Generally, wealth succession planning entails (amongst others), the development of an action plan or strategy for the distribution of an individual or a family's accumulated wealth to designated beneficiaries. The action plan will incorporate information such as details of the beneficiaries, details of assets including category and location, etc. It will also show instructions on timing of distributions, conditions for distributions, decision makers, exclusions and so on.
There are various factors that should be considered in developing a wealth succession plan; some being tax and nationality of beneficiaries. This is highly important and critical because where proper checks are not done, the accumulated wealth can be eroded by taxes that will be applicable upon transfer or distribution to beneficiaries. Income tax and wealth transfer tax regulations differ across countries. However, for most jurisdictions, the tax in this regard will depend on the jurisdiction from which the income was created, the nationality of the wealth creator and beneficiaries, their tax residence, etc. Thus, special care should be taken to understand the regulations that apply across the relevant jurisdictions, in order to ensure the wealth succession plan achieves the desired objectives.
In recent times, there has been a high demand for obtainment of alternative citizenship by the elites in most African countries. The demand is largely due to the desire to take advantage of the perceived benefits associated with dual or multiple nationality status. Some of the perceived benefits include ability to take advantage of available opportunities for business expansion, ease of entry and visa-free travels to other countries, access to alternative educational systems, increased options for residence purpose and ability to enjoy the rights and privileges available to citizens of other countries.
Certain jurisdictions, such as the United States of America (US), Canada, United Kingdom (UK) are quite popular among Nigerians for a second citizenship. This citizenship is obtained via different means depending on regulations in the respective countries. However, in many instances, the implications of holding dual/multiple citizenship is often overlooked in wealth succession planning process. Most of the time, these implications are realised only in hindsight, when it may be too late or fairly difficult to make changes to wealth succession structures that would have been established.
In this article, we discuss wealthy individuals and families with dual/multiple citizenship and the implications of this status to their wealth transfer/succession plans.
Nationality of Beneficiaries and Wealth Succession Planning from a Tax Perspective
Wealth planning structures are crafted to suit the unique circumstance of a wealth creator. This implies that the methods adopted for one person may not be suitable for another. Nevertheless, there are a number of renowned methods that are seen to be efficient (depending on the asset category) and as such, widely accepted. Some of these methods include wills, inheritance, gifting, private trusts, foundations etc.
Regardless of the method adopted, there will come a time when the beneficiary will take ownership of wealth or receive income (periodically or otherwise) from the wealth planning structure already put in place. At this stage, certain taxes may become applicable to the beneficiaries based on the local laws of the respective jurisdictions.
In most jurisdictions, taxation is based on residence. Hence, taxable persons are subjected to tax in those jurisdictions only if they are deemed to be resident within the jurisdiction, with the tax base being their global income. Non-resident persons in these jurisdictions are typically subjected to tax on the income they derive therein only. In a few jurisdictions such as US, citizen based taxation is adopted. This implies that regardless of where a US citizen is resident or where their income is derived, such citizens are required to file and pay taxes in the US on their global income. Hence, non-resident US citizens that are beneficiaries of a wealth succession plan are required to account for the taxes on the income derived from the plan, in the US as well as in their resident jurisdiction.
Worthy of note as well are inheritance, estate and gift taxes. Inheritance tax is a form of tax that is levied on a person/beneficiary that inherits money or property of a person that passes on; an estate tax is levied on the estate of a deceased; while a gift tax is a tax levied on a person based on the money or property gifted by such person during his/her lifetime to another person. Although in Nigeria, there are no laws on these, wealthy families with multiple citizenship or with estates/assets outside the country, may be impacted by regulations such as these. Inheritance, gifts and estate taxes exist in countries such as the UK, US, Switzerland, Netherlands, Canada and Portugal. Across these jurisdictions, some common factors that determine the tax exposure are type of asset, value of the asset, time of asset claim by beneficiary, residence status, sale of asset, etc. For example in the UK, depending on the value and stipulated thresholds, inheritance tax is payable when a UK property is inherited whether or not the beneficiary is a UK citizen or resident. For UK citizens, inherited non-UK assets may not be subject to inheritance tax. In the US however, US citizens are subject to estate tax on their assets within and outside the US; non-resident persons are subject to estate tax on select US based properties.
