Presentation on theme: "International Estate Planning Issues"— Presentation transcript:
1International Estate Planning Issues Stephen C. HartnettAssociate Director of EducationAmerican Academyof Estate Planning Attorneys
2International Estate Planning U.S. Clients / Trusts – Foreign AssetsLaws varyNot obvious – trap for unwaryHidden taxesExample – Canadian propertyFunding into U.S. trust is a recognition eventUnknown consequencesForced heirship?SEEK COUNSEL IN FOREIGN JURISDICTION!!Good resource = LexMundi.orgLawyers in 100 countries
3International Estate Planning Citizenship: key to analysisU.S. Citizenship AcquisitionBorn in the United States (Constitution)50 States + DistrictGuamPuerto RicoU.S. Virgin IslandsTerritorial waters around each (12 nautical miles)EVEN IF here momentarily and never returnedMUST be subject to U.S. jurisdiction at birthNot diplomatsBorn outside U.S.Both parents U.S. citizens ANDOne parent resided in U.S. prior to child’s birth
4International Estate Planning U.S. CitizenshipBorn outside U.S.; One U.S. parentParent lived in U.S. for 5+ years prior to birthParent lived in U.S. 2+ yrs after turning 14Naturalized U.S. citizenWhat about other citizenship?Could be both – Look to other country’s lawsExamples: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.
5International Estate Planning ExpatriationAffirmative act + intent to expatriateBut, Sec. 877If expatriate to avoid taxStill taxed as citizen for 10 yrs.Avoid 877 IF:Income tax under $124k average prior 5 yrs ANDNet worth less than $2 million ANDAffirm tax law compliance for prior 5 yrsOr -- Dual national ANDNo substantial contact w/ U.S.Never U.S. resident, passport ANDNot present U.S. over 30 days ea of 10 prior yrsMinors, U.S. cit at birth, expat by 18 ½Neither parent U.S. cit at birth
6International Estate Planning Expatriation – Not citizen but taxed like oneKICKER: CAN BE EXCLUDED FROM U.S. AND NOT EVEN GIVEN VISA TO VISITRESIDENCYIncome TaxCitizensGreen Card Holders (LPRA)Lawful Permanent Resident AlienBoth taxed on worldwide incomeResidentsTax on worldwide income IF“substantial presence”Income tax “count the days”“Substantial presence” =
7International Estate Planning Substantial presence31 days in current year AND183 over 3 yrs as followsAll in current yr +1/3 of first prior year1/6 of second prior yearIf total 183 or greater = residentExempt (diplomat, etc) andcommuters Mexico / Canada not residentsWhat is “U.S.?”50 States + DC + territorial watersNOT Possessions / territories
8International Estate Planning Residency – Estate taxLike common law domicilePhysical presence+ No present intent to leaveOnce established – stays until new one establishedCan be illegal and be “resident”Subjective, but factors are:EmploymentFriendsFamilyHomesCommunity involvement
9International Estate Planning Estate Tax Residents – Like citizensTaxed worldwide assetsGet standard AEANon-Resident Alien (NRA) taxationIncome taxTaxed on U.S. source income (exc portfolio debt)Interest from U.S. gov’t, corp., indiv debtDividend from U.S. corpForeign corp if 25% effect connect w/ U.S. 3 yrsPersonal services in U.S.U.S. rents / royaltiesU.S. realty gains
10International Estate Planning Income Tax – NRAsFDAPFixed and determinable gains, profits, and incomeTaxed at flat 30% rateU.S. source gains exemptUnless physical presence 183 days in year“Effectively connected” to US trade/businessTrade or business– regular, continuous, substantialNot incidental and sporadicTaxed at normal, graduated ratesEstate Tax – NRAsTaxed on U.S. situs assets onlyGet AEA of only $60k (EGTRRA did not change)
11International Estate Planning Estate Tax on NRAsSitus of assetsIn U.S.Tangible assets physically presentU.S. corp stock2035 to 2038 if U.S. situs at transfer or deathOut of U.S.Life insurance proceeds on decedent (even if U.S. co.)Art on exhibition in U.S.Imported exclusively for that purposeOn loan to museum/gov’tNot getting any of proceeds“Portfolio debt”
