Your assets are everything you own – including your home, your savings and your investments, and the wealth & property that you inherit. We spend a lifetime creating these assets and a strong base for retirement and the next generation, but very little time is devoted to the preservation and transition of these assets.
Taxes and death are certain, however the impact of both can be planned. If you die without a valid will or succession structure like a Trust in place, your assets will be distributed according to applicable laws of interstate succession – which may not be what you want. Nothing can be done even if your intentions were communicated but not appropriately structured or documented. As a result, it’s essential to have a valid estate plan in place, regardless of the size of your wealth, the complexity of your family, or your citizenship or domicile status.
Many emerging wealth folks today will be high net-worth individuals (HNIs) in the future. Wealth preservation alongside wealth growth is a critical goal, especially for global HNIs. Global HNIs are people with significant assets across more than one country. Asian Americans, led by Indians, have been the highest-earning ethnic group in the USA. This has led to massive wealth creation for such Indian Americans, alongside the growth back home of their family assets and business in India.
Cross-border estate planning involves the management and transition planning of assets across different jurisdictions, typically involving individuals or families with connections to more than one country. The intersection of legal systems in the USA and India creates a web of rules that Indians in the USA must carefully navigate to safeguard their legacy.
The US legal system offers various tools and strategies for individuals to manage their assets and ensure their distribution according to their wishes, even for those who are not citizens or residents of the country. However, understanding the nuances of US estate planning requires careful attention to detail.
Individuals, whether they are foreign nationals or US citizens living abroad, have the right to own assets in the United States. These assets can include real estate properties, financial investments, business interests, intellectual property, and more. One of the primary concerns for individuals is the US estate tax, which is imposed on the transfer of assets at death. The US estate tax applies to the worldwide assets of US citizens and residents, but only to the assets situated in the US for individuals who are non-US residents.
The US imposes an estate tax, of up to 40%, on the transfer of a decedent’s taxable estate at death. There is an exemption of USD 13.61 MN ( indexed for inflation 2024), which as per current law will fall to USD 7 MN from 2026. Depending on the 2024 election outcomes, there could be additional changes to the exemption amounts. Non-resident aliens (who are non-US domiciliary) are also subject to a top estate tax rate of 40%, but their estate tax exemption amount is only USD 60,000 and is not indexed for inflation. Married couples can club their exemption limits too.
A detailed examination of the residential and domicile status under the US tax laws becomes inevitable to determine the applicability of estate and gift tax in the US. In addition to Federal tax, to add to the complexities there are states that calculate the tax exemption differently and have clawback provisions for certain gifts. Given that the estate tax exemption limit is likely to be cut, proactively devising an appropriate estate plan for Indian NRIs with US connection becomes time-bound and inevitable. Before the reduction in limits kicks in, it is important to consider gifting while the exemption amounts are higher and gifting earlier in the year.
In the Indian context, there is currently no estate tax levy like the US. The passing of wealth to legal heirs in India is primarily governed by succession laws applicable to individuals in case of death intestate. However, the process of transition has many frictions and practical challenges, where there is no Will in place. A well-drafted will combined with an appropriately structured Family Trust goes a long way in facilitating a smooth inheritance of wealth across generations and jurisdictions in India.
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Estate planning is a crucial aspect of financial management that often involves intricate legal considerations, particularly when it pertains to the United States and NRIs. Estate planning across borders for non-resident Indians involves navigating the legal, tax, and cultural complexities of managing assets and wealth across international borders.
The importance of Succession planning in India has gone underrated due to a lack of understanding of its benefits and or other cultural factors. With a growing awareness in this domain in recent years, innovative structures for inter-generational family wealth holding and transfers have emerged. And with a plethora of rich Indian families now having ties in the US whether, in the form of US-based descendants, accumulation of assets and wealth in US and India, or migration in and out of the US, the importance of careful tax and legal planning in not only India but its impact in the US cannot be emphasised enough. With proactive planning, non-residents can navigate the complexities of US estate planning with confidence and peace of mind.
Monika Wadhwa, Partner North Americas, Legacy Growth
