Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features: W. Aaron Hawthorne, Managing Director, Andersen Tax, Dallas

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A U.S.-Mexican Tax and Estate Planning for Cross-Border Clients Reconciling U.S. and Mexican Law on Trusts, Ownership of Real Property, Situs and Wealth Transfers TUESDAY, NOVEMBER 14, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: W. Aaron Hawthorne, Managing Director, Andersen Tax, Dallas Raoul Rodriguez, CFP, EA, Wealth Manager, Pinnacle Advisory Group, Miami Charles Tibshirani, Senior Partner, MEXLAW, Playa del Carmen, Mexico The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted.

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5 US - Mexican Tax and Estate Planning Cross-Border Clients November 14,

6 MEXICAN LAW Legislative Background Legislative Background Republic (Federation) Federal Jurisdiction State Jurisdiction Local Municipal Jurisdiction 6

7 US Probate Process Translation Apostil MEXICO WILLS Conflict of Wills Delays 7

8 TITLING REAL ESTATE Restricted Zone Trust Residential Property Bank Trustee Substitute Beneficiaries Title, Possession, Usufruct Mexican Corporation Other Areas 8

9 MARRIAGE Combined Assets Separate Assets Foreign Marriages 9

10 MEXICAN WILLS AND PROBATE STRUCTURE Types of Mexican Wills Parties Registration Revocation Probate process Ab Intestate Successions 10

11 ESTATE TAXES IN MEXICO Residents and Non-residents Legal Residence versus Tax Residence Other Estate Planning Documents Powers of Attorney Advance Appointment for Medical Instructions Advance Appointment for Guardians 11

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13 Overview of U.S. Taxation For U.S. income tax purposes an individual that is not a U.S. citizen, is either A U.S. Resident Alien or A Non-Resident Alien ( NRA ). The U.S. Internal Revenue Code contains different tests for residence for income tax and estate and gift tax. An alien may be a resident for income tax but not estate and gift tax. And the vice versa, but much less likely! 13 13

14 Taxation of U.S. Citizens Income tax: Worldwide taxation, irrespective where reside. US citizen even if have other passports. Double taxation avoided through foreign tax credits. Taxation of income of non-u.s. corporations if certain requirements are met under U.S. anti-deferral provisions (also special non-u.s. trust rules). Significant compliance: annual returns + information returns. Estate and gift tax: Taxable on worldwide transfers testamentary and lifetime over a certain amount ($14k annually or $5.49m lifetime). Tax return filings required when exceed $14k in the year or most transfers to trusts or similar entities

15 Income Tax Information Reporting Form 8832 Entity Classification Election Form 8833 Treaty Based Return Position Form 926 Transfers to a Foreign Corporation Form 5471 Owner/Officer relationships with Foreign Corporations Form 5472 Foreign ownership of U. S. Corporation Form 8865 Ownership of Foreign Partnerships Forms 3520/3520-A Foreign Trusts/Gifts Form 8858 Foreign Disregarded Entities Form 8938 Statement of Specified Foreign Financial Assets (for 2011 and going forward) Form International Boycott Report Form 8854 Initial and Annual Expatriation Statement FBAR Form 114/114A Report of Foreign Bank and Financial Accounts Form 8621 Passive Foreign Investment Companies 15 15

16 How does a non-u.s. Citizen become subject to the same tax fun? Two Tests: 1. Lawful Permanent Resident ( Green Card ) Test: At any time during taxable year (See 7701(b)(1)(A)(i) and (6)). Initially based on U.S. immigration law, but then applies for tax purposes even if holder is ineligible to enter U.S. Thus, an alien who receives a Green Card is considered a U.S. resident until the green card is revoked (and has not been administratively or judicially determined to have been abandoned). OR 16 16

17 How to become a U.S. Income Tax Resident (Continued) 2. Substantial Presence Test (See 7701(b)(1)(A)(ii) and (3)). In the U. S. for 31 days in current year and the current year days + 1/3 of the first prior year days + 1/6 of the second prior year days => 183 days Never round up, Reg (b)-1(c)(1) Will not meet test, if: If never present in U.S. more than 122 days; or File a U.S. return and Meets the Closer Connection exception 7701(b)(3)(B). Certain specified types of visas are exempt from day count (diplomats, students, teachers, medical, charitable sport) 7701(b)(5). IF meet either statutory test, then consider residency definition under any applicable income tax treaty

18 U.S. Income Taxation of NRAs Not taxed on worldwide income. Income Tax only on U.S. source income: Two regimes identify the source: Passive Income. Business Income. Generally not subject to information reporting. UNABLE to file jointly with a resident/citizen spouse

19 U.S. Transfer Taxation of NRAs Nonresidence = Not domiciled within the U.S. Reg (b). Not taxed on worldwide gratuitous transfers of assets. Gift Tax U.S. situs tangible or real property. Still eligible for annual exclusion of $14,000 per donee No gift splitting with spouse. Estate Tax U.S. situs property, including intangible, tangible and real property, with exemption of only $60, Beware: revocable transfers and transfers within 3 years of death of any U.S. situs property which the decedent has transferred, by trust or otherwise, if the property is situated in the U.S. at the time of transfer or at the time of the decedent s death. Use of blocker corporations requires careful planning. No unlimited marital deduction but allowed annual exclusion gift to noncitizen spouse of $149,000 (inflation indexed). 2523(i) 19 19

