Estate Planning Techniques for Multinational Familiesmedia.straffordpub.com/products/estate-planning-techniques-for... · 8 International Trade and/or Investment Presents Coordination

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no

longer permitted.

Estate Planning Techniques

for Multinational Families Navigating Interests in Foreign Business, Real Estate and Financial Accounts

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, OCTOBER 7, 2015

Presenting a live 90-minute webinar with interactive Q&A

Andrew Bernknopf, Member, De Castro West Chodorow Glickfeld & Nass, Los Angeles

Elizabeth L. Morgan, Principal, Elizabeth Morgan & Associates, Naples, Fla.

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-961-9091 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address the

problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

NOTE: If you are seeking CPE credit, you must listen via your computer — phone

listening is no longer permitted.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email that you

will receive immediately following the program.

For CPE credits, attendees must participate until the end of the Q&A session and

respond to five prompts during the program plus a single verification code. In addition,

you must confirm your participation by completing and submitting an Attendance

Affirmation/Evaluation after the webinar and include the final verification code on the

Affirmation of Attendance portion of the form.

For additional information about continuing education, call us at 1-800-926-7926 ext.

35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

Overview of International Estate Planning Issues Affecting

U.S. Persons or Non-U.S. Persons with U.S. Sitused Assets

October 7, 2015

Elizabeth L. Morgan Elizabeth Morgan & Associates

[email protected]

© 2015 Elizabeth L. Morgan

10415 Morado Circle| Building 1, Suite 310 | Austin, TX 78759 Phone 239-228-4998 | Fax 512-370-2751

BIOGRAPHY

Elizabeth L. Morgan (formerly Elizabeth Morgan Schurig) represents a wide array of clients faced with multi-jurisdictional tax, estate, and business planning issues. She is experienced in the design of complex estate and business plans for U.S., non-U.S., and dual-citizen clients, and in assisting such clients with their pre-immigration and expatriation tax planning. Ms. Morgan frequently advises clients on the resolution of international tax and treaty issues in connection with their estate and business planning, and serves as outside counsel to several high net worth family offices. She has formulated and administered estate and business plans for individuals and entities with ties to Australia, the Bahamas, Canada, the Channel Islands of Jersey and Guernsey, China, Costa Rica, the Czech Republic, Dubai, France, Germany, India, the Isle of Man, Israel, Italy, Liechtenstein, Mexico, Nepal, the Netherlands, New Zealand, Oman, Panama, Portugal, Spain, Switzerland, and the United Kingdom. In addition to her expertise in the design, administration, and tax compliance of both inbound and outbound foreign trust and business structures, she has an extensive background in traditional probate, trust, and estate administration. A frequent author and speaker in the areas of domestic and international estate planning, asset protection, and foreign trust planning and tax compliance, Ms. Morgan has been quoted in various publications, including The Wallstreet Journal, Practical Accountant, Investments & Wealth Monitor, and Bloomberg Wealth Manager. She is a contributing author (since 1995) and co-editor (since 2000) of the four-volume treatise, Asset Protection: Domestic and International Law and Tactics (Thomson/West Group, updated quarterly). Her 2003 article, “A Charging Order is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?” was quoted in the Florida Supreme Court dissenting opinion in Olmstead v F.T.C., 44 So. 3d 76, Fla., 2010.

• EDUCATION:

• The University of Texas School of Law (J.D., 1988)

• Baylor University (B.A., English, 1984)

Elizabeth L. Morgan

Elizabeth Morgan & Associates

E-mail: [email protected]

Austin: 512.370.2732

Naples: 239.228.4998

Fax: 512.370.2751

7

International Trade and/or Investment

Affords Opportunities

Allows for acquisition of assets or services that are either unavailable or more costly in the taxpayer’s home country

Allows taxpayers access to alternative business or legal structures that are unavailable in the taxpayer’s home country

8

International Trade and/or Investment

Presents Coordination Concerns

Each (or all) countries have an interest in collecting a tax from either the trade or the transfer

Some countries have disparate taxing systems, making coordination difficult

Without coordination, overlapping claims of taxing authority (“juridical double taxation”) can hurt both the taxpayers and the taxing authorities because juridical double taxation will discourage, rather than encourage, foreign trade and investment

9

Bilateral Income and Estate Tax

Treaties

Australia (1953) Ireland (1949) Austria (1982) Italy (1955) Canada (1980) Japan (1954) Denmark (1983) Netherlands (1969) Finland (1952) Norway (1949) France (1978) South Africa (1947) Germany (1980) Switzerland (1951) Greece (1950) United Kingdom (1978)

Juridical Double Taxation issues are typically addressed by the enactment of bilateral income and estate tax treaties

The U.S. is a party to more than 50 bilateral income tax treaties but is a party to only 16 estate and/or gift tax treaties. This is because many countries do not have an estate inheritance, and/or gift tax.

