Estate Planning for Foreign Nationals

Transcription

1 Estate Planning for Foreign Nationals What Financial Professionals Need to Know Tel. (212)

2 What We ll Be Covering Non-Tax Estate Planning Issues US Estate Taxation of US citizens & Resident Aliens US Estate Taxation of Non-Resident Aliens Expatriation Taxes Double Taxation & Estate Tax Treaties Taxation of Foreign Trusts Non-Tax Estate Planning Issues

3 Counseling Foreign Clients May not be aware of importance of estate planning in US. Forced heirship countries Estate/inheritance taxes non-existent or can t be reduce with planning.

4 Non-Tax Estate Planning Issues Who Gets What? What law applies? Is there forced heirship? May need more than one will Planning for Minor Children Temporary & Permanent Guardianship Designation Planning for Incapacity & Estate Administration Power of Attorney in effect in each country where they own assets. Healthcare proxy in effect in any country where they spend time.n Non-U.S. resident cannot serve as executor (NY). RLT may be preferable.

5 US Income Taxation of Foreign Nationals US Income Tax Resident if any of the following apply: 1. US Citizen 2. US Green Card Holder 3. Meets the Substantial Presence Test

6 US Income Taxation for US Residents v. Non-Resident Aliens (NRAs) US Residents: Taxed on worldwide income NRAs: Taxed only on U.S.-source income

7 US ESTATE TAX RULES Two Main Categories of Taxpayers 1. US citizens and resident aliens: Taxed on worldwide assets 2. Non-Resident Aliens: Taxed on US Assets

8 RESIDENCE = DOMICILE Test for Domicile: The place that you live without any definite, present intention of leaving. Subjective: What was intention? Not the same as test for US income tax residence Role of immigration status Look to intent of visa. Temporary Visa Holder: Likely NOT domiciled in U.S. Green Card Holder: Likely domiciled in the U.S.

9 Implications of Domicile Status Estate is administered in accordance with law of the country in which individual was domiciled. Different U.S. Estate Tax rules for U.S. citizens/permanent Residents and Non-Resident Aliens (nondomiciliaries)

10 US Estate Tax Rules US Citizens & Permanent Residents Value of estate = Worldwide assets Estate Tax Exemption: $5.49 million 40% tax on value of estate exceeding $5.49 million. Credit for foreign death taxes Three differences between rules for US citizens and noncitizen domiciliaries with respect to spouses

11 Calculation of Foreign Tax Credit Maximum US Foreign Death Tax Credit = Tenative US Estate Tax X Value of Foreign Property Value of US Gross Estate Not a dolar for dolar credit!

12 Hypothetical Assets: - U.S. Residence: $2 million - Residence in home country: $1 million - Bank/Brokerage Accounts in US: $1 million - Bank/Brokerage Accounts in home country: $500,000 - Retirement Accounts: $500,000 - Life Insurance: $2 million Value of Estate = $7 million

13 Hypothetical Value of Estate $7,000,000 Deductions for debt, estate expenses - $500,000 Taxable Estate $6,500,000 Estate Tax Exemption $5,500,000 Amount Subject to Tax $1,000,000 US Tax Rate x 40% Tentative Tax (before foreign credit) $400,000 Foreign Tax Rate = 40% Foreign Tax Owed = $400,000

14 Calculation of Foreign Tax Credit Maximum US Foreign Death Tax Credit = Tenative US Estate Tax X Value of Foreign Property Value of US Gross Estate $400,000 X $1,000,000 $7,000,000 = $60,000 (approx)

15 Hypothetical: Foreign Death Tax Credit Value of Estate $7,000,000 - Deductions for debt, estate expenses - $500,000 Taxable Estate $6,500,000 Estate Tax Exemption $5,500,000 Amount Subject to Tax $1,000,000 Tax Rate x 40% Tentative Tax (before foreign credit) $420,000 - Foreign Death Tax Credit - $60,000 Total US Estate Tax $360,000 Total Foreign Estate Tax + $400,000 Total Estate Tax $760,000

16 Strategies for Avoiding Double Taxation - Wrap foreign property in US LLC to convert it to U.S. property. (Only works in some cases). - Life insurance during term of ownership.

17 Differences in Estate Tax Rules for US Citizens & US Resident Aliens 1. Spousal Exemption 2. Spousal Portability 3. Spousal Joint Ownership Presumption

18 SPOUSAL EXEMPTION US citizens: Unlimited transfers between spouses (gift & estate tax) No unlimited spousal exemption for transfers to non-citizen spouses Estate tax: No spousal exemption Gift tax: Annual exclusion of $148k (2016)

19 SPOUSAL PORTABILITY US citizens: Surviving spouse can use deceased spouse s unused gift/estate tax exemption. Portability not available to surviving noncitizen spouses

20 JOINTLY-HELD ASSETS General Rule: Estate Tax Treatment Assets owned jointly treated as owned by non-spouses for estate tax purposes. Presumption of 100% ownership by first-to-die. 2040(a) US Citizens Spouses: Assets jointly held by spouses deemed owned 50/50 for estate tax purposes, regardless of which spouse purchased asset. 2040(b) Not applicable where surviving spouse is noncitizen.

