|Stephen A. Malley
specializes in the areas of international business, tax and finance, transnational estate, tax, and asset protection planning, and pre-immigration and expatriation planning. Mr.
practice includes domestic and foreign licensing of intellectual property, and the formation of captive liability insurance companies.
U.S. companies with or developing foreign operations
U.S. citizens with foreign assets or conducting business and investing overseas
Foreign individuals with U.S. assets and/or U.S. business
*Domestic and transnational estate and asset protection planning
Learn more about Stephen A. Malley
AND ASSET PROTECTION PLANNING
PRIVACY IS ALIVE AND WELL
The now common perception that there is no privacy may be valid for internet communications, but not necessarily for estate planning.
Most Countries and financial institutions in Europe, Asia and South America have signed reciprocal agreements requiring disclosure of beneficial ownership of financial accounts. Many if not most of these Countries, including the U.S., Germany, France and the UK, require disclosure of specific "Foreign" assets.
Especially now, wealthy families throughout the world are highly motivated to keep their wealth, tax and estate planning confidential, for any number of good reasons. U.S. Wills and Trust, formed in certain States including Delaware, can still offer a significant level of confidentiality, even if income tax reporting is required.
Advance planning is critical.
The Interplay of Tax Treaties and
Foreign Tax Credits on Cross-border Estates
The United States has estate and/or gift tax treaties with sixteen sovereign nations (see Appendix A). These treaties affect some transfer and estate tax consequences relating to assets held within the relevant Countries. Treaties control which treaty country can assess transfer taxes by either:
- Determining which country is the decedent's/donor's domicile for transfer tax purposes;
- Determining in which country the property is deemed to be located.
Certain estate tax treaties relieve some of the burden that occurs when a surviving spouse is a non-resident or Citizen by increasing the marital deduction for non-resident spouses. Moreover, where both countries have a claim and assess taxes, a tax credit regime may operate to eliminate or at least reduce double taxation. U.S. taxation of surviving non-citizen spouses is nevertheless subject to the reduced estate tax exemption, unless a Qualified Domestic Trust is used.
These treaties among the pertinent jurisdictions will affect how an estate is structured, and the interplay of the relevant transfer tax regimes and Treaties must be carefully analyzed. States, including California, do not all recognize tax Treaties.
BASIC U.S TAX RULES FOR U.S. RESIDENTS
It is always essential to determine where an individual is resident and domiciled, which may differ, and both being very relevant to planning. Following is a brief summary of U.S. rules:
- INCOME TAX is assessed on worldwide income to U.S. Citizens and "Residents", defined as Green Card holders, and persons meeting the "Substantial Presence" test (183 days in one year or over three years by formula). Tax credits for foreign income tax paid may be available by Treaties, which serve to avoid double income taxation.
Tax on worldwide income is often an unpleasant surprise for immigrants, including EB5 investors who immigrate.
- U.S. ESTATE TAX for non-Citizens, even if resident here is not based on "residency" but rather on "domicile", which normally has a subjective determination, meaning essentially the place of intended permanent abode. The non-Citizen, even with a Green Card, may be Resident for income tax purposes, but if not domiciled here only U.S. "sited" assets would be included in the estate for estate tax purposes. As discussed below, a person could be deemed to have a double domicile by the U.S. and the relevant other Country. The application of Estate tax treaties must be considered.
To determine domicile, the IRS will look all relevant facts, including time spent in the U.S., personal, business and professional connections, family connections, voter and license registrations, and etc.
- BEQUESTS AND GIFTS to a non-Citizen spouse, regardless of a Green Card or length of time inn the U.S., are not entitled to the unlimited marital deduction. Bequests to a non--Citizen spouse in excess of the current exemption ($5.45 mm) must go into a special Trust (Qualified Domestic Trust) to secure the unlimited spousal exemption. Gifts to a non-Citizen spouse are currently taxed in excess of $148,000 annually, plus the annual exclusion; (all these numbers are indexed for inflation). Note a spouse generally has until an estate tax is due to become a U.S. Citizen, not always an option.
BASIS U.S. TAX RULES FOR "NON-RESIDENT ALIENS"
Following is a brief summary of U.S. rules for those not resident or domiciled in the U.S.:
- INCOME TAX is assessed on U.S. source income.
- ESTATE TAX is assessed on U.S. "sited" assets, and unless the beneficiary is a U.S. Citizen, the estate tax exemption is limited to $60,000,with no credit for gifts; other draconian rules apply. The situs rules are extensive but not necessarily definitive, for example regarding treatment of partnerships. Examples of U.S. sited assets include art, jewelry, gold coins, cash in a safe deposit box, furniture, equities and shares of stock in U.S. companies, whether publicly traded or privately held (including shares of stock in a co-operative apartment corporation), and regardless of the location of the share certificates, shares in U.S. funds and accounts with U.S. brokerage firms.
Non-U.S. sited assets include, just for example, stock in a foreign corporation, insurance policies (not all), "portfolio debt obligations" (often used), foreign assets not connected with a U.S. trade or business; Note that partnership interests require special consideration of all relevant facts, and the law is not entirely clear.
- GIFT TAX is assessed on the transfer of "tangible" property, such as real estate, stocks and bonds, jewelry, and U.S. sited assets as discussed above. However, for gift tax purposes, shares of stock in a U.S. corporation (even though included for estate tax purposes), and some other sited assets are excluded.
ESTATE PLANNING ISSUES FOR FOREIGN ASSETS
For both U.S. Citizens and non-resident aliens
Following is a brief description of just some of the important issues which must be considered, both by U.S. taxpayers with foreign assets, foreigners with U.S. assets, and by those with no U.S. connections at all.