10

Different Taxation Regimes

• Income Tax

• Sales Tax

• Value Added Tax (functions like a sales tax)

• Net Wealth Tax

• Stamp Tax or Duty (on sales or transfers)

• Property Tax

• Transfer Tax

In the international arena there exist different taxation regimes, which are often difficult to coordinate or reconcile.

11

Treaty Application

The effect of the taxation rules may be changed by treaty if the individual subject to the applicable tax is a citizen of or resident in another country or if the property or entity subject to the tax is sitused in another country. Therefore, it is very important to ask the pertinent questions regarding residence, citizenship, and/or situs and to ascertain whether there exists a treaty relationship before making any planning recommendation.

12

Inheritance Tax vs. Estate Tax

Inheritance Tax: a tax on the receipt of an inheritance that is typically paid by the individual receiving the property

Most European countries have an inheritance tax

The tax can be levied based upon either domicile of the donor, domicile of the recipient, or situs of the transferred property

Many inheritance tax statutes have progressive rates with different tables based upon degree of consanguinity – meaning that closer relatives pay less tax than more remote relatives or strangers

The gift is reduced by the tax

13

Inheritance Tax vs. Estate Tax (cont.)

Estate Tax: a tax on the transfer of property that is typically paid by the executor of the estate or the donor of the property

U.S. federal transfer tax system is an estate tax

The gift is not reduced by the tax unless otherwise specifically charged with the tax by statute or otherwise

14

Who and What is Taxed by the United States?

15

U.S. Citizens

A U.S. citizen is a person who is born or naturalized in the U.S. and subject to its jurisdiction as a citizen (Treas. Reg. §1.1-1(c))

Taxed on worldwide income regardless of residence or questions of domicile (IRC §1)

Taxed on transfers of worldwide property regardless of residence or questions of domicile (IRC §2001)

16

U.S. Residents

A U.S. resident for income tax purposes is a person who is one of the following in the calendar year in question (IRC §7701(b)(1)(A))

Lawful permanent resident

An individual who is “substantially present”

An individual who has elected to be a resident for that calendar year on his or her personal income tax return

17

U.S. Residents (cont.)

A U.S. resident for transfer tax purposes is a person who is “domiciled” in the U.S. at the time of death or at the time of the transfer

This definition is based upon subjective intent and contained only in the regulations (Treas. Reg. §20.0-1(b)(1)) and in the case law

Because the definition is different for income tax purposes than for transfer tax purposes an individual could be subject to income tax but not transfer tax, or vice versa

18

U.S. Residents (cont.)

Taxed on worldwide income (IRC §1)

Taxed on transfers of worldwide property (IRC §2001)

19

Non-Resident Aliens

Taxed on income effectively connected with the conduct of a U.S. trade or business and on certain types of non-business, “fixed or determinable annual or periodical” income (“FDAP” income) (IRC §871(a))

Interest on bank deposits and on portfolio interest is not subject to tax (IRC §871(h) & (i))

20

Non-Resident Aliens (cont.)

Caveat – transfers of stock in a U.S. corporation are not subject to gift tax (IRC §2501(a)(2))

Taxed only on transfers of property situated in the U.S. (IRC §2501(a)(1) and §2511(a))

Property situated in the U.S. (IRC §2104)

Real property located in the U.S. (Treas. Reg. §20.2104-1(a)(1))

Tangible personal property located in the U.S. (Treas. Reg. §20.2104-1(a)(2))

Stock in a U.S. corporation (IRC §2104(a))

21


Certain lifetime transfers (IRC §2104(b))

• Transfers with a retained life estate

• Transfers taking effect at death

• Revocable transfers

• Certain transfers made within 3 years of death

Interests in partnerships that conduct a U.S. trade or business (Rev. Rul. 55-701, 1955-2 C.B. 836)

Debt obligations of U.S. persons and U.S. political entities (IRC §2104(c)) unless the debt qualifies for the portfolio interest exemption under IRC §871(h)(1) (IRC §2105(b)(3))

