They say the only things that are certain are death and taxes. As we frequently discuss, that isn’t necessarily true; no one in Dubai or Vanuatu ever muttered those words, and there are plenty of tax-free countries in the world.
In fact, tax-free countries or not, it’s possible to live your life in a totally tax-free way using legal tax reduction strategies. Offshore companies, offshore bank accounts, and a globally mobile lifestyle with proper travel planning can allow you to keep more of your own money. That’s what I help people with every day.
But how do you avoid estate taxes, also commonly referred to as the “death tax”? After all, if you followed all of the tax laws properly during your life, why should some government get a final swipe at your estate?
That’s why several people I helped have recently asked “If I’m a nomad, do I have to pay taxes on inheritance?” This article will help people who are currently globally mobile (ie: digital nomads, perpetual travelers, tax non-residents, etc.) and those who are currently living in their home country but open to some form of internationalization.
First, let’s understand some basic terms…
What is the Death Tax?
The simple question is this: will the government tax a big chunk of your estate when you die, taking assets set aside for your heirs in the process?
For many of us who are young entrepreneurs, the idea of passing down what we’ve built isn’t often top of mind. But it should be, because bankrupt governments are increasingly using estate taxes as a way to raise more revenue, particularly from people with substantial wealth.
In the United States, both the federal government and some state governments charge an estate tax based on the value of property you when you die. Therefore, US estate taxes are divided between federal estate tax and state estate tax.
These taxes doesn’t affect every estate – in fact, a small number of people pay it, in part due to careful estate planning by the wealthy – but it does hit people who are must hurt: the wealthy.
There’s a growing social movement to increase estate taxes on the basis that your heirs don’t deserve much money because they’ll probably just put it up their nose or turn into Kim Kardashian anyway. The majority in the so-called “99%” have deemed, despite their utter lack of business knowledge or logic, that any “rich kid” should be deprived of a fortune because the average voter knows better how to spend that money.
In short, the death tax is – according to the IRS – “a tax on your right to transfer property at your death”. Since your property needs to be transferred when you’re dead, it’s hard to avoid.
Each country calculates values differently, but the process is generally at least somewhat straightforward.
In the United States, your estate tax obligation is determined by adding up the fair market value of all assets you own or control, including cash, real estate, equities, trusts, businesses, cryptocurrencies, insurance policies, precious metals, and any one-of-a-kind Wu Tang Clan albums. This is called your “gross estate”.
From that, you may deduct any mortgages and debts, as well as certain administrative costs in some countries. However, you must also consider that assets such as real estate could have gone up substantially in value over the years, even though your enjoyment of that increase in value has not.
Then, the government applies tax at current estate tax rates, which are generally not progressive but usually only apply to larger estates. If you have an old car and some Hermes bags to your name, you generally won’t have to pay.
In the United States, you may pass an unlimited amount of property to your spouse tax-free, so this is factored in to the equation. For our purposes, your citizenship status may have its own impact; for example, former US citizens or US citizens with non-US spouses have separate taxation rules which could come into play here.
In 2018, the US estate tax threshold is $5.6 million per person, which will likely result in several thousand dead people paying a death tax. That may not seem like a lot, and the small numbers are often bandied about by political commentators as evidence that the estate tax doesn’t really matter.
Of course, it DOES matter if you’re the one paying it, which is why you may want to consider internationalizing your estate.
Estate Tax Rates Around the World
Speaking of the United States, it has the fourth highest estate tax or inheritance tax rate in the developed world, with rates of 40 percent.
The world’s highest rate of 55 percent is levied by Japan, which was recently in the news for indicating that it would apply the tax to everyone including non-resident citizens and even expats who resided in the country for ten years or more. The Governor of Tokyo has tried to improve that, but the fact remains that Japan’s inheritance tax laws were extremely draconian, even as they pandered to some invented sense of reason by suggesting that the tax wouldn’t apply until an estate was worth about $6 million.
Other countries with the highest estate taxes are South Korea – 50 percent and France – 45 percent. The United Kingdom is tied with the United States with a top rate of 40 percent, while noted high-tax countries such as Spain, Greece, Belgium, and Germany apply rates in the thirties.
