Germans love to travel to the United States. Moreover, during the past two decades, an increasing number of Germans have acquired vacation homes in the sunshine state of Florida. However, many of them are not aware that by doing so they have to comply with two legal and tax systems: (i) Germany, as their home jurisdiction, and (ii) United States, as the country where they spend part of their time and own a substantial asset. Specifically, under both German and Florida conflicts of law rules, their ownership of Florida real property (i.e. a vacation home) is governed by the laws of the State of Florida. Thus, their German Last Will and Testament (“Will”)may not automatically govern the transfer and dispose of their Florida real estate.
Even if the Florida real estate is mentioned in the German Will, such disposition may still fail for legal reasons. In Germany, it is very common to have a holographic, hand-written Will. Under German Laws of Succession, the Will is valid if it is merely signed and dated by the testator. However, with regard to the Florida real estate, Florida law will govern, presenting a problem because the validity of a Will in Florida is governed by Section 732.502 of the Florida Statutes which requires that a valid Will must be properly signed by the testator and at least two attesting witnesses. Further, holographic Wills in most states of the United States, including Florida, are strictly construed so that they must comply with their respective state’s specific statutes.
Many of our readers know a holographic Will is traditionally an instrument created in its entirety with one’s own handwriting. However, as an exception to the limitation on holographic Wills, Florida law treats an entirely handwritten Will with signatures from the testator and two witnesses, as a non-holographic Will. (Other states in the United States have similar exceptions.) Thus, if a German domiciliary signs his or her handwritten Will in the presence of two witnesses, who also sign in the presence of each other (and not at separate times), the instrument presumably would be valid under Florida law. Of course, it is not worth the risk of even having a holographic Will, when it is quite easy in the United States to get this part of one’s wealth transfer planning done correctly with competent counsel.
A German domiciliary has several options to avoid a situation where a German Will might not be valid under Florida law (or any other state in the United States). For instance, the testator could have two Wills: a German Will dealing with the moveable estate and other assets in Germany, and a Florida Will created with proper advice of Florida counsel dealing only with the Florida real estate.
Another way to avoid such a situation especially in case of a substantial residential real estate holding would be to establish a U.S. limited liability corporation (“U.S. LLC”). A U.S. LLC may qualify under German Income Tax Laws as a partnership, so that, according to German civil law, the German citizen’s Will would dispose of an interest in an entity, rather than Florida real estate. Thus, the German Will would be applicable and a formal probate proceeding of the Will in Florida (assuming there are no other U.S. assets) should be avoided.
For German clients it should be mentioned that the utilization of trusts are a common estate planning tool in the United States. As such, U.S. counsel, (who are not familiar with German laws), may often recommend the use of a trust structure. However, irrevocable trusts have many adverse German tax implications that must be considered. For example, the creation of a trust from a German point of view can trigger up to 50% inheritance tax. Also, every distribution from the trust to the beneficiaries is treated as a gift between the Settlor of the trust and the beneficiary, and is also an income taxable event. As such, there is a strong likelihood of double taxation. Therefore, a trust for a Florida vacation home of a German domiciliary is problematic, and other solutions must be considered.
Finally, the U.S./German Estate and Gift Tax Treaty (the “Treaty”) provides very valuable tax planning options. A German couple can make use of Sec. 10, Paragraph 4 of the Treaty, which provides safeguards that only one-half of the Florida real estate is taxable under the U.S. federal estate tax regime. Additionally, under Sec. 10, Para-graph 6 of the Treaty, the surviving spouse would qualify for the unlimited estate tax marital deduction under the laws of the United States, provided the Florida property passes to the surviving spouse. Therefore, most German citizens, with real property in the United States, do not have to be afraid about high U.S. federal transfer taxes.
Nevertheless, when acquiring Florida real estate, especially expensive vacation homes, a German domiciliary should carefully consider having a separate Florida Will, specifically dealing with the Florida real property. They should also give some thought to tax planning opportunities on both sides of the Atlantic so when the property is inherited or donated to other family members, there are no ghastly tax surprises.
It goes without saying that careful communication and coordination among German and U.S. tax counsel is an important component to the enjoyment of a residence in the state of Florida and in other states.