- "Forced Heirship": Many civil law Countries require that specified family members receive most if not all an estate, including France, Germany, Japan, and South Korea. In the Middle East, there may be religious rules governing heirship. China generally gives "supported" family members a priority claim. Some Countries, like France, impose large and perhaps confiscatory transfer taxes on assets transferred or directed to other than direct family members.
Canada (some Provinces), Ireland, Australia, the UK and some other countries, under very specific circumstances, may allow a Will to be "reformed" to ensure that immediate family members who demonstrate "need" are not disinherited.
- Citizenship, Residency, and Domicile: In most relevant countries, the determination of status is critical, and affects both income, gift and estate tax planning. Treaty issues are discussed below. The issues of "domicile" and "residency" can be problematic as each country has its own definitions. In France, for example, owning or even renting a residence can, with other factors, cause one to be "resident" there for tax purposes. The asset "situs" rules also differ country by country.
- Community or Separate Property
: The character of asset ownership must be determined, and it can be complicated, certainly in the U.S. The character of assets and related laws may determine if and how much of an asset one has the right to transfer.
- Conflicts of Laws, Situs Rules: The relevant laws must be determined, and even then, there is often a potential conflict over which law should govern.
- Estate Tax, Transfer, or Inheritance Tax
: A country may tax an estate directly, or instead impose an inheritance tax, usually on beneficiaries. Some levy an income or capital gains tax on testamentary transfers of property (such as Canada, the UK, Germany, Italy, and Chile). It is of course imperative to determine what taxes and what tax credits will apply before determining an appropriate estate and tax plan.
- Liability to Creditors: In Countries such as Japan, Switzerland, and some European Countries, the "automatic" transfer of an estate to heirs may carry liability to creditors of the decedent, although an election may be available to limit that liability; in Switzerland, for example, the election must be made within one month. Advance planning may well solve most if not all these exposures.
- Multiple Taxing of Assets: The U.S. assets of a non-resident alien could be subject to U.S, estate tax, and with no tax credit allowed for foreign transfer or inheritance taxes on the same property. As for U.S. Citizens with foreign assets, the U.S. has only a few estate tax treaties which can afford some relief from double taxation. The application of tax credits is complex and must be considered.
- Probate or Direct Inheritance: States in the U.S. generally have probate procedures to transfer assets from an estate. Many Countries have "direct" inheritance rules, without a probate procedure. The relevant rules are an important consideration in an estate Plan. (See Asset Protection below).
- Trusts: Estate planning in the U.S. usually involves the use of revocable and irrevocable Trusts, and the use of Trusts may be appropriate to hold title to foreign assets, if for example there are foreign beneficiaries, or if asset protection is critical. The "tax haven" trust may offer very substantial asset protection, but unless designed otherwise, and gift tax paid or reported, it must be reported as a Grantor Trust, and reported in any case for income tax purposes.
Foreigners with no U.S. connection or assets might also consider the use of U.S. Trusts, especially if there are U.S. beneficiaries. However, many civil law Countries do not recognize Trusts, and others, like the UK, generally impose a tax on transfer of assets to a Trust. The Delaware Trust may, in the near future, not be as "confidential" as is now the case, but Delaware and some other States still offer interesting planning opportunities for foreigners.
- Foreign Trusts may be of particular interest to nonresident aliens, if, for example, there are U.S. assets and U.S. beneficiaries; these may be advantageous for foreign assets as well. This structure can be designed to avoid future gift or estate tax issues.
- Private Placement Life Insurance
Private Placement life insurance may offer a good planning opportunity. For U.S. purposes, the policy should be "U.S. compliant", to earn tax free, and the death benefit is tax free. In the U.S., cash value must be reported. A properly structured policy can provide effective pre-immigration planning, provide substantial asset protection, and might be of particular interest when a spouse is a non-U.S. Citizen.
Most Countries have specific rules governing such life insurance programs, including the U.S., France, Israel, China, and Canada. Canada, for example, asserts a "deemed distribution" of assets in a trust, including a life insurance trust, every 21 years.
ESTATE TAX TREATIES
The U.S. has estate and gift tax treaties with the following countries: Australia, Austria, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. They are not identical.
For example, the U.S.-German treaty emphasizes "domicile", but Germany will generally tax the person as being domiciled in Germany if
he or she is deemed for other reasons to be subject to unlimited tax liability for the purposes of the German inheritance and gift tax. Under the German Treaty, if an individual is deemed to be domiciled in both Countries, but in one for less than 10 years, Citizenship will generally be determinative.
The U.S.-French treaty recognizes that the law of "each Country" will apply, which can produce some surprising results
. If the individual is deemed to be domiciled in both countries, but the individual has been domiciled in the other Country for less than 5 years out of the previous 7 years, the "tie-breaker" rules apply (beyond the scope of this article).
The U.S.-UK Treaty provides essentially that a person is deemed domiciled in the U.S. if he or she was a resident of the U.S. or if he or she was a U.S. citizen and had been a resident of the U.S. at any time during the preceding three years, and is deemed domiciled in the U.K. if he or is deemed there for the purposes of the tax which is the subject of the treaty. In the case of a "double domicile", The Treaty applies a "7 out of 10 year" income tax liability to govern the application of estate tax.
Advance planning can minimize or avoid some tax in most all situations. It is imperative to analyze the assets involved, historical tax history, and of course all applicable Treaties.
THIS ARTICLE PROVIDES AN OVERVIEW OF COMPLEX LAWS AND ISSUES AND IS NOT INTENDED TO BE A DEFINITIVE DISCUSSION OF APPLICALBE LAW, TAX, OR PLANNING OPPORTUNITIES. IT IS NOT LEGAL ADVICE.
Stephen A. Malley
A Professional Corporation
©2017 Stephen A. Malley, J.D.