Bank deposits in a U.S. branch of a foreign bank (Treas. Reg. §20.2104-1(a)(8))

22


Property not situated in the U.S. (IRC §2105)

Proceeds of life insurance (IRC §2105(a))

Bank insurance company deposits within the meaning of IRC §871(i)(3) (IRC §2105(b)(1))

Deposits with a foreign branch of a U.S. bank (IRC §2105(b)(1))

Debt obligations that qualify for the portfolio interest exemption under IRC §871(h)(1) (IRC §2105(b)(3))

Interests in foreign corporations

23

Covered Expatriates

The Heroes Earnings Assistance and Relief Tax (“HEART”) Act of 2008 creates a new category of taxed individual called a “covered expatriate” in new IRC §877A

24

Covered Expatriates (cont.)

Definition: A covered expatriate is any U.S. citizen who relinquishes citizenship and any long-term U.S. resident who ceases to be a permanent resident of the U.S., if the individual:

Has an average net income tax liability for the 5 years preceding the date of such expatriation that exceeds $145,000, (adjusted for inflation currently $157,000); or

Has a net worth ≥ $2 million; or

Fails to certify under penalty of perjury that he or she has complied with all U.S. tax obligations for the preceding 5 years

25


Definition of long-term U.S. resident: an individual who was a permanent resident (“green card” holder) for at least 8 of the 15 tax years ending with the year that the individual ceases to be a permanent resident within the meaning of IRC §7701(b)(6)

Visa holders are not subject to these rules

Expatriation results in a recognition event so that the expatriate is treated as if he or she has sold all of his or her assets for their fair market value on the date before expatriating

26


This “exit tax” gives an exemption for the first $627,000 of net appreciation (adjusted for inflation) and allows for deferral of the payment of the tax on any asset the expatriate elects until the asset is sold or the expatriate dies, whichever happens first, as long as a bond or other security is posted

Deferred compensation and tax deferred retirement accounts are exempt from the general exit tax but are subject to withholding of 30% on amounts distributed to the covered expatriate

27


Grantor trusts of which the covered expatriate is the grantor are subject to the exit tax

Non-grantor trusts of which the covered expatriate is a beneficiary on the day before expatriation are not subject to the exit tax but the trustee must withhold 30% on all distributions of income to the covered expatriate and distributions of appreciated property to a covered expatriate will cause the trust to recognize gain as if the property were sold to the covered expatriate at its fair market value

28


Under new IRC §2801 gifts and bequests from a covered expatriate after expatriation to a U.S. citizen or resident (“covered gifts or bequests”) are subject to tax in the hands of the U.S. citizen or resident at the highest marginal rate then in existence for estate tax (IRC §2001(c)) or, if higher, the highest marginal rate then in existence for gift tax (IRC §2502(a)) (IRC §2801(a) and (b))

29


Special rules apply to covered gifts or bequests made to trusts (IRC §2801(e)(4))

Gift or bequest to a domestic trust – the trust is treated as if it is a U.S. citizen and the trust is required to pay the tax

30


• Gift or bequest to a foreign trust – the tax is not imposed on the trust at the time of the transfer – rather, it is imposed at the time that assets attributable to the transfer are distributed to a U.S. person

– To the extent that the distribution carries out distributable net income (“DNI”) the beneficiary can deduct the tax due under this section from the income tax due

– Query – Will this tax also be deductible from the IRC §668 interest charge on accumulation distributions?

31


Covered gifts or bequests do not include:

Property included on a timely filed gift or estate tax return

Property that is deductible as a charitable or marital gift under IRC §2055, 2056, 2522, or 2523 (IRC §2801(e)(2))

The tax only applies to the extent that the value of the covered gifts or bequests received by a U.S. person during a calendar year exceeds the annual exclusion amount (IRC §2801(c))

32


The tax is reduced by the amount of gift or transfer tax paid to a foreign country with respect to such gift

Query – How will the coordination of this between countries work?

33

Gift Tax

• The donor is liable for the gift tax rather than the recipient (IRC §2502(c))

• No difference between U.S. citizens and permanent residents with regard to taxability of gifts and availability of deductions

• Non-resident alien individuals are subject to tax on transfers of tangible property situated in the U.S. – no gift tax is due on transfers of intangible property (like U.S. stocks and bonds) (IRC §2501(a))

34

Gift Tax (cont.)

