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International Estate Planning Issues Stephen C. Hartnett Associate Director of Education American Academy of Estate Planning Attorneys Stephen C. Hartnett.

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Presentation on theme: "International Estate Planning Issues Stephen C. Hartnett Associate Director of Education American Academy of Estate Planning Attorneys Stephen C. Hartnett."— Presentation transcript:

1 International Estate Planning Issues Stephen C. Hartnett Associate Director of Education American Academy of Estate Planning Attorneys Stephen C. Hartnett Associate Director of Education American Academy of Estate Planning Attorneys

2 International Estate Planning U.S. Clients / Trusts – Foreign Assets Laws vary Not obvious – trap for unwary Hidden taxes Example – Canadian property Funding into U.S. trust is a recognition event Unknown consequences Forced heirship? SEEK COUNSEL IN FOREIGN JURISDICTION!! Good resource = LexMundi.org Lawyers in 100 countries U.S. Clients / Trusts – Foreign Assets Laws vary Not obvious – trap for unwary Hidden taxes Example – Canadian property Funding into U.S. trust is a recognition event Unknown consequences Forced heirship? SEEK COUNSEL IN FOREIGN JURISDICTION!! Good resource = LexMundi.org Lawyers in 100 countries

3 International Estate Planning Citizenship: key to analysis U.S. Citizenship Acquisition Born in the United States (Constitution) 50 States + District Guam Puerto Rico U.S. Virgin Islands Territorial waters around each (12 nautical miles) EVEN IF here momentarily and never returned MUST be subject to U.S. jurisdiction at birth Not diplomats Born outside U.S. Both parents U.S. citizens AND One parent resided in U.S. prior to childs birth Citizenship: key to analysis U.S. Citizenship Acquisition Born in the United States (Constitution) 50 States + District Guam Puerto Rico U.S. Virgin Islands Territorial waters around each (12 nautical miles) EVEN IF here momentarily and never returned MUST be subject to U.S. jurisdiction at birth Not diplomats Born outside U.S. Both parents U.S. citizens AND One parent resided in U.S. prior to childs birth

4 International Estate Planning U.S. Citizenship Born outside U.S.; One U.S. parent Parent lived in U.S. for 5+ years prior to birth Parent lived in U.S. 2+ yrs after turning 14 Naturalized U.S. citizen What about other citizenship? Could be both – Look to other countrys laws Examples: U.K.: even if renounce, still U.K. citizen (subject) Ireland: Irish citizen from birth even if born in U.S., parents born in U.S., but grandparents born in Ireland. U.S. Citizenship Born outside U.S.; One U.S. parent Parent lived in U.S. for 5+ years prior to birth Parent lived in U.S. 2+ yrs after turning 14 Naturalized U.S. citizen What about other citizenship? Could be both – Look to other countrys laws Examples: U.K.: even if renounce, still U.K. citizen (subject) Ireland: Irish citizen from birth even if born in U.S., parents born in U.S., but grandparents born in Ireland.

5 International Estate Planning Expatriation Affirmative act + intent to expatriate But, Sec. 877 If expatriate to avoid tax Still taxed as citizen for 10 yrs. Avoid 877 IF: Income tax under $124k average prior 5 yrs AND Net worth less than $2 million AND Affirm tax law compliance for prior 5 yrs Or-- Dual national AND No substantial contact w/ U.S. Never U.S. resident, passport AND Not present U.S. over 30 days ea of 10 prior yrs Minors, U.S. cit at birth, expat by 18 ½ Neither parent U.S. cit at birth Not present U.S. over 30 days ea of 10 prior yrs Expatriation Affirmative act + intent to expatriate But, Sec. 877 If expatriate to avoid tax Still taxed as citizen for 10 yrs. Avoid 877 IF: Income tax under $124k average prior 5 yrs AND Net worth less than $2 million AND Affirm tax law compliance for prior 5 yrs Or-- Dual national AND No substantial contact w/ U.S. Never U.S. resident, passport AND Not present U.S. over 30 days ea of 10 prior yrs Minors, U.S. cit at birth, expat by 18 ½ Neither parent U.S. cit at birth Not present U.S. over 30 days ea of 10 prior yrs

