1 / 34

International Estate Planning Issues

International Estate Planning Issues. Stephen C. Hartnett Associate Director of Education American Academy of Estate Planning Attorneys. International Estate Planning. U.S. Clients / Trusts – Foreign Assets Laws vary Not obvious – trap for unwary Hidden taxes Example – Canadian property

bedros
Download Presentation

International Estate Planning Issues

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. International Estate Planning Issues 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

  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 child’s 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 country’s 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

  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 IF“substantial 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

  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

  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. gov’t, 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)

  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/gov’t • 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

  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

  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.: • Australia Austria Canada • Denmark Finland France • Germany Greece Ireland • Italy Japan Netherlands • Norway South Africa Sweden • United Kingdom Switzerland

  15. International Estate Planning • 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 decedent’s 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 spouse’s death (unless no estate tax) • Tax on disqualification of QDOT • Tax = tax avoided in predeceasing spouse’s 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 • Spouse’s 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)

  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?

  21. International Estate Planning • Foreign Trusts • Trust that’s 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

  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 there’s 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 person’s 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

  26. International Estate Planning • Gifts / Bequests from Foreigners • Not taxable as income • Consider impact on beneficiary’s 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, it’s 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

  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.

  29. International Estate Planning • Case #1: John & Mary • John: • Father born U.S.A., moved to Switzerland 8th 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 d’Azur. 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 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: • $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

  32. International Estate Planning Case #2, continued • Ivan’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

  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.

  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

More Related