• Gift tax exclusions available to non-resident aliens

– Annual exclusion (currently $14,000) (IRC §2503(b))

• Non-resident aliens not entitled to split gifts with spouses however

– Educational or medical payments (IRC §2503(e))

– Charitable deduction (IRC §2522(b))

– Unlimited marital deduction for gifts to U.S. citizen spouse (IRC §2523(a) and (i))

35

Gift Tax (cont.)

• Gift Tax deductions not available to non-resident aliens

– No marital deduction available for gifts to non-U.S. citizen spouse but the annual exclusion is $100,000; adjusted each year for inflation – currently $145,000 (IRC §2523(i)(2))

– No lifetime gift tax credit is available (IRC §2505)

36

Estate Tax

• The executor is liable for the payment of the estate tax (IRC §2002)

• No difference between U.S. citizens and permanent residents with regard to taxability of transfer and availability of deductions

• Non-resident aliens are subject to estate tax on the value of their assets which are situated in the U.S. (IRC §§2101 and 2103). The rate of tax is the same as for U.S. citizens and permanent residents.

37

Estate Tax (cont.)

• Non-resident alien unified credit (IRC §2102(b)(2))

– $13,000 (or $60,000 worth of assets)

– For certain decedents who are U.S. citizens but acquired citizenship by being born in a U.S. possession the credit is the greater of:

• $13,000 ($60,000 in asset value), or

• That proportion of $46,800 as the value of the decedent's gross estate situated in the United States bears to his entire gross estate, wherever situated (which could exempt as much as $175,000 in value)

• Pursuant to Sec. 901 of the Economic Growth and Tax Relief Reconciliation Act, after December 31, 2010 this section shall be redesignated as IRC §2102(c)(2)

38

Estate Tax (cont.)

• Where permitted by treaty, non-resident alien decedents are allowed the same unified credit as a U.S. citizen or permanent resident (IRC §2102(b)(3))

• Pursuant to Sec. 901 of the Economic Growth and Tax Relief Reconciliation Act, after December 31, 2010 this section shall be redesignated as IRC §2102(c)(3)

39

Generation-Skipping Transfer Tax (“GST”)

The GST tax applies to transfers by a non-resident alien of U.S. situs property, with the gift tax situs rules applicable to inter-vivos transfers and the estate tax situs rules applicable to transfers at death (Treas. Reg. §26.2663-2(b))

40

Qualified Domestic Trust (“QDOT”)

In 1988 Congress eliminated the unlimited marital deduction for spouses who were not U.S. citizens but substituted the concept of a special type of marital trust that could be used in that circumstance. This trust was designed to allow for deferral of the estate tax but under conditions that would ensure that the U.S. government could collect the tax when due in the future.

41

QDOT (cont.)

• Planning point – always ask clients what their citizenship status is (either during the planning stage or after death) because they will not necessarily know that they should alert you to this fact – many plans are done incorrectly because citizenship is incorrectly assumed

42

QDOT (cont.)

• A QDOT must meet the following requirements

– The Trust instrument (or will creating the trust) must require that:

• At least 1 trustee be either an individual who is a citizen of the U.S. or a domestic corporation (the “U.S. Trustee”); and

• No distribution (other than a distribution of income) may be made from the trust unless the U.S. trustee has the right to withhold the tax imposed by IRC §2056A

– The executor of the decedent's estate has elected QDOT treatment

43

QDOT (cont.)

– The security requirements contained in Treas. Reg. §20.2056A-2(d)(1) are met

• The QDOT security requirements differ based on size of the QDOT assets

– Large QDOT (assets > $2M) – 2 choices

1. 1 U.S. bank trustee

2. A bond equal to 65% of the fair market value of the trust assets in favor of the IRS

– Small QDOT (assets ≤ $2M) – only requirement is that its assets not be comprised of more than 35% in foreign real property

44

QDOT (cont.)

• There are significant penalties for undervaluation of the trust assets

• If QDOT provisions were not included in the trust or will of the decedent but assets pass to the non-citizen spouse in a fashion that would otherwise qualify for the marital deduction, the property will be treated as passing to a QDOT if the property is either transferred or assigned to a QDOT by the surviving spouse (or his or her legal representative) before the estate tax return is filed (Treas. Reg. §20.2056A-4(b)(1))

45

QDOT (cont.)