6 International Estate Planning Expatriation – Not citizen but taxed like one KICKER: CAN BE EXCLUDED FROM U.S. AND NOT EVEN GIVEN VISA TO VISIT RESIDENCY Income Tax Citizens Green Card Holders (LPRA) Lawful Permanent Resident Alien Both taxed on worldwide income Residents Tax on worldwide income IFsubstantial presence Income tax count the days Substantial presence = Expatriation – Not citizen but taxed like one KICKER: CAN BE EXCLUDED FROM U.S. AND NOT EVEN GIVEN VISA TO VISIT RESIDENCY Income Tax Citizens Green Card Holders (LPRA) Lawful Permanent Resident Alien Both taxed on worldwide income Residents Tax on worldwide income IFsubstantial presence Income tax count the days Substantial presence =

7 International Estate Planning Substantial presence 31 days in current year AND 183 over 3 yrs as follows All in current yr + 1/3 of first prior year 1/6 of second prior year If total 183 or greater = resident Exempt (diplomat, etc) and commuters Mexico / Canada not residents What is U.S.? 50 States + DC + territorial waters NOT Possessions / territories Substantial presence 31 days in current year AND 183 over 3 yrs as follows All in current yr + 1/3 of first prior year 1/6 of second prior year If total 183 or greater = resident Exempt (diplomat, etc) and commuters Mexico / Canada not residents What is U.S.? 50 States + DC + territorial waters NOT Possessions / territories

8 International Estate Planning Residency – Estate tax Like common law domicile Physical presence + No present intent to leave Once established – stays until new one established Can be illegal and be resident Subjective, but factors are: Employment Friends Family Homes Community involvement Residency – Estate tax Like common law domicile Physical presence + No present intent to leave Once established – stays until new one established Can be illegal and be resident Subjective, but factors are: Employment Friends Family Homes Community involvement

9 International Estate Planning Estate Tax Residents – Like citizens Taxed worldwide assets Get standard AEA Non-Resident Alien (NRA) taxation Income tax Taxed on U.S. source income (exc portfolio debt) Interest from U.S. govt, corp., indiv debt Dividend from U.S. corp Foreign corp if 25% effect connect w/ U.S. 3 yrs Personal services in U.S. U.S. rents / royalties U.S. realty gains Estate Tax Residents – Like citizens Taxed worldwide assets Get standard AEA Non-Resident Alien (NRA) taxation Income tax Taxed on U.S. source income (exc portfolio debt) Interest from U.S. govt, corp., indiv debt Dividend from U.S. corp Foreign corp if 25% effect connect w/ U.S. 3 yrs Personal services in U.S. U.S. rents / royalties U.S. realty gains

10 International Estate Planning Income Tax – NRAs FDAP Fixed and determinable gains, profits, and income Taxed at flat 30% rate U.S. source gains exempt Unless physical presence 183 days in year Effectively connected to US trade/business Trade or business– regular, continuous, substantial Not incidental and sporadic Taxed at normal, graduated rates Estate Tax – NRAs Taxed on U.S. situs assets only Get AEA of only $60k (EGTRRA did not change) Income Tax – NRAs FDAP Fixed and determinable gains, profits, and income Taxed at flat 30% rate U.S. source gains exempt Unless physical presence 183 days in year Effectively connected to US trade/business Trade or business– regular, continuous, substantial Not incidental and sporadic Taxed at normal, graduated rates Estate Tax – NRAs Taxed on U.S. situs assets only Get AEA of only $60k (EGTRRA did not change)

11 International Estate Planning Estate Tax on NRAs Situs of assets In U.S. Tangible assets physically present U.S. corp stock 2035 to 2038 if U.S. situs at transfer or death Out of U.S. Life insurance proceeds on decedent (even if U.S. co.) Art on exhibition in U.S. Imported exclusively for that purpose On loan to museum/govt Not getting any of proceeds Portfolio debt Estate Tax on NRAs Situs of assets In U.S. Tangible assets physically present U.S. corp stock 2035 to 2038 if U.S. situs at transfer or death Out of U.S. Life insurance proceeds on decedent (even if U.S. co.) Art on exhibition in U.S. Imported exclusively for that purpose On loan to museum/govt Not getting any of proceeds Portfolio debt