On the other hand, fifteen OECD member countries apply no death tax when property is passed on to close family or lineal heirs, although some countries have exceptions. Some European countries do have ongoing wealth taxes, so it’s possible that you would pay income tax AND wealth tax when alive, and then a death tax when you die.
Yet the average man on the street would insist that “the rich” aren’t taxed enough.
If you’ve read our site at all over the last six years, you would know that my suggestion to those seeking low estate tax rates is to “go where you’re treated best” and find a zero-tax country with friendly laws for wealthy people.
The fact is, it’s possible to pay no estate tax at death by structuring your financial affairs properly while alive. You don’t even have to move to some far-flung country or set up a complicated structure. No doubt, proper planning is important not only to ensure you are located in a tax-free country for inheritance, but also to ensure you properly exit your position in your current high-tax country. In most cases, you can’t simply go live in another country for a few days, die, and call it good.
On a positive note, more countries are reducing or eliminating their estate taxes as they realize that the entire concept is nothing but a way to unfairly bilk the wealthy out of money at death. Many countries have seen estate tax revenues drop due to proper estate planning and even expatriation, so much so that thirteen jurisdictions have repealed estate taxes since 2000.
There is no way that any article on the internet could reliably cover all possible situations, nor should it. Proper estate planning advice should not come cheap, but if you have the means to be seeking a way to avoid death taxes that should indicate it may be worth it. If you’d like some help with legal tax reduction, you can click here.
While proper planning is required above simply reading a list, here are some of the countries that do not impose estate taxes on their subjects…
Countries with No Estate Taxes
Australia has had no inheritance tax since 1979, when all of its states joined together to abolish the tax. That part is a rather straightforward and pleasant change of pace from Australia’s rather strict tax policies. However, assets inherited as part of an Australian estate may be subject to capital gains tax. Heirs must keep records of the investment basis of any assets they inherit, as well as any costs incurred by the estate along the way. Additionally, Australian residents who inherit foreign assets may be subject to other Australian taxes as well.
While far fewer Chinese have been immigrating to Australia recently, the process of moving to Australia is still expensive. It also requires paying some of the world’s highest income taxes until you actually die.
Like Australia, New Zealand isn’t exactly known for its low taxes. I’m often asked whether living in New Zealand is a good option for better quality of life and second passports, given its relative isolation, and high taxes are always a deterring factor in my opinion. However, while New Zealand requires the deceased to have a final tax return filed in their name, they do not impose a death tax nor tax assets passed to beneficiaries. The estate will still need a tax ID number and to file its own return.
If you’re planning to move to New Zealand, you should have several millions dollars to invest there; recent changes in immigration law increased investment to NZ$3 million to NZ$10 million for anyone seeking to become a resident and work toward naturalization.
Unlike its neighbor to the south, Canada has no estate tax. In theory, that would make it an attractive domicile for wealthy Americans who want to enjoy the same language, culture, and geography without the hefty death tax bill when they expire. Heirs of Canadian estates do not need to add their inheritance to their tax return. In practice, things are a bit more complicated.
That’s because the CRA treats asset transfers after death as a sale, except in cases where such assets as passed to a surviving spouse in which case there are exceptions. There is capital gains tax charged to the increase in the value of your worldwide assets at death, which must be reported on the deceased’s final tax return or “terminal return”. While a primary residence is generally exempt, other assets could trigger capital gains taxes at half the nominal rate.
Estonia is one perhaps a model case study of a modern tax-friendly jurisdiction; personal income taxes are flat and going down, corporate taxes are flat and only charged at distribution, and there is no estate tax since 2014. The country has its own (much ballyhooed, in my opinion) e-resident program, which doesn’t apply to estate matters. Oh, and taxes can be easily filed online, too.