21 JOINT OWNERSHIP Inclusion of Asset in Estate of First-to-Die H (noncitizen) & W (citizen) contribute equally to purchase of home. W dies 20 years later. Home is worth $2 M. Entire value included in W s estate unless H can show proof of his contribution.

22 JOINTLY-HELD ASSETS Gift Tax Treatment Creation of JT in Real Property: Creation of JT/TbE between spouses is NOT a taxable gift. Gift on sale if one spouse receives more than his or her contribution. Creation of JT in Personal Property: General Rule: Creation of JT is a taxable gift. Exception: Joint bank/brokerage accounts BUT withdrawal of funds by non-contributor triggers gift (NY)

23 US GIFT TAX RULES Gifts between Spouses: General Rule: Unlimited exemption for gifts between spouses. Exception: No unlimited exemption for gifts to non-citizen spouses. ($148k annual exclusion)

24 GIFT TAX ISSUES Example: W creates joint bank account w H to deposit paycheck. H stays home with kids. H is noncitizen. W deposits $500k into joint bank account in No gift on deposit (in NY) H withdraws $300k for down payment on separate property. Gift of $300k $148k excluded from gift tax 40% gift tax on $152k = $40,800

25 Planning Strategies for Non-Citizen Spouses Does Treaty Alleviate Rules for Non-Citizens? Lack of Unlimited Gift Tax Exemption Segregate assets between spouses. Limit transfers between spouses to annual gift tax exclusion. Joint Ownership Presumption Keep records of spousal contributions to purchase of joint assets. Lack of Unlimited Exemption & Portability Utilize gifting to equalize estates Credit shelter/disclaimer trust QDOT: Qualified Domestic Trust

26 Qualified Domestic Trust (QDOT) A testamentary trust set up for the benefit of the noncitizen surviving spouse. Defers estate tax from first-to-die spouse s estate. Transfers to trust aren t subject to estate tax at time of grantor spouse s death. Income from trust can be paid to spouse free of estate tax. Distributions of principal subject to estate tax. Assets in trust subject to estate tax upon death of spouse. If spouse becomes citizen, no estate tax on distributions. Assets in trust included in spouse s estate.

27 Qualified Domestic Trust (QDOT) Post-Mortem Planning: Can create QDOT at death of first spouse prior to filing of federal estate tax return. QDOT tax eliminated if surviving spouse becomes a US citizen and resident.

28 Qualified Domestic Trust (QDOT) Recommend as last resort Defers, doesn t eliminate estate tax. Burdensome requirements for setting up and administering trust. Requires security for IRS

29 US ESTATE TAXATION OF NON-RESIDENT ALIENS

30 Base of Estate Tax Estate Tax applies only to U.S. assets. U.S. Assets: - U.S. real estate - Tangible personal property (art, jewelry, etc.) located in US - Stock in U.S. corporation - Mutual funds/etfs, etc. to extent they hold US assets. - US partnership interests Non-US Assets: - Life insurance - US bank accounts - US bonds * * Unless decedent was a US income tax resident at time of death.

31 Exemptions & Deductions Estate Tax Exemption = $60,000 Marital Deduction: Same as US gift/estate tax rules for US resident decedents. Unlimited for US citizen spouses; none/qdot for noncitizen spouses. Deductions from US Estate: Funeral, estate expenses, debts, etc., regardless of location Amount of deduction = Total estate expenses & debts X Value of US estate Value of total estate

32 Assets: Hypothetical: Non-U.S. Domiciliary Residence in Home Country $3 million NYC Condo $1.5 million FMV Mortgage ($1,000,000) Stock in U.S. Corporations $500,000 Worldwide Gross Estate $5,000,000 Gross U.S. Estate $2,000,000

33 Hypothetical: Non-U.S. Domiciliary Debts/Expenses $100,000 estate expenses $1M mortgage Deduction from US Gross Estate $1.1M x $2M/$5M = $440,000 Taxable Estate $1,560,000 Exemption - $60,000 Amt Subject to Tax $1,500,000 Tax Rate x 40% US Estate Tax Owed $600,000

34 U.S. Gift Tax Rules for Non-U.S. Domiciliaries No unified gift & estate tax Gift Tax Exemption = $0 Eligible for annual exclusion (including gifts to non-citizen spouse). US Assets Subject to Gift Tax: - US real estate - Tangible property located in U.S. Gifts of stock in US corporations NOT subject to gift tax.