12 International Estate Planning Estate Tax – NRAs Out of U.S. – portfolio debt (issued after 7/18/84) 1) Bonds, notes, other debts 2) Not issued by corp / partnership in which D or related party have 10% + interest 3) Registered form OR Bearer and legend, etc To prevent U.S. citizen/resident from acquiring 4) Interest payable outside the U.S. U.S. bank deposits Deposits in U.S. branch of foreign bank Strategies to convert to non-U.S. assets Put in offshore corp (not partnership) w/ bus purpose Convert to other non-US situs assets Estate Tax – NRAs Out of U.S. – portfolio debt (issued after 7/18/84) 1) Bonds, notes, other debts 2) Not issued by corp / partnership in which D or related party have 10% + interest 3) Registered form OR Bearer and legend, etc To prevent U.S. citizen/resident from acquiring 4) Interest payable outside the U.S. U.S. bank deposits Deposits in U.S. branch of foreign bank Strategies to convert to non-U.S. assets Put in offshore corp (not partnership) w/ bus purpose Convert to other non-US situs assets

13 International Estate Planning Gift Taxation of NRAs ONLY gift taxed if 1) tangible AND 2) U.S. situs Examples: U.S. realty, U.S.-located tangible personalty E.g., currency, autos, airplane Note: Art work on loan NOT exempt from gift tax like it is estate tax. Strategies Convert to intangible Move out of U.S. before gifting Gift Taxation of NRAs ONLY gift taxed if 1) tangible AND 2) U.S. situs Examples: U.S. realty, U.S.-located tangible personalty E.g., currency, autos, airplane Note: Art work on loan NOT exempt from gift tax like it is estate tax. Strategies Convert to intangible Move out of U.S. before gifting

14 International Estate Planning Treaties If citizen or resident of more than one country Look to treaties (income / estate & gift) Conventions and Protocols Override U.S. statutes / Regs Estate and / or Gift treaties w/ U.S.: AustraliaAustriaCanada DenmarkFinlandFrance GermanyGreeceIreland ItalyJapanNetherlands NorwaySouth Africa Sweden United KingdomSwitzerland Treaties If citizen or resident of more than one country Look to treaties (income / estate & gift) Conventions and Protocols Override U.S. statutes / Regs Estate and / or Gift treaties w/ U.S.: AustraliaAustriaCanada DenmarkFinlandFrance GermanyGreeceIreland ItalyJapanNetherlands NorwaySouth Africa Sweden United KingdomSwitzerland

15 International Estate Planning Treaties Example: Estate and Gift tax Convention and Protocol between the United States and France Treaties Example: Estate and Gift tax Convention and Protocol between the United States and France

16 International Estate Planning Transfer to Non-Citizen Spouse ONLY matters if need marital deduction!! Citizen of decedent is irrelevant Citizen of surviving spouse is issue Purpose: Deferred tax from decedents death Make sure it is collected down the road Solution: Special rules if spouse not citizen Residency is irrelevant Qualified Domestic Trust (QDOT) Qualifies for deduction if left in QDOT Or irrevocably assigned by due date of Form 709 Or if spouse is U.S. citizen by 709 due date Or amend Irrevocable trust by Special Co-Tr. Transfer to Non-Citizen Spouse ONLY matters if need marital deduction!! Citizen of decedent is irrelevant Citizen of surviving spouse is issue Purpose: Deferred tax from decedents death Make sure it is collected down the road Solution: Special rules if spouse not citizen Residency is irrelevant Qualified Domestic Trust (QDOT) Qualifies for deduction if left in QDOT Or irrevocably assigned by due date of Form 709 Or if spouse is U.S. citizen by 709 due date Or amend Irrevocable trust by Special Co-Tr.