– If the surviving spouse transfers the assets to the QDOT then she is deemed to be the transferor for all purposes (income, estate, gift, and GST tax)

• If there is no QDOT but the surviving spouse becomes a citizen before the date on which the estate tax return is filed then a regular marital deduction in the estate of the decedent will be allowable (IRC §2056A(b)(12))

46

Foreign Death Tax Credit

Because of the disparity in tax theory and treatment among countries (and sometimes even canons or territories within countries) U.S. persons may find themselves or their assets subject to tax by a foreign jurisdiction either based on personal domicile or the location of assets. When that happens IRC §2014 provides a credit against the estate tax for the amount of the foreign tax.

47

Foreign Death Tax Credit (cont.)

• There are two limitations to this credit:

1. The credit shall not be an amount that exceeds the ratio that exists between the value of the taxed assets and the value of the assets in that country subject to tax; and

2. The credit shall not be an amount that exceeds the ratio that the foreign property bears to the total U.S. taxable estate

48

A Final Note – Tripwires for the Unwary

• Trusts as omnibus dispositive vehicles

– While an efficient and seemingly benign planning tool from a U.S. standpoint, the use of a trust will, in many countries, be problematic

• In countries such as the UK, even transfers to fully revocable management trusts often trigger immediate inheritance tax

• In some countries the legal relationship between the trustee and beneficiaries is not recognized, causing undesirable tax and often creditor difficulties

49

Tripwires (cont.)

• Even with a bilateral treaty in place the application of foreign tax to a transfer may result in additional tax being due to a foreign jurisdiction for which there is no U.S. credit or exemption.

• Beware the promise of tax nirvana because for U.S. taxpayers (whether citizens or permanent residents) nirvana exists only in our own backyard.

October 7, 2015

Andrew Bernknopf, Esq. De Castro, West, Chodorow, Mendler, Glickfeld & Nass, Inc.

Estate Planning Techniques for Multinational Families

BIOGRAPHY

PRACTICE EMPHASIS: Integrated practice of tax law, business law and estate planning, with an emphasis on international issues. His work involves: • U.S. estate, trust and tax planning for international and domestic families. • U.S. immigration and emigration tax planning. • Inbound and outbound structures for investments, real estate and business interests and cross-border transactions. • Foreign and U.S. grantor and non-grantor trust structures. • Start-up, merger and acquisition structures. • Taxation of derivatives and complex financial instruments. • Entertainment and technology industry taxation. • Corrective U.S. tax compliance and tax controversy representation. • Counsel to family offices. EDUCATION: LL.M., Taxation, New York University School of Law J.D., Harvard Law School B.A., Yale University

51

Andrew Bernknopf, Esq.

Member

De Castro, West, Chodorow, Mendler, Glickfeld & Nass, Inc.

10960 Wilshire Boulevard • Suite 1400 • Los Angeles, CA 90024

Direct: (310) 445-7657

Email: [email protected]

mailto:[email protected]

OVERVIEW

• More Opportunities, More Traps

• It’s good to have friends abroad. (As it is with corporate tax planning.)

• Do it right, pay no U.S. transfer tax; do it wrong, pay more U.S. transfer tax.

– Smaller taxable base, but smaller exemption.

– More reporting/compliance; stiff penalties for non-compliance.

• U.S. income tax planning may be at cross-purposes from transfer tax planning.

⁻ For example, foreign corporate estate tax blocker loses capital gain rate on sale

and loses inside income tax basis step-up at death; and

⁻ Foreign corporate estate tax blocker may lose Treaty rates on dividend income.

• Coordination Abroad

• Coordination with foreign tax and administration issues and foreign tax advisors and

trustees.

⁻ Often, time-sensitive action is needed.

⁻ Foreign income, estate, inheritance tax credit coordination.

DE CASTRO, WEST, CHODOROW, MENDLER, GLICKFELD & NASS, INC. 52

OVERVIEW

• Understand Client’s Goals, U.S. Time Horizon

• Client goals dictate the U.S. structure. For example:

– Short-term U.S. stay or investment horizon may favor structure that preserves

capital gain and qualified dividends (e.g., a U.S. LLC or other pass-through).

– Consider covering short-term U.S. estate tax exposure with term life

insurance.

• Incomplete Guidance, Risks

• Because of lack of complete tax guidance, many transactions involve risk.

– Often, the risk-free alternative, such as, foreign-to-foreign bank transfer, is not

practical.

• Risks and trade-offs need to be discussed with the client.


U.S Situs vs. Non-U.S. Situs Assets


ESTATE TAX

Asset U.S. or Foreign Situs Notes

U.S. Real Property U.S.

Foreign Real Property Foreign.

Stock in U.S. Corporation U.S. Includes mutual funds organized as U.S. corporations even if underlying assets are shares in foreign companies.