35 U.S. Gift & Estate Tax Rules for Non-U.S. Domiciliaries: Recap $60k estate tax exemption $0 gift tax exemption Unfavorable estate tax deduction rules.

36 Planning Strategies for Non-U.S. Domiciliaries Move assets out of US to extent practical. Avoid gifting US assets. Alternative: Gift cash to donee to purchase US assets. Wrap US assets in foreign corporation to avoid US inheritance laws & US estate/gift tax. May have adverse US income tax consequences Purchase life insurance to cover US estate tax.

37 DOUBLE TAXATION & ESTATE TAX TREATIES

38 POTENTIAL FOR DOUBLE TAXATION Who Is Taxed - Domicile, Residency, Nationality What Is Taxed - Assets located in country - Assets owned worldwise Credit for Foreign Tax - Assets located outside of country - Where are assets located? - Real estate located outside of country

39 POTENTIAL FOR DOUBLE TAXATION Example 1 US Citizen residing in Belgium - Subject to U.S. estate tax as citizen - Subject to Belgian estate tax as resident Owns $10M of stock in US company - Subject to U.S. taxation (worldwide taxation) - Subject to Belgian taxation (worldwide taxation) Credit for Foreign Tax - US: Credit not available for tax on assets located in US - Stock in US corporations located in US - Belgium: Credit only available for real estate located in foreign country Tax Owed - US Estate Tax: $1.8M - Belgium Estate Tax: $5.8M - Total Tax: $7.6M

40 POTENTIAL FOR DOUBLE TAXATION Example 2 Belgian Citizen & Resident - Subject to Belgian estate tax on worldwide assets as resident Owns $10M of stock in US company - Subject to U.S. taxation (assets located in US) - Subject to Belgian taxation (worldwide taxation) Credit for Foreign Tax - US: Credit not available for tax on assets located in US - Stock in US corporations located in US - Belgium: Credit only available for real estate located in foreign country Tax Owed - US Estate Tax: $4M - Belgium Estate Tax: $6.4M - Total Tax: $10.4M

41 Countries with US Estate Tax Treaties Australia * Austria * Canada Denmark * Finland France * Germany * Greece Ireland Italy Japan * Netherlands Norway South Africa Switzerland * Includes gift tax provisions. UK *

42 TREATY TOPICS Domicile: Where was decedent domiciled? Situs: Where is property located for purposes of death tax? E.g., Stock in corporation Marital Deduction Proportional Estate Tax Credit

43 EXPATRIATION PLANNING

44 Expatriation/Exit Tax Applies to Covered Expatriates Must satisfy two prongs: Abandonment of US Citizenship/Greencard: Individual who relinquishes US citizenship Long-term LPR (7+ years) Income/Net Worth: Net worth > $2 million Avg annual income tax liability > $160,000 (Income > $500,000) OR Failure to certify US tax compliance for previous 5 years.

45 Effect of Expatriation Rules for Covered Expatriates: Exit Tax 40% tax on gifts and bequests to US citizens and US residents.

46 Exit Tax Tax on Unrealized Capital Gain Mark to market all assets Increase in basis Exclusion Amount: $693,000 Tax on Individual Retirement Accounts (IRAs) Deemed a withdrawal of entire account balance Ordinary income tax on all pre-tax money Qualified Deferred Compensation (401(k) accounts) Continues to receive tax-deferred status Flat 30% withholding upon withdrawal

47 Estate Tax Issues for Covered Expatriates Tax on US Heirs All gifts or bequests from covered expatriates to US citizens or US residents are subject to gift/estate tax at highest rate.

48 Effect of Expatriation Planning Recommendations: Evaluate situation prior to applying for a greencard. Evaluate situation prior to 8 th year of greencard.

49 US Income Taxation of Foreign Trusts

50 When Is a Trust a Foreign Trust? US courts do not have primary jurisdiction over the trust; A US resident does not have authority to control all substantial decisions of the trust; or US grantor trust where grantor ceases to be a US income tax resident. 7701(a)(30)(c)

51 Throw-Back Tax on US Beneficiares of Foreign Trusts Upon distribution to US beneficiary, distribution will be deemed to constitute any previously untaxed income to the trust. Subject to US income tax, plus interest at the IRS underpayment rate. 667(a) 668

52 Foreign Trusts & Estate Tax Planning Be careful of using foreign trusts where there are or are expected to be US beneficiaries. Example: Mother is French citizen. Two kids are dual citizens. Mother sets up grantor trust (ILIT) for kids. Family moves back to France. Kids decide to live in US when they grow up.

53 Disclaimer: The content of this presentation is exclusively for informational and educational purposes and should not be relied upon as legal advice. Please consult with a legal or financial professional in connection with your personal situation. Circular 230 Notice: Any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

54 Tel. (212)