17 International Estate Planning QDOT U.S. person must control corpus distributions Individual citizen Domestic corporation QDOT election – on last timely return or first return w/in 1 yr of due date TAX Distribution of corpus EVEN IF ESTATE TAX REPEAL Tax balance at spouses death (unless no estate tax) Tax on disqualification of QDOT Tax = tax avoided in predeceasing spouses estate QDOT U.S. person must control corpus distributions Individual citizen Domestic corporation QDOT election – on last timely return or first return w/in 1 yr of due date TAX Distribution of corpus EVEN IF ESTATE TAX REPEAL Tax balance at spouses death (unless no estate tax) Tax on disqualification of QDOT Tax = tax avoided in predeceasing spouses estate

18 International Estate Planning QDOT Exceptions to tax: Hardship Spouse Anyone spouse has legal obligation of support No other reasonably available source Income distributions Not subject to estate tax Of course, subject to income taxation Sub J – taxed to beneficiary Always QDOT? Cost to administer Projected asset growth Tax avoided and future incurred Spouses loss of control / citizenship plans QDOT Exceptions to tax: Hardship Spouse Anyone spouse has legal obligation of support No other reasonably available source Income distributions Not subject to estate tax Of course, subject to income taxation Sub J – taxed to beneficiary Always QDOT? Cost to administer Projected asset growth Tax avoided and future incurred Spouses loss of control / citizenship plans

19 International Estate Planning Gift tax Annual exclusion Present interest Otherwise qualify for marital deduction $125,000 (2007) Joint tenancy – normally completed gift But not if non-citizen spouse UNLESS created 1/1/82 to 7/13/88 Then depends on local law IF severance only w/consent – complete Joint tenancy – typically complete (most) Tenancy by entirety – not complete (most) Gift tax Annual exclusion Present interest Otherwise qualify for marital deduction $125,000 (2007) Joint tenancy – normally completed gift But not if non-citizen spouse UNLESS created 1/1/82 to 7/13/88 Then depends on local law IF severance only w/consent – complete Joint tenancy – typically complete (most) Tenancy by entirety – not complete (most)

20 International Estate Planning Taxation of Trusts Overview U.S. Trusts Grantor Trusts Foreign grantor Domestic grantor Non-Grantor trust Sub J, trust or beneficiaries Beneficiaries may be U.S. or foreign Foreign Trusts No U.S. situs – so what do we do? Taxation of Trusts Overview U.S. Trusts Grantor Trusts Foreign grantor Domestic grantor Non-Grantor trust Sub J, trust or beneficiaries Beneficiaries may be U.S. or foreign Foreign Trusts No U.S. situs – so what do we do?

21 International Estate Planning Foreign Trusts Trust thats not U.S. person. Sec. 7701(a)(31)(B) Trust IS U.S. person if meets Court and Control Court Test: Primary supervision in U.S. court Federal state or local Not U.S. territory Ok if concurrent jurisdiction w/ foreign Not if auto migration (but invasion/nationalization) Safe Harbor: No migration clause No direction to administer outside U.S. In fact administered in U.S. Foreign Trusts Trust thats not U.S. person. Sec. 7701(a)(31)(B) Trust IS U.S. person if meets Court and Control Court Test: Primary supervision in U.S. court Federal state or local Not U.S. territory Ok if concurrent jurisdiction w/ foreign Not if auto migration (but invasion/nationalization) Safe Harbor: No migration clause No direction to administer outside U.S. In fact administered in U.S.

22 International Estate Planning Foreign Trust Control by U.S. person test: All substantial decisions in U.S. person control How/who/when distributions Allocation between principle and income Trust termination Trustee removal/replacement Investment decisions Sue/defend lawsuit/compromise claim If inadvertent change (U.S. trustee resigns/dies) 1 yr grace period. (Service can extend) If fixed– retroactive If not fixed w/in period, foreign trust from change Foreign Trust Control by U.S. person test: All substantial decisions in U.S. person control How/who/when distributions Allocation between principle and income Trust termination Trustee removal/replacement Investment decisions Sue/defend lawsuit/compromise claim If inadvertent change (U.S. trustee resigns/dies) 1 yr grace period. (Service can extend) If fixed– retroactive If not fixed w/in period, foreign trust from change

