Concept of Citizenship, Residence and Domicile
We could call this the status of a person recognized under the custom or law as being a member of a country. It is a status that cannot be lost by changing a physical location. Usually citizenship of the place of birth is automatic, but this may also be done by application. Each country has their own policies and regulations which change the criteria of who is issued citizenship. Many countries fast-track naturalization based on the marriage of a person to a citizen. Countries such as the USA, which are destinations for such immigration often have regulations to try to detect marriages, where a citizen marries a non-citizen typically for payment, without them having the intention of living together.
States normally grant citizenship to people who have entered the country legally and been granted permit to stay for a period. Sometimes this also is given to those who are granted political asylum, and also lived there for a specified period. This is called Naturalization.
Naturalization is normally subject to conditions which may include passing a test demonstrating reasonable knowledge of the language or way of life of the host country (USA), a time period of being in the actual geographic area (normally four to five years) good conduct (no serious criminal record) and moral character (such as drunkenness, or gambling), vowing allegiance to their new state or its ruler and renouncing their prior citizenship. In some Arab states this would include religious belief criteria. Normally naturalisation is age restricted unless the parent or guardian applies on behalf of the minor. In the USA and most countries this age is 18 years of age.
The requirements for citizenship by naturalisation can be seen to vary considerably and also change requirements depending on external and internal factors.
People may have dual citizenship where they are members of two countries or multiple citizenship where they may have three or more countries. These countries do not require naturalized citizens to formally renounce any other citizenship (South Africa)
In the European Union minimal rights for European Union citizens have been established for any person who is a citizen of a member state of the commonwealth and Ireland.
A person who does not have citizenship of any state is said to be stateless.
There are domiciles of origin, domiciles of law and domicile of residency.
The domicile is considered the country which a person officially has as their permanent home, or has a substantial connection with. On birth this is automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. Domicile is important when it comes to determining your tax liabilities in three main areas: your income tax (from investment or employment), Capital Gains Tax and Inheritance Tax.
The general rule is that the wife must adopt the residence of the husband and that she cannot without just cause maintain a separate domicile. You can only have one domicile at a time.
Domicile generally requires two elements: physical presence in a state, and the intent to remain there indefinitely (animus manendi).
Deemed domicile’ means that even if you are not domiciled in the country you may be considered to be unless there is strong evidence that you intended to live in your new location permanently or indefinitely.
You may have more than one residence. The concept of residence, represents a fine balance -between a rule predicated solely on physical presence and rule of domicile based largely upon subjective intentions. By the adoption of this concept, which is necessarily elastic, countries refrain on the one hand from a harsh and impractical attempt to collect taxes on the foreign income of alien visitors. On the other hand, it is to prevent an unfair practice whereby the aliens live in a country for considerable periods of time, enjoying the benefits and protection of laws and government to the same or substantially the same extent as resident citizens, from avoiding the burden of contributing to the cost of such laws and government to the same extent as citizens, simply because they do not intend to live here indefinitely or have no intention of abandoning their previous home. Residence may not be as permanent a relationship as domicile but it is sufficiently hardy to endure throughout a temporary physical absence.
Taxation Citizenship, Residence and Domicile
Systems of taxation vary among governments, making generalization difficult.
Countries that tax income generally use one of two systems: territorial or residential.
Certain countries only taxes non-residents on, income earned within the country. Residents are fully taxed by the country according to its tax code. This is the essence of what is called “territorial taxation”.
In the residential tax system, residents of the country are taxed on their worldwide (local and foreign) income, while non-residents are taxed only on their local income. Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation.
Citizenship is an efficient proxy for domicile according to the United State who is the only country to hold a citizenship-based approach to federal income taxation although Eritrea has a non-renounceable citizenship and it imposes a special 2% tax on all Eritreans abroad – dual-nationals included.
US persons” abroad, like US residents, are also subject to various reporting requirements regarding foreign finances, such as Report of Foreign Bank and Financial Accounts (FBAR) Foreign Account Tax Compliance Act (FATCA) and Internal Revenue Service (IRS) forms 3520, 5471, 8621 and 8938. The penalties for failure to file these forms on time are often much higher than the penalties for not paying the tax itself.
