Estate planning: having a portfolio in multiple jurisdictions complicates matters

Celine Santos works with Rosemont Consulting and deals with issues on international private law, in particular estate planning for private clients holding overseas assets. In this column, she talks about estate planning.

What estate planning advice would you give to a client with a real estate portfolio in different jurisdictions, including Hong Kong?

Understanding the client’s family background and identifying his or her assets, including real estate, and objectives which will form part of his or her estate, should be first and foremost. The advice depends on many factors. What is the personal and family situation of the client, [such as] the marital status? Is he or she single, divorced, or married? If married, did the client enter into a prenuptial agreement? If not, it [may be] necessary to consider conflict-of-laws [which refers to which national laws apply in case of a dispute involving those with different nationalities]. Any children? If so, from which marriage? Then we will have to know the objectives of the client. Tax optimisation? Civil purposes? Or both? The next step would be identifying estate planning tools for carrying out the client’s wishes. There are many legal tools that can be used to manage and distribute assets to the intended heirs, including a trust, will, joint tenanted properties and life insurance. One effective way is to amend the matrimonial regime in order to protect the rights of the surviving spouse or to increase them. This has to be done in accordance with the law applicable to the matrimonial regime, and this law has to be determined by the conflict-of-laws applicable to this issue. These conflict-of-laws rules can determine the sole inheritance law applicable to movable and immovable assets wherever situated, or two different laws – one applicable to movable assets and the other one applicable to immovable assets. In this case, by changing a real estate asset into a movable asset, we can change the inheritance law and then the rules applicable to the transfer of this asset.

What types of vehicles would you recommend for holding real estate assets as part of an estate planning strategy?

A trust, which is very flexible, or trust deeds may [be options to] transfer assets to beneficiaries. Other alternatives include companies [onshore, offshore and mid-shore companies, such as] Special Purpose Vehicle. The choice of the vehicle depends on the law applicable to the estate. If the inheritance law does not recognise the structure chosen, difficulties may arise. This can be the case for trusts which are, most of the time, not recognised in [some] civil law jurisdictions. Although China has its domestic law of trust, the approach its courts might take towards foreign trusts is uncertain.

What are the tax implications, given that Hongkongers are increasingly investing abroad, not only in Britain , the United States, Canada and Australia, but also in Asean countries, and Taiwan and Japan?

The tax environment will depend on local legislation. This is continually changing and will need to be considered in each country at the time of the purchase [of property] during the lifetime of the ownership, and at the time of the sale. It will depend on how the real estate is owned, and how it is used [commercial or private use]. From a Hong Kong taxation point of view, tax implications will generally be simpler due to the nature of the [city’s straightforward] tax system, and the lack of estate duties. The effects of any double-tax agreements with the country should also be considered.

What are the consequences if a property owner dies intestate, especially those with properties in several jurisdictions? How does one deal with this type of situation?

In case of assets in different jurisdictions, the inheritance law will be designated by the application of conflict-of-laws of the [country, and when it comes to the transfer of real estate assets, it is best to get a local lawyer].