23 International Estate Planning Foreign Trust Watch accidental grantor trust status IF US person makes contribution AND if U.S. beneficiary THEN GRANTOR TRUST as to the US contributor As long as theres a US beneficiary US Beneficiary= if may be paid to any US person IF foreign trust/partnership/ US person IF US person partner/beneficiary Gain recognition on transfer to foreign trust If US person contributes to foreign trust Recognition of gain (not loss) Unless grantor under regular grantor trust rules 671 Or testamentary and basis step up (inclusion) Foreign Trust Watch accidental grantor trust status IF US person makes contribution AND if U.S. beneficiary THEN GRANTOR TRUST as to the US contributor As long as theres a US beneficiary US Beneficiary= if may be paid to any US person IF foreign trust/partnership/ US person IF US person partner/beneficiary Gain recognition on transfer to foreign trust If US person contributes to foreign trust Recognition of gain (not loss) Unless grantor under regular grantor trust rules 671 Or testamentary and basis step up (inclusion)

24 International Estate Planning Foreign Trusts (non-grantor) Distributions – sub J Trust treated as NRA Beneficiaries Reporting requirements for U.S. grantor Trust must file Form 3520-A (grantor must make sure) Trust must distribute that to beneficiaries Report these events: Creation of Foreign Trust by U.S. person Transfer of assets to Foreign Trust by U.S. person The death of US person/grantor of Foreign Trust or if any part was includible in US persons estate Change in trust residence to/from U.S. Foreign Trusts (non-grantor) Distributions – sub J Trust treated as NRA Beneficiaries Reporting requirements for U.S. grantor Trust must file Form 3520-A (grantor must make sure) Trust must distribute that to beneficiaries Report these events: Creation of Foreign Trust by U.S. person Transfer of assets to Foreign Trust by U.S. person The death of US person/grantor of Foreign Trust or if any part was includible in US persons estate Change in trust residence to/from U.S.

25 International Estate Planning Foreign Trusts Transfer excludes FMV Obligations ignored unless In writing Not longer than 5 yrs U.S. dollars AFR to 130% AFR Transferor reports status of note on Form 3520 each year Foreign Trusts Transfer excludes FMV Obligations ignored unless In writing Not longer than 5 yrs U.S. dollars AFR to 130% AFR Transferor reports status of note on Form 3520 each year

26 International Estate Planning Gifts / Bequests from Foreigners Not taxable as income Consider impact on beneficiarys plan Reporting Requirements IF gift/bequest from non-US person EXCEPT 2503(e) transfer From foreign trust To trust unless w/ Crummey powers THEN report on Form 3520 IF $100,000 (individual) for year Aggregate related parties $10,000 if foreign partnerships/corps. NOTE for entities, its for all entities OTHERWISE could be income taxable, etc. Gifts / Bequests from Foreigners Not taxable as income Consider impact on beneficiarys plan Reporting Requirements IF gift/bequest from non-US person EXCEPT 2503(e) transfer From foreign trust To trust unless w/ Crummey powers THEN report on Form 3520 IF $100,000 (individual) for year Aggregate related parties $10,000 if foreign partnerships/corps. NOTE for entities, its for all entities OTHERWISE could be income taxable, etc.

27 International Estate Planning Transport of Currency Physical transport Currency and Monetary Instrument Report (CMIR) IF over $10,000 or equivalent Obligation on transporter or recipient Report at exit/entry point Report w/in 15 days of receipt Transport of Currency Physical transport Currency and Monetary Instrument Report (CMIR) IF over $10,000 or equivalent Obligation on transporter or recipient Report at exit/entry point Report w/in 15 days of receipt

28 International Estate Planning Charitable Giving Gift / Estate deduction No problem for foreign charities NRA, residents or citizens EXCEPT NRAs not to foreign corp charities Income tax charitable deduction U.S. Organizations only (all taxpayers) Can do via friends of or supporting org. friends of / support org must have review and control of projects (ok if all outside U.S.) TREATY exception: Canada, Israel, Mexico charities are ok. Charitable Giving Gift / Estate deduction No problem for foreign charities NRA, residents or citizens EXCEPT NRAs not to foreign corp charities Income tax charitable deduction U.S. Organizations only (all taxpayers) Can do via friends of or supporting org. friends of / support org must have review and control of projects (ok if all outside U.S.) TREATY exception: Canada, Israel, Mexico charities are ok.

