Pirates of the Caribbean: Land Transfers & Estate Planning in Foreign Jurisdictions
Understanding Local Colorado Real Estate Law
Thinking about buying real estate in the Bahamas? Maybe a timeshare in Barbados? A quaint villa in the French West Indies? Well, before you do, you may want to research the local real property taxes, think about how this little piece of paradise fits into your overall estate plan and decide exactly how to take title to the real estate. Understanding the local law before taking title can save thousands of dollars at some future date.
Real Estate Taxation Laws Vary
Taxation of real estate varies from country to country and especially in “no tax” jurisdictions found in the Caribbean. A “no tax” jurisdiction actually means no income tax. Many foreign countries heavily tax real property transfers and levy substantial, annual real property taxes. Real property transfer taxes of 10% are not uncommon in the Caribbean. Annual real property taxes are often 2% of the property value. Fees by local lawyers to transfer the property can be based upon the value of the property (2.5% to 10%) and not time spent. With tax rates and legal fees like this, thinking about how to take title to the real estate and how that real estate may integrate into an overall estate plan is necessary. Otherwise, secondary transfers may be necessary at substantial cost.
For example, let’s say married U.S. citizens with a revocable trust are thinking about buying a villa in the French West Indies. Should the trust take title to the real estate? Should the individuals take title in their own name? If the individuals take title in their own names, should they take title in joint tenancy with right of survivorship or as tenants in common? Does France even recognize joint tenancy? Does France have any forced heirship laws? Does the law impose a duty on the couple to will the real estate to their children at death? What if the husband has three estranged children from a prior relationship? What are the rights of those children? Will the French government impose an inheritance or estate tax upon death of the owner?
In the above example, the most likely solution is none of the above. France does not recognize trusts, has forced heirship laws and levies estate tax at death. Traditionally, the vehicle of choice is an entity called an SCI (Sociètè Civile Immobiliere). Much like domestic LLC’s, corporations and partnerships, real estate held in an SCI is considered personal property as opposed to real property. Personal property is disposed of according the Last Will and Testament of the decedent in her country of residence (no local probate proceeding is necessary). An SCI is a good vehicle for gifting partial ownership during life and makes for an easy transfer upon death. However, it is not always the right choice. There are many factors to consider, and no matter what, it will be much more expensive than a U.S. LLC set up to hold U.S. real estate.
Plan Wisely Before Purchasing Foreign Real Estate
Going back, after-the-fact, and restructuring the way title is held can be very much like a remodel of an old home – expensive, frustrating and time consuming. While in Colorado, we routinely sever joint tenancies, deed property to revocable trusts, and create LLC’s to hold already-acquired real estate, the tax structures of these foreign jurisdictions and the associated legal fees make this a very expensive proposition. The solution is to plan before a foreign real estate purchase. A person should consult with their U.S. legal counsel, their certified public accountant and employ legal counsel in the foreign jurisdiction before taking title to foreign real estate. While this will cost some money up front, the payoff down the road will be substantial.
