The challenges of receiving a U.S. inheritance can be broadly categorized into two phases: (1) the transfer of assets and (2) management of assets once received. Each phase comes with its own set of risks and hurdles.
This first phase can be particularly daunting since it involves a cross-border probate process, tax considerations, and other legal risks. See next week’s article for a discussion of the second phase.
The transfer of assets
1. Probate process: Probate is a legal process that happens after people pass away. It involves proving the validity of their will (if they had one) and distributing their assets (like money, property, and belongings) to the right people, according to the law and their wishes. This process helps ensure that everything is handled properly and fairly when someone dies. One big mistake that Americans in Israel often make is that they don’t have a will that properly covers their assets around the world.
2. Cross-border taxation: While Israel does not have inheritance taxes, it does tax income generated from inherited assets. So, if you inherit an investment portfolio or property from the U.S. that generates income (like dividends or rental income), those income streams may be subject to taxation in Israel.
3. Foreign exchange risk: Currency exchange rates fluctuate constantly. When transferring assets internationally, changes in the exchange rate can significantly affect the value of the inheritance.
4. Legal differences: The laws governing inheritance can differ significantly between the U.S. and Israel. Without careful planning, these legal differences can disrupt the intended distribution of assets. Forced heirship rules are one example of this at play.
5. Property transfer: Administering an estate with property could require a physical presence, for instance, to manage property maintenance, oversee asset appraisal, or facilitate property sale. The distance and potential travel restrictions can make these tasks much more challenging for a beneficiary living in Israel. Also, when inheritors in Israel hire property managers in America to oversee the real estate that they received, the next generation is often shocked at the fees they must pay and the lack of service they receive. This disappointment is compounded when the “professional” real estate manager is a member of the family who has been running the properties for years.
Each of these challenges requires careful planning to avoid undue stress and maximize the financial potential of your inheritance.
If you intend to receive a U.S.-based inheritance and want to make sure it will help you achieve your goals and realize your dreams, let’s start a conversation (doug@profile-financial.com or 02-624-2788).
Douglas Goldstein, CFP®, GFP®, is the director of Profile Investment Services, Ltd. www.Profile-Financial.com He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published September 26, 2023.