Stock in Foreign Corporation Foreign. Even if assets owned by foreign corporation are U.S. real property or U.S. securities.

Debt instrument with U.S. obligor

U.S., unless qualifies as portfolio interest instrument.

Publicly-traded U.S. government and corporate bonds are portfolio interest. Some private debts are portfolio interest.

Deposit in U.S. bank Foreign, unless a business account. CD is bank deposit; U.S. money market fund is not (corporate mutual fund).

Life insurance policy from U.S. issuer

on life of non-resident Foreign. Gift tax issues on premium payments.


ESTATE TAX


Tangible property in U.S., including artwork, jewelry, antiques, cars and currency

U.S. Exception for artwork on loan and items in transit.

U.S. business interests not held through an entity

or through disregarded entity U.S.

Includes U.S. private equity fund investment organized as LLC.

Contract rights with U.S. Counterparty

U.S. E.g., copyright, patent or trademark license owned directly.

Multi-member U.S. LLC or partnership interests

Probably U.S. Perhaps not U.S. if underlying assets are foreign.

Foreign LLC or partnership interests Uncertain. Substantial risk of U.S. situs on “look-through” or “aggregate” theory if underlying assets are U.S.


GIFT TAX


U.S. Real Property U.S.

Foreign Real Property Foreign.

Stock in U.S. Corporation Foreign (intangible).

Stock in Foreign Corporation Foreign (intangible).

Debt instrument with U.S. obligor

Foreign (intangible). Regardless of status as portfolio interest instrument.

U.S. bank account Foreign (intangible). Transfer of ownership of account.


GIFT TAX


Wire transfer to U.S. bank Probably foreign (intangible). An electronic credit/debt obligation of bank is not currency. But IRS could challenge.

Check deposit in U.S. bank Probably foreign (intangible).

An electronic credit/debt obligation of bank is not currency. But IRS could challenge. (Do not “cash” check.)

Life insurance policy Foreign (intangible).

Tangible property in U.S., including artwork, jewelry, antiques, cars and currency

U.S. Currency transfer in U.S. is taxable. See Blodgett v. Silberman, 277 U.S. 1 (1928).

U.S. business interests not held through an entity

or through disregarded entity

Foreign, to extent intangible (e.g., contract rights, IP, goodwill); U.S., to extent tangible (e.g., inventory, equipment).

Multi-member U.S. LLC or partnership interests

Probably foreign (intangible). See Blodgett v. Silberman, 277 U.S. 1 (1928).


U.S. Real Property “Blocker” Structures for Non-U.S. Owner






Estate and Gift Tax Structures Summary

• Intangibles

• "Intangibles" are key vehicle for non-U.S. citizen/non-U.S. resident lifetime gifting to U.S.

• Irrevocable Trusts

• Irrevocable trusts should be considered as the vehicle for lifetime gifting (of intangibles).

• Foreign corporate blocker

• Foreign corporation is the basic blocker structure for non-U.S. citizen/non-U.S. resident for U.S. estate tax purposes.

• Non-Recourse Encumbrance

• May be able to reduce net value of U.S. situs assets with non-recourse encumbrance.

• Valuation Discount for U.S. Situs Assets

• As with domestic estate planning, fractional interests in property and minority interests in entities can result in valuation discounts for U.S. situs assets.


CONVERSION ISSUES

• Best to have desired U.S. blocker or intangible structure in place from outset.

• Income tax on transfer to entity.

⁻ U.S. real property interest to foreign corporation.

⁻ U.S. income tax resident transfers property to foreign corporation.

• FIRPTA withholding on amount realized on disposition of U.S. real property interest.

• Exceptions:

⁻ Non-recognition transactions.

⁻ Disregarded entities.

⁻ No amount realized on gift.


CONVERSION ISSUES

• Case law doctrines.

⁻ Step transaction.

⁻ Other doctrines.

• Retained life estate (§2036).

⁻ Transfer for value exception.

• CFC sandwich.

⁻ U.S. shareholder -- foreign corporation -- U.S. assets.

⁻ Wrong way rate conversion for U.S. shareholder.

• Once in corporation hard to get out without triggering tax.

⁻ Deemed sale on distribution of appreciated property.

64 DE CASTRO, WEST, CHODOROW, MENDLER, GLICKFELD & NASS, INC.

CFCs

• CFC (controlled foreign corporation)

• CFC is more than 50% “U.S. shareholders” by vote or value, taking into account all arrangements.