12International Estate Planning Estate Tax – NRAsOut of U.S. – portfolio debt (issued after 7/18/84)1) Bonds, notes, other debts2) Not issued by corp / partnership in whichD or related party have 10% + interest3) Registered form OR Bearer and legend, etcTo prevent U.S. citizen/resident from acquiring4) Interest payable outside the U.S.U.S. bank depositsDeposits in U.S. branch of foreign bankStrategies to convert to non-U.S. assetsPut in offshore corp (not partnership) w/ bus purposeConvert to other non-US situs assets
13International Estate Planning Gift Taxation of NRAsONLY gift taxed if1) tangible AND2) U.S. situsExamples:U.S. realty, U.S.-located tangible personaltyE.g., currency, autos, airplaneNote: Art work on loan NOT exempt from gift tax like it is estate tax.StrategiesConvert to intangibleMove out of U.S. before gifting
14International Estate Planning TreatiesIf citizen or resident of more than one countryLook to treaties (income / estate & gift)Conventions and ProtocolsOverride U.S. statutes / RegsEstate and / or Gift treaties w/ U.S.:Australia Austria CanadaDenmark Finland FranceGermany Greece IrelandItaly Japan NetherlandsNorway South Africa SwedenUnited Kingdom Switzerland
15International Estate Planning TreatiesExample:Estate and Gift tax Convention and Protocol between the United States and France
16International Estate Planning Transfer to Non-Citizen SpouseONLY matters if need marital deduction!!Citizen of decedent is irrelevantCitizen of surviving spouse is issuePurpose:Deferred tax from decedent’s deathMake sure it is collected down the roadSolution:Special rules if spouse not citizenResidency is irrelevantQualified Domestic Trust (QDOT)Qualifies for deduction if left in QDOTOr irrevocably assigned by due date of Form 709Or if spouse is U.S. citizen by 709 due dateOr amend Irrevocable trust by Special Co-Tr.
17International Estate Planning QDOTU.S. person must control corpus distributionsIndividual citizenDomestic corporationQDOT election – on last timely return or first return w/in 1 yr of due dateTAXDistribution of corpusEVEN IF ESTATE TAX REPEALTax balance at spouse’s death (unless no estate tax)Tax on disqualification of QDOTTax = tax avoided in predeceasing spouse’s estate
18International Estate Planning QDOTExceptions to tax: HardshipSpouseAnyone spouse has legal obligation of supportNo other reasonably available sourceIncome distributionsNot subject to estate taxOf course, subject to income taxationSub J – taxed to beneficiaryAlways QDOT?Cost to administerProjected asset growthTax avoided and future incurredSpouse’s loss of control / citizenship plans
19International Estate Planning Gift taxAnnual exclusionPresent interestOtherwise qualify for marital deduction$125,000 (2007)Joint tenancy – normally completed giftBut not if non-citizen spouseUNLESS created 1/1/82 to 7/13/88Then depends on local lawIF severance only w/consent – completeJoint tenancy – typically complete (most)Tenancy by entirety – not complete (most)
20International Estate Planning Taxation of TrustsOverviewU.S. TrustsGrantor TrustsForeign grantorDomestic grantorNon-Grantor trustSub J, trust or beneficiariesBeneficiaries may be U.S. or foreignForeign TrustsNo U.S. situs – so what do we do?
21International Estate Planning Foreign TrustsTrust that’s not U.S. person. Sec. 7701(a)(31)(B)Trust IS U.S. person if meets Court and ControlCourt Test:Primary supervision in U.S. courtFederal state or localNot U.S. territoryOk if concurrent jurisdiction w/ foreignNot if auto migration (but invasion/nationalization)Safe Harbor:No migration clauseNo direction to administer outside U.S.In fact administered in U.S.
