs properties.
Unlike the US and Illinois, both of which tax the estate of the decedent, Germany taxes the inheritance received by each beneficiary.18 German law gives a surviving spouse a EUR 756,000 ($837,500) inheritance tax exemption.19 The exemptions for other relatives are much lower, for example EUR 20,000 ($22,500) for siblings.20 In contrast, the US has an estate tax exemption of $5,450,000,21 and Illinois an exemption of $4,000,000 for the entire estate,22 with bequests between spouses generally non-taxable (see below for exceptions for non-citizens).23
A close analysis of the tax treaty by German counsel is crucial in this case, as it is possible that the Schmidts could shed their (unfavorable) German inheritance tax domicile by keeping indicia of ties to the US and breaking indicia of ties to Germany. However, even if they successfully shed German tax domicile under the treaty, German real estate held in the Schmidts’ individual names at death will always be taxable in Germany, and it will be taxed with a low $2,000 exemption if they are not otherwise domiciled in Germany.24 Therefore, German counsel may suggest selling German real estate, or creating a foreign-situs corporation to hold the property to eliminate German taxation.25
Note that trusts are a common law creation, not traditionally used in civil law countries such as Germany. German counsel would likely advise against mixing German-situs assets into a trust or naming German residents as trust beneficiaries. Further, if there is any chance that the German government might view the Schmidts’ US assets as subject to German taxation (i.e. if the Schmidts might have German tax domicile), German counsel may caution against using a US revocable living trust, or may suggest very careful drafting to avoid negative consequences. For example, a careless transfer by a German domiciliary of property to a trust, followed by his death and the appointment of a non-relative successor trustee, could result in Germany viewing the successor trustee as the beneficiary of a bequest at a very low tax exemption level.26
Due to a nuance in US estate tax law, if Helmut is a US citizen, but not Katrin, Helmut would qualify for the unlimited marital deduction upon Katrin’s death, but not vice/versa.27 As a surviving non-citizen spouse, Katrin would pay estate tax on an outright bequest of over $5.45 million, but not Helmut. Fortunately, instead of an outright bequest, Helmut can leave his assets in a Qualified Domestic Trust (QDoT) for the benefit of Katrin, without estate tax before her death.28 Complex rules govern QDoTs, such as a requirement that QDoTs over $2,000,000 name a US corporate trustee and/or require individual trustees to carry a bond.29 A QDoT is not needed for most international clients, but it could be necessary for Helmut, a high-net-worth non-citizen.
Having to navigate two (2) complex estate tax systems, the Schmidts will benefit greatly from coordinated estate planning between their German and Illinois counsel.
Conclusion. Hopefully this article will help DuPage attorneys be aware of some basic estate planning concerns for international families. Attorneys can assist these clients with guardianship, disposition, and estate tax issues, and coordinate with foreign counsel when appropriate.
Thanks to W. David Braun, Partner, Quarles & Brady LLP in Chicago and Dr. Tobias Beuchert of Dissman Orth in Munich, Germany, who reviewed this article and provided guidance. Dr. Beuchert offered practical advice relating to the tax treatment of German-situs real estate.
1. Ramirez v. Garcia De Bretado, 547 S.W.2d 717 (Tex. App. 1977).
2. 755 ILCS 5/11-3. Air Force JAG from 2007-2014.
3. Prince v. Massachussets, 321 U.S. 158, 166 (1944).
4. Stanley v. Illinois, 405 U.S. 645, 651 (1972).
5. Troxel v. Granville, 530 U.S. 57, 66 (2000) (O’Connor, J. announcing judgment of the court and delivering opinion, in which Rehnquist, Ginsburg, and Breyer JJ., joined).
6. See short form at 755 ILCS 5/11-5.4(f).
7. Convention of 25 October 1980 on the Civil Aspects of International Child Abduction (The Hague Convention).
8. For an example of international cooperation to return a kidnapped child under the Hague Convention, see Munoz v. Ramirez, 923 F.Supp.2d 931 (W.D. Tex. 2013).
9. Benton v. Sontigeanu, 450 S.W.3d 714 (Ken. App. 2014) (trial court properly issued custody decree allowing international travel if father posted $250,000 bond).
10. Convention of October 5, 1961 on the Conflict of Laws Relating to the Form of Testamentary Dispositions (The Hague Convention).
11. Uniform International Wills Act, established at the Convention of October 26, 1973 Providing a Uniform Law on the Form of an International Will (The Washington Convention).
12. 755 ILCS 10.
13. For an example of forced heirship laws, see Code Civil (French Civil Code), Sections 912-920.
14. 26 USC 2031(a).
15. Erbschaftsteuer- und Schenkungsteuergesetz (ERB StG) (German Inheritance and Gift Tax Act of 1974, last amended November 2, 2015), § 2.
16. Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation on Estates, Inheritances, and Gifts, effective January 1, 1979.
17. 26 USC 2014.
18. Erbschaftsteuer- und Schenkungsteuergesetz (ERB StG) (German Inheritance and Gift Tax Act), § 1.
19. Id. at §16-17.
21. IRS Rev. Proc. 2015-53.
22. 35 ILCS 405/2.
23. 26 USC 2056.
24. ERB StG, § 2(1)(3), 16; Bewertungsgesetz (BewG) (German Valuation Act), § 121.
25. BewG at § 121.
26. See German Federal Fiscal Court decision II R 45/10 dated September 27, 2012.
27. 28 USC 2056(d).
28. 26 USC 2056A.
29. 26 CFR 20.2056A-2(d).
Ian Holzhauer is an associate at Nagle Obarski PC in Naperville. He earned his J.D., magna cum laude, from Georgetown University in 2007, and his B.A. in History, summa cum laude, from the University of Florida in 2004. He served as an Air Force JAG from 2007-2014.