⁻ Attribution rules, such as, family members and for shares owned through

entities, but no attribution for foreign family.

⁻ For trust-owned foreign corporations, look to U.S. beneficial interests,

including history of distributions. (Difficult question for discretionary trusts.)

• Consequences of CFC status:

• U.S. ordinary income pass-through to U.S. shareholders (including indirect shareholders, such as, trust beneficiaries) on pro rata share of "subpart f" income.

• Loans to U.S. treated as dividend distributions to extent of accumulated E&P.

• Gain on sale of CFC stock converted to dividend income to extent of accumulated E&P.


CFCs

• Keep in mind:

⁻ "30-day rule" results in no pass-through of CFC income if U.S.

shareholder for less than 30 days.

⁻ Possible "check-the-box" CTB election for deemed dissolution with up

to 75-day earlier effective date.

→ Gives up to 105 days to eliminate CFC after death of non-U.S.

shareholder.


PFICs

• PFIC (passive foreign investment company)

• A foreign corporation that is not a CFC (i.e., not controlled by U.S. shareholders), for any taxable year:

⁻ More than 75% of gross income is passive income; or

⁻ More than 50% of assets produce or are held for production of passive income.

⁻ Examples: foreign mutual funds, hedge funds, private equity, REITs

⁻ Maxim: Once a PFIC, always a PFIC

⁻ As with CFCs, there are attribution rules and possible indirect U.S. shareholdings, such as, with respect to trust beneficial interests. For example, PFICs might be owned as investments underneath a CFC holding company whose shares are owned by a trust.

• Consequences of PFIC ownership:

⁻ Unless a tax election is made, the consequences of U.S. direct or indirect ownership of PFIC shares:

⁻ Throwback tax on "excess distributions" and gains.

⁻ No Section 1014 basis step-up on death of PFIC direct shareholder.


PFICs

• Possible elections:

⁻ QEF (qualified electing fund): applicable to non-public investments.

⁻ Results in current pass-through of PFIC income (but not loss) and retention of character of underlying capital gains and qualified dividends.

⁻ Basis is increased for income pass-through, minus any distributions.

⁻ Capital gain on sale of PFIC shares for gain

⁻ Basis step-up at death of U.S. shareholder.

Note: If no distributions from PFIC, pass-through tax must be paid from other sources.

⁻ MTM (mark-to-market): applicable to publicly traded funds.

⁻ Results in ordinary income or ordinary loss each year based on difference in PFIC share price at year-end.

Keep in mind:

⁻ If dissolving CFC holding company under 30-day rule discussed above, may trigger PFIC deemed sale (excess distribution) on funds held by CFC (no inside basis step-up).


69

TRUSTS

DE CASTRO, WEST, CHODOROW, MENDLER, GLICKFELD & NASS, INC.

Sample Foreign G-1 / U.S. G-2 Trust Structure


TRUSTS

• Same non-tax functions as for U.S. domestic planning.

⁻ Assets pass without U.S. probate.

⁻ Spendthrift/asset protection for beneficiaries.

⁻ Control over distributions.

• Good inbound U.S. vehicle (foreign donor to U.S. donee).

⁻ If funded with non-U.S. situs assets, there is no U.S. transfer tax.

⁻ Pre-immigration gift effectively expands exemption amount.

⁻ Life estate to the first generation in U.S. can escape U.S. estate tax, and second generation not subject to GST if trust is funded with foreign-situs (GST exempt) assets. (Compare to outright gift or bequest to U.S. citizen or resident.)


TRUSTS

• "Dynasty trusts" (perpetual duration trusts).

• Under current law, escapes GST forever if funded with foreign-situs (GST exempt) assets.

• Foreign or U.S. Trust.

⁻ "Control" (all substantial decisions) and "court" (primary supervision) tests both must be U.S. to be U.S. domestic trust for income tax purposes.

⁻ U.S. domestic trust subject to U.S. income tax on worldwide income, minus distributions (including distributions to non-U.S.).

⁻ Foreign trust non-U.S. source income is not subject to U.S. income tax when earned, but distributions of accumulated income (UNI) to U.S. can be subject to very high U.S. income tax (100% cap) under "throwback" rules.


TRUSTS

• Grantor or Non-Grantor Trust

• Grantor Trust.

⁻ For U.S. income tax purposes, income, deductions, credits (including foreign tax credit) of trust are treated as that of the grantor (deemed owner of trust assets).

