TRUST & ESTATE PLANNING

Estate Planning for Families with International Ties

03.19.2018 - Gerard F. Joyce

DOWNLOAD PDF

As the world gets smaller, wealth planning has become a bit more complicated for families who live and work in a number of different countries. Non-US citizens who own property in the United States face unique tax challenges, as do citizens of the US with business or personal ties outside the country.

Be Our Guest: Non-US Citizens with Assets or Family in the United States

If you are a non-US person with assets or family in the United States, you may be focused on just your personal situation—that is, what are the US income tax consequences of your US connections? However, you may not be aware of gift and estate taxes that may apply to the assets you own.

As a non-US person, you are not generally subject to US gift and estate taxes unless you own assets that are treated as “US situs” or US-based. The US situs rules vary between the US gift and estate tax, but the type of assets subject to the federal estate tax include US real estate, US stocks and mutual funds, cash, tangible property located in the US and certain debt obligations.

Establishing a Trust Can Preserve Your Legacy to US Recipients for Generations to Come

If you are a non-US person who wishes to leave a substantial legacy to US persons, the best option in our view is to use an irrevocable trust. If the trust is designed correctly, the US estate tax is never triggered, even though the trust benefits US persons.

Conversely, if you were to leave significant assets directly to a child or another US citizen or resident without the use of a trust vehicle, these assets would become part of the recipient’s US taxable estate. Even though the assets were held outside the US, they may become subject to US federal estate tax.

A word of caution when using trusts: It is important to ensure the trust is not funded improperly with US assets to cause the property to be deemed to be included in your estate for US estate tax purposes. And, location of the trust is also important. Many non-US citizens establish their trusts in the state of Delaware for the privacy, tax benefits and estate-protection features these trusts can offer. Home country laws and US estate tax treaty provisions can significantly impact your planning, so it is important take a coordinated approach.

Lastly, even if you use a foreign holding company to avoid US estate tax, this technique will not work over the long term for your US family members as they will then own the foreign company (or its underlying assets) and be subject to the US estate tax, which applies to a US person’s worldwide assets.

The Challenges in Owning and Transferring US Real Estate

One of the most common challenges is transferring US real estate, which is subject to both US income tax and to federal estate and gift taxes. Non-citizens can often eliminate the estate tax exposure by setting up a trust or non-US holding company to buy the property and name family members as beneficiaries.

Capital gains tax on the sale of the US real estate cannot be avoided in the long run. However, many clients structure the ownership through a US LLC that is, in turn, owned by a non-US company. This helps avoid the “FIRPTA withholding” which is 10% of the sales proceeds rather than a tax on the actual gain, if any.

There is no one-size-fits-all solution. You need to weigh a variety of factors, such as how long you plan to live in the US and whether or not your US children will use the US real property. The longer you own the property and the longer the property will be held by US persons weighs in favor of funding a US trust to purchase the US real estate. This way, there should never be a US gift or estate tax, and the capital gains rules apply only when the property is sold. In addition, the FIRPTA rules are avoided because the US real property is not “foreign owned” since the US trust is the owner.

Another factor to consider is whether the property is for personal use or commercial property. Commercial properties may warrant very complex vehicles to avoid US estate tax and to minimize US income tax on the property’s income. You should understand whether the benefits from your planning warrant the cost or whether another option, such as purchasing insurance, can more efficiently fund any US estate tax obligation.

Bon Voyage? Relinquishing US Citizenship or Long-Term Green Card Status

If you are a US citizen who gives up US citizenship (or a green card holder for eight out of the last 15 years who terminates his or her status), your assets could still be effectively subject to US income and estate taxes. The IRS has established income tax rules in the form of an “exit tax” that is specifically for high-income and high-net-worth expatriates, as well as a so-called “phantom” estate tax on legacies passing to US persons. Generally, these rules apply if your net worth is greater than $2 million or if your average annual US income tax (not income) is greater than $165,000. The tax cost of these rules should be seriously evaluated before expatriating.

Delaware Trusts Help Avoid Estate Taxes

Many non-US citizens establish Delaware Trusts for the privacy, tax benefits and estate-protection features they offer. Often, families prefer to keep information about their international holdings private—not to avoid tax obligations, but to manage the risk of political instability in their home country and prevent the release of private financial information that could put their personal safety at risk.

The rules that govern Delaware Trusts for non-US citizens are complex, but one of the most popular strategies among non-citizens is setting up a foreign grantor trust in the state of Delaware. When funded entirely with non-US assets, the trust is not subject to the US federal estate tax.

Unfortunately, when the person who created the trust (the grantor) dies, most other tax benefits associated with a Delaware foreign grantor trust do not extend to beneficiaries. But there are strategies that can help mitigate this problem, including converting the foreign trust to a domestic trust, essentially bringing it back onto US shores.

Benefit from a Professional

If your estate plan is complicated by multiple citizenships or international assets, we always recommend seeking guidance from our professionals who can help navigate the nuances of the laws and rules surrounding cross-border planning.

VIEW OUR FULL 2018 OUTLOOK


This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

TRUST & ESTATE PLANNING

Estate Planning Must-Haves

03.22.2018 Bryan Kirk

NEXT POST

TRUST & ESTATE PLANNING

Tax Reform for the Holidays: Better to Give than Receive

12.26.2017 Craig Richards, CPA/PFS, CFP

PREVIOUS POST