Most countries consider that income earned within the geographic borders to be taxable with no distinction has been drawn between resident and non-resident citizens.
Non residency is subject to criteria of time and intent and those considered transients or sojourners are taxable as non-residents only on income from sources within the country.
For example: the UK requirement for residence is:
183 days or more per tax year in the country’s borders. If you go and work abroad for more than one year, you must not be back in the UK for more than 91 days, on average, in any 365 day period, for the duration of your time abroad.
South Africa has the same system in place as the USA for residence. However the SA tax system is a very onerous and expensive system with a 45% upper tax limit and an extremely low entry for tax liability. SA taxes their citizens on worldwide income. Additional income tax is payable on any income earned offshore above R 1 250 000 per annum,
It is possible for you to be resident in more than one country at any given time and it will fully depend on how you’ve spent your time and what the rules are in each country – the major issue here is that if you don’t manage it carefully, you may be taxed twice.
An interesting table on this
matter may be found at https://en.wikipedia.org/wiki/International_taxation
Marriage/partnership regimes and what they mean on death
While no one can know the laws of all countries, The Hague Convention on Marriages (1978) applies when both the country of marriage and the country where recognition is sought need are members of this convention. To help in international marital regimes it is recommended you use international family law counsellors. These legal professionals are experienced in discovering, understanding and comparing such laws, not by merely reviewing the bare language of the governing statutes, cases or treaties, but by evaluating the practical impact of the laws as they might apply to their clients’ actual circumstances in the various legal systems in issue.
Matrimonial and partnership regimes are systems to create an ownership structure for property ownership within the marriage or partnership. They determine what properties are included in that estate, how and by whom it is managed, and how it will be divided and inherited at the end of the marriage or partnership. A marriage contract is a formal deed in which the future spouses set out the property regime applicable to their marriage as they see fit, albeit within the confines of the law. It is the marriage license that makes the marriage state legal so a religous marriage may not have legal standing in the country the spouses reside in.
The communal estate regime is based on the existence of three separate estates: the property that belongs to each of the spouses separately and the property that belongs to both spouses together.
In the regime of separate estates there is no communal estate. All assets and liabilities are, in principle, completely separate and each of the spouses manages his or her own property. These systems are not mutually exclusive. They may be modified by means of special provisions in a legal contract. If they do not sign a contract, the legal regime applicable to the country shall apply.
The spouses may change their matrimonial property regime during their marriage by appearing before a notary.
In the 19th Century on marriage the husband assumed all legal rights and obligations for the woman. Couverture was a legal doctrine whereby, upon marriage, a woman’s legal rights were subsumed by those of her husband. A married woman could not own property, sign legal documents or enter into a contract, obtain an education against her husband’s wishes, or keep a salary for herself. If a wife was permitted to work, under the laws of coverture she was required to relinquish her wages to her husband.
Matrimonial regimes today are applied either by operation of law or by way of prenuptial agreement in civil-law countries, and depend on the domicile (lex domicilii ) of the spouses at the time of or immediately following the wedding ceremony. Although marriages are usually created by a legal ceremony, some states and countries, recognize common law marriage. A common law marriage may be defined as a non-ceremonial or informal marriage by agreement entered into by a man and a woman or two same sex partners, having capacity to marry, ordinarily without compliance with statutory formalities such as marriage licenses. In the USA only Texas presently allows this, but if established prior to 1996 will continue in Idaho to have legal standing.
Not all countries recognise a marriage in another country.
In the USA there are two distinct property systems in the United States: common law and community property. Each system creates different rights and interests in property. There is a difference in the way that federal tax is assessed and collected under each system. Federal law determines how property is taxed, but state law determines whether, and to what extent, a taxpayer has “property” or “rights to property” subject to taxation.
Common law where each spouse is a separate individual with separate legal and property rights is the dominant property system in the United States and has been adopted by 41 states.