⁻ In other words, a disregarded entity for U.S. income tax purposes, other than special reporting rules

⁻ If foreign-owned, not subject to U.S. income tax if no U.S. source income.

⁻ Not subject to "accumulation tax" (discussed below) during lifetime of foreign grantor.

• Non-grantor Trust.

⁻ A tax conduit for U.S. income tax purposes. Income taxation at the trust or beneficiary level depends on distributions from the trust.

⁻ A foreign non-grantor trust is generally not subject to U.S. tax unless it has U.S. source income. But the foreign non-grantor trust will be subject to U.S. "accumulation tax" rules on distributions to U.S. beneficiaries.


TRUSTS

Special grantor trust rules:

⁻ Limit on foreign grantors: Non-U.S. person will not qualify as owner of a grantor trust, unless the trust is revocable solely by the settlor or provide for sole lifetime benefit to settlor or spouse.

⁻ U.S. grantor of foreign trust for benefit of a U.S. person: U.S. person who is settlor of a foreign trust for the benefit of a U.S. person is treated as owner of a foreign grantor trust.

⁻ Foreign grantor trust for benefit of a U.S. person established up to 5 years before becoming a U.S. person: Non-U.S. settlor of a foreign trust is treated as the owner of a foreign grantor trust at the time of his/her U.S. income tax residency starting date, if trust was formed within 5 years of that date and has a U.S. beneficiary.

⁻ U.S. beneficiary grantor trust. Possible freeze technique.


TRUSTS

• Special foreign non-grantor trust rules:

⁻ Trust accumulation tax (applicable to foreign non-grantor trust distributions).

⁻ "Excess distributions" (> DNI or FAI) treated as occurring in prior years of the foreign trust, to the extent of undistributed net income (UNI) from those prior years.

⁻ With the "throwback" interest charge, potentially a 100% tax on excess distributions.

⁻ Techniques to prevent accumulation of UNI (i.e., block trust-level income).

⁻ Corporate blocker. (But beware of possible CFC or PFIC status for underlying foreign corporations.)

⁻ Life insurance vehicles (e.g., private placement variable life insurance).


TRUSTS

⁻ Special foreign non-grantor trust rules (cont’d):

• Techniques for managing accumulation tax on distributions to U.S. from foreign trust with UNI.

⁻ Limit annual distributions to DNI or FAI (i.e., a dynasty trust with no principal distributions).

⁻ Regularize distributions and pay ordinary income tax on entire distribution (including principal).

• Foreign trust intermediary / anti-abuse rule.

⁻ Where applicable, distribution to foreign person followed by gift to U.S. treated as distribution to U.S.

⁻ QDOT (Qualified Domestic Trust):

• Vehicle to defer estate tax on U.S. estate-taxable assets that pass to non-citizen spouse.

• Preserves pre-tax investment base for spouse/avoids forced liquidation at first death.

• Consider survivorship (second-to-die) life insurance to fund estate tax on second death.


COMPLIANCE OVERVIEW

• Examples of U.S. Filings

⁻ Form 8938 (Specified Foreign Financial Assets)

⁻ FBAR (Foreign Bank Account Report) (FinCen Electronic Form 114)

⁻ Form 3520 (Report of Foreign Trust Distributions or Foreign Gifts or Bequests)

⁻ Form 3520-A (Report of Foreign Grantor Trust with U.S. Owner)

⁻ Form 5471 (Report of U.S. Shareholders of Foreign Corporations) (CFC return)

⁻ Form 8621 (PFIC return)

⁻ FATCA registration for foreign trusts that are FFIs

⁻ Form 1120 or 1120-F (Corporate Income Tax Return)

⁻ Form 8665 (Foreign Partnership Report)

⁻ Form 5472 (25%-or-more foreign-controlled U.S. corporation or foreign corporation with U.S. ECI)

• Corrective Compliance

⁻ Streamlined Filing Procedure.

⁻ OVDP (Offshore Voluntary Disclosure Program).

⁻ Corrective filing of FBARs and informational returns.

⁻ "Quiet" corrective filing.


NOTICE

• This presentation is for general educational purposes only and

does not provide legal or tax advice.

• The materials are not intended to be used for avoiding federal tax penalties that may be imposed, or promoting, marketing or recommending any entity, investment, plan or arrangement to any person.


Documents

Estate Planning Techniques for Multinational Familiesmedia.straffordpub.com/products/estate-planning-techniques-for... · 8 International Trade and/or Investment Presents Coordination