Ecuador Inheritance Tax


There have been all types of rumors regarding the proposed Ecuador inheritance tax.  Many readers have written to us in panic. They have also been sending me links to websites making outrageous claims and coming to wild conclusions based on a proposal that was, just that a proposal, not a fact. 

Correa

Correa wants your money banner shown at yahoo.com article about Ecuador demonstrations over proposed Ecuador inheritance tax. (1)

The reality is that Ecuador’s President Correa proposed legislation to create an inheritance tax.  This proposal met opposition.  Protesters in Ecuador took to the street for three nights running in Quito, Guayaquil and Cuenca to demonstrate over Correa’s plan for “redistribution of wealth” that would increase inheritance taxes.

Correa has temporarily withdrawn the proposal.

This does not mean there will not be an inheritance tax.  There probably will be additional taxation in Ecuador so let’s examine the bill presented by President Correa to get a feel of what might come to pass.  

The proposed bill, that has been withdrawn, was based on distribution and not profit.  There was also a US$70,000 threshold on each distribution.  This could allow as much as $280,000 in untaxed proceeds in the case of a married couple, with two children leaving an estate of $280,000. There would be no inheritance tax since all property in Ecuador is owned 50-50 by spouses.  The spouse of the deceased would already own 50% because of the marriage.  The other 50% would go to the children.  So the spouse would have $140,000 tax free and the other $140,000 would be split between the two children ($70,000 for each).  None of the distributions would pass the threshold. The idea is that this tax would not affect middle class families.

Of all the emails I received about this proposed tax, not one asked the two most important questions.

#1:  Will wealth beyond Ecuador be included in the calculations?

#2: Does Ecuador have double taxation treaties and with whom?

These are really important questions.  For example the IRS page “United-States-Income-Tax-Treaties—A-to-Z” (2) (bolds are mine) says:  The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a “saving clause” which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.

According to this IRS website, Ecuador does not have a tax treaty with the USA.  The estate of a US person, resident in Ecuador with Ecuador assets at the time of their passing could owe full US AND Ecuador inheritance tax., if Ecuador creates an inheritance tax.

This could be enormously confusing and highly taxing so I am asking our Ecuador attorney and US tax preparer to assist me in writing a full report about inheritance tax consequences now.  Then if  Ecuador does implement an inheritance tax, we’ll do an update.  If you are an Ecuador Living Club member we’ll post this at your password protected site.  We have already posted a report on how to use Ecuador wills.

Ecuador Living Club members can read this report at their password protected site by clicking here.  Ecuador Wills Report

See below how to join the Ecuador Living club and obtain a password.

Gary

(1) news.yahoo.com Ecuador opposition against inheritance tax-plan

(2) www.irs.gov United-States-Income-Tax-Treaties—A-to-Z

 



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