Tax regulations around income and assets derived from wealth planning structures are generally broad, complex and differ across jurisdictions; as such, persons with multiple citizenship need to be conversant with what applies in the respective countries.
Managing Wealth Succession Challenges for Individuals with Dual/Multiple Citizenship
- Invest in Understanding the Applicable Laws in the
Beneficiary's Nationality(ies) for Wealth Transfer
Wealth creators need to understand what tax exposures will arise for their beneficiaries with dual/ multiple nationalities. These considerations should be noted at the wealth succession planning stage. Where a structure has already been put in place without these considerations, efforts should be made to ensure that the structures are m
This understanding will enable wealth creators take advantage of tax planning mechanisms that can be adopted or even better, recognize scenarios that poses no tax risks. For example, there is no tax implication for a Nigerian citizen that gifts his estate to beneficiaries that are nationals of St Kitts & Nevis, British Virgin Islands and Grenada, as these jurisdictions do not have inheritance or gift taxes in place.
- Take Advantage of Available Planning
Opportunities
Planning opportunities can be explored for varying circumstances. For instance, where an estate exists in a jurisdiction with regulations on estate tax and gift tax, the estate owner (whether an individual or a family) may adopt a gift estate planning strategy that entails giving away the assets to the beneficiaries whilst the wealth creator is still alive. This will reduce the size of the estate and the attendant taxes that will be applicable upon demise of the estate owner.
- Review of Wealth Succession Methods and their Distinct
Character
Trusts (like many others) have been widely regarded as an efficient wealth succession and planning tool that enables tax efficient transfer of wealth to succeeding generations. However, the character of the trust will determine its efficiency for this purpose. For the purpose of this discussion, we will consider irrevocable trusts and their implications on distributions to beneficiaries with multiple nationality.
Irrevocable trusts are trusts that cannot be changed, modified, altered, or terminated by the grantor/settlor once the trust deed is signed. For most jurisdictions (including Nigeria), irrevocable trusts are generally adopted for tax planning purpose for the settlor/wealth creator. The assets and wealth of the wealth creator are typically transferred to the trust, thus relieving the settlor of their ownership. Hence, the settlor is exempted from any tax that may arise from the income generated from the assets, other than that which applies on the income/distributions he receives from the trust.
Distributions of income from a trust to resident beneficiaries of most jurisdictions are subject to income tax. The liability of the beneficiaries is determined by the extent of their entitlement or the amounts actually paid to them. This applies to local and offshore trusts.
In the case of the US, as previously stated, citizens and residents are taxed on their worldwide income. Hence, offshore trust beneficiaries will be subjected to tax on income and other distributions that they receive from trusts whether such income is brought into the US or not. However, a US tax resident beneficiary of a non-US trust will be able to enjoy tax exemption on the distribution received from the trust (during the lifetime of the settlor) if such trust is set up as a Foreign Grantor Trust (FGT) and the growth of the FGT is not attributed in any way to the US tax resident beneficiary. In order to enjoy this tax holiday, the trust will need to be set up to properly qualify as a FGT. One of the traits of the FGT is that the trust must be a revocable trust. Thus, the wealth creator will need to consider these trust characters as they make their wealth succession plans.
"There are various factors that should be considered in developing a wealth succession plan; some being tax and nationality of beneficiaries. This is highly important and critical because where proper checks are not done, the accumulated wealth can be eroded by taxes that will be applicable upon transfer or distribution to beneficiaries."
Conclusion
Seek Sound Professional Advice
Due to differences in tax legislation across various jurisdictions and their potential impact on wealth planning structures, the importance of seeking advice from experienced advisors cannot be underscored. A wealth succession plan that does not adequately cover key areas such as taxes may end up as inefficient and hence not achieving the initial objectives of wealth creator. So, please speak to an experienced advisor to discuss your specific circumstance and together you can design a bespoke solution that is efficient and effective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