The community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. The U.S. Territory of Puerto Rico is also a community property jurisdiction. Alaska has also adopted a community property system, but it is optional. For income tax purposes, Spouses filing a joint return, as a matter of federal law, are jointly and severally liable for the tax on all of the income of both spouses reportable on the joint tax return, whether it is community property or separate property. If spouses file separate returns, each spouse is taxed on 50% of the total community property income regardless of which spouse acquired the income. In addition, each spouse is taxed upon 100% of his or her separate property income. Community property may also affect basis in property. For collection purposes, the Service (depending on state law) may collect taxes owed by only one spouse entirely from community assets or a portion thereof. This includes community property earned by or titled in the name of the other spouse.
So the marital regime is determined by the state in which you were married, so for instance the New York State is a common law or equitable property state, but New Mexico is a community property state. While a move from a common law state (where the marriage took place) , to a community state , makes the couple subject to “community” marriage rules FOR TAX purposes while they are resident in the “community” state, it will not change the estate situation on death or divorce.. Further, the appropriate method of analysis to employ is also different under each system. The local Counsel offices have created a Revenue Officer’s Guide to Local Law for each of the fifty states which may prove helpful to the Estate and trust planner.
Most countries such as France, South Africa and most USA States, default to a community of property regime. This means that all pre-marital and marital property is owned in joint tenancy. Property acquired during marriage by gift or inheritance of one spouse is normally separate property of that spouse. Property gifted to both spouses is community property. The natural inclination to think in terms of “his” and “hers” must be discarded with regard to such community of property. There are flavours of this regime such as a universal community of property with gifts and inheritances or an award for personal injury damage excluded. This agreement may be modified to only martial property being included in the joint tenancy or a community of profit and loss – similar to above but liabilities (“loss”) are separate.
A limited community of property is similar to community of property but with certain marital property being separate.
In terms of this marriage contract the termination results in the division of the difference between the net increases in the respective estates during the duration of the marriage
It is important to determine the value of the estate at the time the marriage is contracted, for example R1m, and the value of the estate at termination of the marriage, for example R1.5m.
The amount by which the estate has increased (in this case R500 000) is then deemed the accrual in the marriage.
The same calculation must be done for the other party to the marriage.
The party whose estate accrued by the smaller amount will then have a claim against the other party’s estate for half of the difference in accrual:
The accrual will consequently be divided equally (R300 plus R100 000 = R400 000 for the one party and R500 000 less R100 000 = R400 000 for the other party in the marriage).
Certain assets are normally excluded from the accrual:
* An inheritance received during the duration of the marriage;
* Donations made between the parties during the duration of the marriage;
* Assets explicitly excluded in terms of the conditions of the marriage contract.
Although each marriage partner may bequeath his or her separate estate at his or her discretion, it should be borne in mind that in terms of the accrual system the other party may have a claim that will have to be finalised before the testamentary distribution can take place.
The testator could be prevented from bequeathing his estate as he wishes if, after settlement of all claims, there are not sufficient assets or funds in his estate to carry out his wishes.
Divorce Planning and Prenuptial Agreements
A community of property estate, having been created, is terminated on the date that one spouse dies, divorces or obtains a legal separation. It may also be changed when the domicile changes. Some countries and states will recognise physical separation providing the intention is to end the marriage with the burden of proof on the party asserting that the community property estate was terminated. Determination of community of property requires the existence of a legally valid marriage while domiciled in a community property state or country. It also requires an analysis of whether property was acquired while spouses were subject to community property laws (i.e., during the existence of a “community property estate”).
Prenuptial agreements will continue after divorce if the agreement is so structured to constitute a continuing condition, such as a life policy or a requirements for a property to go to the spouse. These provisions will constitute a claim on the estate.
Some states or countries have adopted statutes that recognize civil unions (including same sex partners) as an alternative to marriage California, Nevada, Washington and Wisconsin are US States that also allow this as does South Africa.