22International Estate Planning Foreign TrustControl by U.S. person test:All substantial decisions in U.S. person controlHow/who/when distributionsAllocation between principle and incomeTrust terminationTrustee removal/replacementInvestment decisionsSue/defend lawsuit/compromise claimIf inadvertent change (U.S. trustee resigns/dies)1 yr grace period. (Service can extend)If fixed– retroactiveIf not fixed w/in period, foreign trust from change
23International Estate Planning Foreign TrustWatch accidental grantor trust statusIF US person makes contributionAND if U.S. beneficiaryTHEN GRANTOR TRUST as to the US contributorAs long as there’s a US beneficiaryUS Beneficiary= if may be paid to any US personIF foreign trust/partnership/ US personIF US person partner/beneficiaryGain recognition on transfer to foreign trustIf US person contributes to foreign trustRecognition of gain (not loss)Unless grantor under regular grantor trust rules 671Or testamentary and basis step up (inclusion)
24International Estate Planning Foreign Trusts (non-grantor)Distributions – sub JTrust treated as NRABeneficiariesReporting requirements for U.S. “grantor”Trust must file Form 3520-A (grantor must make sure)Trust must distribute that to beneficiariesReport these events:Creation of Foreign Trust by U.S. personTransfer of assets to Foreign Trust by U.S. personThe death of US person/grantor of Foreign Trust or if any part was includible in US person’s estateChange in trust residence to/from U.S.
25International Estate Planning Foreign TrustsTransfer excludes FMVObligations ignored unlessIn writingNot longer than 5 yrsU.S. dollarsAFR to 130% AFRTransferor reports status of note on Form 3520 each year
26International Estate Planning Gifts / Bequests from ForeignersNot taxable as incomeConsider impact on beneficiary’s planReporting RequirementsIF gift/bequest from non-US personEXCEPT 2503(e) transferFrom foreign trustTo trust unless w/ Crummey powersTHEN report on Form 3520IF $100,000 (individual) for yearAggregate related parties$10,000 if foreign partnerships/corps.NOTE for entities, it’s for all entitiesOTHERWISE could be income taxable, etc.
27International Estate Planning Transport of CurrencyPhysical transportCurrency and Monetary Instrument Report (CMIR)IF over $10,000 or equivalentObligation on transporter or recipientReport at exit/entry pointReport w/in 15 days of receipt
28International Estate Planning Charitable GivingGift / Estate deductionNo problem for foreign charitiesNRA, residents or citizensEXCEPT NRAs not to foreign corp charitiesIncome tax charitable deductionU.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.
29International Estate Planning Case #1: John & MaryJohn:Father born U.S.A., moved to Switzerland 8th gradeMother born FranceJohn born FranceMary:Father born U.S.A.Mother born U.S.A.Mary born U.S.A.Split time between SF and Cote d’Azur. John is author. Mary helps him. Researching book on winemaking/growing techniques in U.S. and France.
30International Estate Planning Case #1, continuedAssets:John:$4 million Farm on Cote d’Azur (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:$400,000 Apple stock (inherited – separate)
31International Estate Planning Case #2: IvanIvan: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
32International Estate Planning Case #2, continuedIvan’s 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
33International Estate Planning Case #3: Grace and RainierGrace:Father born U.S.A. (dual U.S. / Ireland)Mother born U.S.A.Grace born U.S.A.Rainier:Father born MonacoMother born MonacoRainier born MonacoMarried 5 yrs ago. Grace became Monaco citizen and renounced U.S.
34International Estate Planning Case #3, continuedAssets (all separate property)Rainier:$100,000,000 inherited property in Monaco and FranceGrace:$10,000,000 realty in Monaco and France$4,000,000 Co-op in Manhattan$2,000,000 U.S. corporate stock