There are no death tax laws in Estonia. That said, any gains from the transfer of property received as a gift or inheritance – which are treated the same way in Estonia’s simplified tax code – are subject to income tax. Gains from the sale of a primary residence are generally income tax-free, as are gains from the transfer of a summer cottage or garden house if it has been owned more than two years. Becoming a resident of Estonia is relatively straightforward for entrepreneurs provided you’re willing to pay some tax, but citizenship requires you to learn Estonian.
As a civil law jurisdiction, Mexico’s estate tax law is rather complicated. Mexico technically does not recognize the concept of inheritance taxes, relying instead on a process of “donations” which determines how assets flow from parties to others who aren’t paying for the assets… including heirs. Mexican law allows for assets to flow to spouses or children (“lineal descendants”) without tax, and to other parties on a rather limited basis.
As in many civil law jurisdictions, Mexico’s stamp tax does apply to transfer of property to descendants, although there is a weird exemption calculated based on the minimum wage. As of today, about $50,000 worth of real estate is stamp tax-free; after that, normal ISAI rates apply.
Hong Kong abolished its inheritance tax in 2006, and even applied a “transition tax rate” of a flat US$13 to estates where someone died while the abolition was being put into place. Today, Hong Kong has no wealth tax, no gift tax, and no estate tax. Even when it did, Hong Kong’s territorial tax status applied to estates as well, meaning foreign estates were exempt. It is still advised to have a will.
Here at Nomad Capitalist, we’re big fans of Hong Kong, even as their banks have become nearly impossible to deal with. It’s possible to become a resident of Hong Kong by forming a company and applying for a residence permit, although doing so voids any offshore tax benefits. After seven years, you can obtain permanent right of abode, although a limited number of tax treaties means you should ensure you do proper planning in your country of citizenship, too.
Macau is not only the “Las Vegas of Asia” and the highest-grossing gambling mecca in the world; it’s also considered a tax haven, with considerable tax benefits for residents. Those who live in Macau are not only exempt from income tax on foreign source income, but there is no gift tax, capital gains tax, or estate tax in Macau. The territory, a Special Administrative Region of China, eliminated it back in 2006 to bring part of its tax policies more in line with Mainland China. It should be considered, however, that a stamp duty may apply to transfers of some property, namely real estate.
It has become harder to become a resident of Singapore – let alone citizen – since 2013 unless you have a couple million dollars to invest there long-term. But those who live in Singapore benefit from a generous exemption from estate tax. The Southeast Asian island city-state eliminated death taxes in 2008, making the tax process for inheritance rather simple. Somewhat like Hong Kong, there were always certain benefits for foreign assets.
One potential worry is that Singapore has discussed bringing back the estate tax. It was removed with “little fanfare” to ensure a continued stream of foreign investment and high-value migration, but the city-state is now more focused on growing its domestic economy and may re-introduce the tax.
Luxembourg offers a relatively favorable climate for avoiding estate tax, but it’s not exactly straightforward. European Union laws dictate that the deceased’s country of residence dictates his/her estate tax jurisdiction, although some assets can be taxed in your country of nationality. Expats living in Luxembourg may choose to avail themselves of Luxembourg’s laws, although some countries such as the United States may also try to be involved.
If you are determined to have a Luxembourg estate, however, you can pay as little as 0%. Non-citizens generally pay a minimum rate of 2% calculated by a complicated formula. Surviving spouses receive inheritance subject to a 5% tax. These rates apply for inheritances passed on to lineal heirs; rates to non-related parties are quite a bit higher. That said, Luxembourg has forced heirship rules that require surviving children to receive at least half of your estate anyway.
While Norway is beautiful, it isn’t exactly known as a low-tax country. In addition to sky-high income taxes, the country also imposes an annual wealth tax. And Norwegians don’t seem to mind, with any lowering of taxes being the subjects for blogger’s complaints about “redistribution concerns”. The only upside to Norway’s high taxes is that the government actually saves and invests its budget surpluses rather than allowing itself to become mired in debt.
However, as of 2014, Norway has no wealth tax. Living there to avoid tax probably wouldn’t make sense, and dual citizenship is not allowed in Norway, but if you’re already Norwegian, you can take solace in this benefit.