In 2015, twenty-one countries have come to recognize same-sex marriages for civil purposes, namely: United Kingdom, Luxembourg, Finland, Ireland, South Africa, Norway, Sweden, Portugal, Iceland, Netherlands, Belgium, Spain, Canada, Brazil, Argentina, Denmark, New Zealand, Uruguay, France and the United States.
An annulment voids the marriage. This is normally retroactive which means that the spouses were never subject to community property laws. Income should not be reported on a community property basis for the period of the putative marriage and the estate is handled as though the marriage did not take place.
Some jurisdictions provide that the marriage is only void from the date of the annulment which would mean the spouses were subject to community property laws
Laws concerning prenuptial agreements vary considerably throughout the world. Some jurisdictions prohibit prenuptial agreements, such as Hong Kong and England (although there is a trend in England towards enforceability).
A prenuptial agreement is passed before a Civil-law notary or other public officer solemnizes the marriage. Some countries allow a post nuptial agreement as well within a certain time period or if the partner takes on additional spouses (South Africa).
This may also be referred to as an out of community of property with accrual and is done by a anti-nuptial contract(ANC) or pre-nuptial contract. Spouses living in community property states may thus own two distinct types of property: community property (also known as marital property) or separate property (also known as individual property). This gives the surviving spouse or failing them their natural or adopted heirs, rights against the property would not otherwise be present.
Marriage regimes and estates:
Children from a previous marriage cannot be dis-inherited
except by expression of the will. The major child can renounce the inheritance
(but only after the death of their parent, but if they have children, they
can’t renounce their children’s interests except before a family court
Personal and Corporate Philanthropy
Merriam-Webster defines Philanthropy as:
The desire and active effort to help other people.
Something done or given to help needy people.
An organization giving or supported by charitable gifts.
Individuals demonstrate considerable differences in personality, attitudes and values
Contributing to a worthwhile cause has many benefits beyond the act of goodwill itself. It gives local business owners as well as community members an opportunity to embed themselves in the community and network with other donors. And, of course, there are tax deduction benefits. Charity today can actually be profitable with Government giving tax deductions to those donating to recognised agencies or qualified charitable organizations. Giving has been shown to increase a feeling of worth in the giver and there are many places money is needed.
Donations can include cash, intellectual property, volunteered services, sponsorship of local charity events, or donating inventory or services.
Time donation is another aspect, but this donation will not get tax relief except in the corporate world.
Executives increasingly see themselves in a no-win situation, caught between critics demanding ever higher levels of “corporate social responsibility” and investors applying relentless pressure to maximize short-term profits. This has led to companies seeking to be more strategic in their philanthropy. Philanthropy is often used as a form of public relations or advertising, promoting a company’s image or brand through cause-related marketing or other high-profile sponsorships. Payroll giving schemes have been shown to increase employee participation in donating money and adds to the feeling of worth in the organisation.
A higher tax rate tends to favor charitable giving. If you pay tax at the 28% rate, for example, the “price” of making a $1 donation is 72 cents, because you get 28 cents back as long as you itemize the deduction on your tax return. If your tax rate is 41%, making a donation becomes even cheaper: Your price is 59 cents.
If you own shares, you can sell them and give the proceeds to charity via Gift Aid in the UK. Giving shares is highly tax-effective as donors get full tax relief on any capital gains tax and also can claim income tax relief on the fair market value of the shares. The same goes for land and property
In the USA
This online search tool from the IRS lets you
search for charities (federally-approved 501(c)(3) organizations) eligible to
receive tax-deductible charitable contributions.
Estate planning and philanthropy
Pruning their net worth to avoid paying estate taxes is often a popular option, although the tax brackets for estates often mean only the wealthy will get any benefit. America for instance has an exemption of $5 million per person ofr $10 million per couple, while the UK
Tax treaties also pave the way to be charitable outside the country of residence or domicile..
Basic counselling techniques
Family Interviews, Fact and Feeling Finding.
For most people this is a difficult conversation to have. It may take place between spouses or it may need to take place between parents and children or even grandchildren.
The appointment of an executor must be done
The succession plans for the business must be addressed.