29 International Estate Planning Case #1: John & Mary John: Father born U.S.A., moved to Switzerland 8 th grade Mother born France John born France Mary: Father born U.S.A. Mother born U.S.A. Mary born U.S.A. Split time between SF and Cote dAzur. John is author. Mary helps him. Researching book on winemaking/growing techniques in U.S. and France. Case #1: John & Mary John: Father born U.S.A., moved to Switzerland 8 th grade Mother born France John born France Mary: Father born U.S.A. Mother born U.S.A. Mary born U.S.A. Split time between SF and Cote dAzur. John is author. Mary helps him. Researching book on winemaking/growing techniques in U.S. and France.

30 International Estate Planning Case #1, continued Assets: John: $4 million Farm on Cote dAzur (3 mil euros)(separate) $500,000, ½ CP interest in CA home $1,000,000 ½ CP interest in CA rental property $100,000 CDs held at LA branch of Banque National de Paris (separate) Mary: $500,000, ½ CP interest in CA home $1,000,000 ½ CP interest in CA rental property $400,000 Apple stock (inherited – separate) Case #1, continued Assets: John: $4 million Farm on Cote dAzur (3 mil euros)(separate) $500,000, ½ CP interest in CA home $1,000,000 ½ CP interest in CA rental property $100,000 CDs held at LA branch of Banque National de Paris (separate) Mary: $500,000, ½ CP interest in CA home $1,000,000 ½ CP interest in CA rental property $400,000 Apple stock (inherited – separate)

31 International Estate Planning Case #2: Ivan Ivan: Father born U.S.S.R. Mother born U.S.S.R. Ivan born U.S.S.R. Grew up in Siberia. Began acquiring oil/gas leases. Acquired some in U.S. and Nigeria, too. Past several years, 30% time in U.S. 70% traveling for work (hotels) Plans to retire in a few years to Belize or Cayman Islands Case #2: Ivan Ivan: Father born U.S.S.R. Mother born U.S.S.R. Ivan born U.S.S.R. Grew up in Siberia. Began acquiring oil/gas leases. Acquired some in U.S. and Nigeria, too. Past several years, 30% time in U.S. 70% traveling for work (hotels) Plans to retire in a few years to Belize or Cayman Islands

32 International Estate Planning Case #2, continued Ivans Assets $5,000,000 oil and gas leases in Russia, U.S., Nigeria $500,000 condominium in Houston, TX $500,000 U.S. liquid investments with Ameritrade Case #2, continued Ivans Assets $5,000,000 oil and gas leases in Russia, U.S., Nigeria $500,000 condominium in Houston, TX $500,000 U.S. liquid investments with Ameritrade

33 International Estate Planning Case #3: Grace and Rainier Grace: Father born U.S.A. (dual U.S. / Ireland) Mother born U.S.A. Grace born U.S.A. Rainier: Father born Monaco Mother born Monaco Rainier born Monaco Married 5 yrs ago. Grace became Monaco citizen and renounced U.S. Case #3: Grace and Rainier Grace: Father born U.S.A. (dual U.S. / Ireland) Mother born U.S.A. Grace born U.S.A. Rainier: Father born Monaco Mother born Monaco Rainier born Monaco Married 5 yrs ago. Grace became Monaco citizen and renounced U.S.

34 International Estate Planning Case #3, continued Assets (all separate property) Rainier: $100,000,000 inherited property in Monaco and France Grace: $10,000,000 realty in Monaco and France $4,000,000 Co-op in Manhattan $2,000,000 U.S. corporate stock Case #3, continued Assets (all separate property) Rainier: $100,000,000 inherited property in Monaco and France Grace: $10,000,000 realty in Monaco and France $4,000,000 Co-op in Manhattan $2,000,000 U.S. corporate stock


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