Portugal, like many middle-income European nations, abolished its inheritance tax in 2004. That, in addition to its sunny climate, have made it an attractive place for British citizens to relocate to. Portugal not only has no death tax, but it also offers non-EU citizens a ten-year holiday from income tax on most sources of income.
Spouses and children are exempt from stamp duty on any inherited assets transferred to them upon the death of a family member, which puts Portugal one step ahead of other countries on this list. For those who are not part of the deceased’s immediate family, there is a 10% stamp duty. Also of concern is capital gains tax if assets are sold right away. Either way, Portugal offers excellent tax benefits for foreign citizens, and is one country I help people relocate to for tax purposes.
Serbia actually does have an estate tax, but many beneficiaries are exempt. Family members connected by one degree, such as parents, children, and spouses, may receive an inheritance exempt from tax. Agricultural real estate may be inherited tax-free with up to two degrees of separation, meaning grandchildren can inherit farm property. Any other inheritances may be taxed at rates as low as 2.5%.
While Serbia does not offer the “international lifestyle” that estate tax-free cities like Sydney, Montreal, or Singapore offer, it does offer low cost of living and relatively low personal and corporate taxes to benefit from during your life. It’s also relatively easy to immigrate to, and the government recently announced new residence program opportunities.
Nestled in central eastern Europe, Slovakia is rarely discussed as a low-tax destination. However, Slovakia offers a system with no dividends tax, no wealth tax, no gift tax, and no inheritance tax. They do not impose the restrictions on lineal descendants that some other countries do, either.
Slovakia does charge capital taxes tax on any appreciation in value of estate assets when sold. As with many countries in the region, income tax rates are moderate; both personal and corporate income tax rates are fixed at 19%.
When the United States Congress voted to repeal its own estate tax by the 2020s, Quartz suggested that the US was actually like Sweden in an unlikely way: Sweden had unanimously voted to repeal its own death tax years earlier. Like the United States today, Sweden’s estate tax rates were as high as 60% before settling at a flat 30% when the tax was abolished. Now, Swedes pay nothing in estate tax at death.
Sweden does, however, have forced heirship laws which mean that anyone without estate planning will be forced to bequeath their money to their spouse and children. There have always been a number of loopholes in both the previous tax system, and in the forced heirship system, and this is why wealthy Swedish business owners often establish foundations elsewhere in Europe.
Israel technically doesn’t have an estate tax, but it is worth nothing that since so many Israeli citizens are actually tax resident and domiciled in other jurisdictions, that good international tax planning is often needed. Israel does, however, impose heavy capital gains taxes on assets sold.
Are you willing to go to the ends of the earth to save estate tax? Then consider Vanuatu, which doesn’t tax almost anything from income to corporate profits to inheritances (although the French-educated prime minister wants to change that). Vanuatu is a tax haven in the ultimate sense of the word, and while procedures have become a bit more strict, anyone can become a Vanuatu resident or economic citizen.
Provided you’ve cleared up any estate matters and connections in your home country, being tied to Vanuatu would mean you could legally pay zero tax.
Where to Move to Eliminate Estate Taxes?
Again, this article is not designed to solve any one specific situation, nor should it. If you have accumulated millions of dollars, the last thing you want to do is rely on free advice on the internet. Feel free to reach out to me and I’ll see if I can help (good news: no free advice here).
However, your particular estate tax planning may involve some lifestyle planning. As I mentioned earlier, you can’t simply pack your bags for a vacation and claim an exemption from your home country’s estate tax laws. Tax and residence planning is complicated.
If you’re willing to relocate to a tax haven or zero-tax country, your life will be easier. Countries like Vanuatu will be happy to basically leave you alone, allowing you to deal with just about zero taxation.
If you’re willing to totally divorce yourself from your home country by renouncing your citizenship, that can make things easier, too, although it’s generally only a big issue for US citizens, and even then there may be proper planning strategies.
The bottom line is that only an international tax professional with knowledge of legal offshore strategies can help you diagnose the proper prescription. There are a number of questions that only you can answer about what you have and how you want to live before that prescription can be written.