If there is unequal allocations to the heirs it often is best to explain the reasons for such actions to both the inheritor and any inheritee.
Pre-nuptial contracts may deal with inheritances required due to a previous marriage, they may deal with requirements that will outlast the marriage. The savvy estate planner must be alert for such the existence of such documents.
The minors. A guardian for the children must be nominated. Blended families pose special challenges in this case. It may be worthwhile to look at life insurance for such cases to ensure all the children are provided for.
Grandparents should always check that their existing wills, beneficiary nominations or trusts cover all the grandchildren, so update as soon as a new arrival happens.
Spousal loss. Financially this loss may be devastating without careful planning
Most retirement plans have the spouse as the beneficiary. If the spouse dies the retirement plan should be revisited to name the new beneficiaries as soon as possible.
Portability or roll over: a spouse may use any unused spousal exclusion to their own exclusion. In the USA this may be used though the giving of gifts or though the will. Other countries may use it only in the roll-over of the estate duties and taxes. If the couple wish to make use of this then the executor of the first spouse to die must file an estate tax return within nine months. (A six month extension is allowed). It is recommended that all spouses file this even if they do not have the full amount of the exemption in their own estate, since who knows what may happen going forward.
IF a person wishes to disclaim, repudiate turn down a benefit or inheritance they will have nine months to do this.
All families should have a durable power of attorney, which appoints a friend, family member or legal advisor as their agent in case of catastrophic injury or death. A medical or health care proxy or a living should be in place to authorize the medical care you wish to receive in case of the unexpected.
Any child over 18 years of age in a family should have their own health care proxy or living will. If they own assets they need to do their own estate plan. They should also have a durable power of attorney signed.
Special needs depoendants
Approach to factual aspects, beliefs and actual circumstances
A logical question then is whether anything can be done to
save estate tax without making significant lifetime transfers of wealth.
Fortunately, a number of techniques are available to accomplish this objective,
including family limited partnerships or limited liability companies,
fractional ownership of real estate or other assets and ownership of minority
interests in closely-held businesses.
Grief and trauma counselling techniques
Succession Planning: Planning a Family and Business Legacy
Your estate plan should take full advantage of the estate tax and GST exemptions should you die when the estate tax is in effect.
This means that all your clients should be aware that any change to the tax effects of any jurisdiction they have assets will necessitate a review.
We recommend the estate should be reviewed annually to ensure nothing has changed within the family unit. This should be agreed to in writing as one of the service level requirements. The level of review should also be included as a light, moderate and full review. You should have a list of what will be included in each level of review.
A light review will be a phone check of the present circumstances.
A moderate review will be a phone check and subsequent visit to address no more than two aspects of change, which do not require the will to be amended.
A full review includes phone check, required visits and rework of the relevant documentation.
The estate plan should carry out the client’s wishes
Your estate plan should provide that if you die part or all of your wealth will pass to your spouse, children or other beneficiaries in a way that will avoid estate and GST taxes upon their deaths in a manner that is free from maritial regimes and insolvency claims.
Your estate plan should be designed for protecting beneficiaries from imprudent financial decisions and claims of creditors (including claims by a divorcing spouse) and providing for a spouse, children or other beneficiaries in their accustomed manner of living.
It is of prime importance that the estate plans should be designed to maximize flexibility in order to respond to changing circumstances.
Corporate bankruptcies, stock market declines and economic weakness means we should be conservative in estate planning.
When designing a trust for a surviving spouse or dependants, do not underestimate how much will be needed for support. Flexibility can be achieved in a trust by giving the trustee the power to benefit multiple beneficiaries, terminate the trust if necessary or advisable, divide the trust into multiple trusts, change the legal situs of the trust, change the income tax status of the trust and possibly amend the trust instrument.
Lifetime gifts/donations and other transfers that shift
wealth should continue to be used to the extent they do not cause a gift tax
liability and ensuring the remaining assets and income will be sufficient to
maintain the required lifestyle, bearing in mind that markets may be fickle and
assets and income may decline just as easily as they may increase
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