20 U.S. Transfer Taxation of NRAs The United States has Estate, Gift or Estate & Gift tax treaties with the following countries: Australia (Estate Treaty, Gift Treaty) Austria (Estate & Gift Treaty) Belgium (Estate Treaty) Canada (1995 Protocol) Denmark (Estate & Gift Treaty) Finland (Estate Treaty) France (Estate & Gift Treaty) Germany (Estate & Gift Treaty) Greece (Estate Treaty) Ireland (Estate Treaty) Italy (Estate Treaty) Japan (Estate & Gift Treaty) Netherlands (Estate Treaty) Norway (Estate Treaty) South Africa (Estate Treaty) Sweden (Estate & Gift Treaty) Switzerland (Estate Treaty) United Kingdom (Estate & Gift Treaty) 20 20

21 Consequences of U.S. Estate and Gift Tax Residency An alien who is a U.S. resident for U.S. estate and gift tax purposes is taxed in a manner similar to a U.S. citizen on worlwide gifting. In addition, an alien who is a green card holder also is subject to the U.S. expatriation provisions if held the green card for 8 out of 15 years prior to expatriation

22 U.S. Taxation Summary Tax Type Tax Immigrant Status Income Transfer Exit Citizen 1 Worldwide Worldwide Yes Long-term Resident Alien (LTRA) Worldwide? Yes Resident Alien (RA) Worldwide? No Resident Non-citizen (RNC)? Worldwide No Nonresident Alien (NRA) U. S. only? No Nonresident Non-citizen (NRNC)? U. S. only No 1 Some variation for citizens of American Possessions (Puerto Rico, Guam, etc.) 22 22

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24 Comparison of Taxing Regimes Resident Non-Resident Resident aliens are taxed on their worldwide income derived from: ANY source. ANY location. Normally taxed on income derived from U.S sources that is not effectively connected with a U.S. trade or business ( FDAP ); and Income that is "effectively connected" with a U.S. trade or business

25 Comparison of Taxing Regimes Resident U.S. employment income Foreign employment income U.S. passive income Foreign passive income U.S. Capital Gains Foreign capital gains Income for CFC s/pfic s Maybe subject to Exit Tax Gifts of anything to anyone, during life or at death Non-Resident U.S. employment income (if married, unable to file jointly) Certain U.S. passive income (if U.S. source like rent of U.S. real estate) For exempt individuals, U.S. source capital gains if in U.S. in excess of 182 days U.S. Real Estate Gains No Exit Tax Gifts, while living or at death, of property within the U.S

26 U.S. TAX COMPLIANCE & PLANNING 26 26

27 Obligations of U.S. Citizens and those that are U.S. Residents for the year Taxed on Worldwide Income. Individual Income Tax Reporting (Form 1040), tax due April 15. Informational Reporting: Form 8938 (FATCA) & Foreign Entities (Forms 926, 5471, 8621, 8858 and 8865) generally due with Form 1040 FBAR (FinCEN Form 114) - Note FBAR is not a tax return - due Oct. 15. Receipt of Large Gifts/Bequests from Foreign Persons and Transactions with/distributions from Foreign Trusts (Form 3520) due March 14 or April 15. Impact of Treaty Residency Tie-breaker on informational reporting

28 Obligations of Nonresident Alien Taxed on U.S. Source Income. Income Tax Reporting (Form 1040NR), required when any business in the U.S. tax due April 15 Informational Reporting: Must file to claim Closer Connection Exception Tax Treaty benefits Exempt days in the U.S. for any status other than in the U.S. on visa as foreign government related status (diplomatic visas)

29 Current Alternatives to Correct U.S. Tax and Reporting Non-Compliance Fresh Start. Voluntary Disclosure Practice - Internal Revenue Manual Disclosure ( ) Offshore Voluntary Disclosure Program: Opt-Out. Transitional Treatment to Streamlined. Streamlined Foreign/Domestic Offshore Procedures. Delinquent FBAR Submission Procedures. Delinquent International Information Return Submission Procedures. IRS indicates that these programs/procedures are only options to remedy offshore compliance issues

30 U.S. Tax Reporting related to Mexican Trusts Typical fideicomiso or Mexican Land Trust not a trust for U.S. tax purposes, Rev. Rul For a U.S. person that is beneficiary, trustee, grantor or deemed grantor must carefully consider U.S. reporting and income tax implications If only a beneficiary, then the U.S. person will need to report a distribution with Forms 3520-A and 3520 at time of distribution. Must determine if trust is a grantor or non-grantor trust, considering 672(f), and whether the actual or deemed grantor is a U.S. person. If a U.S. person grantor then the grantor will have Form 3520 filing obligations and treatment of the trust as a grantor trust, that is all activity reportable by the grantor. If a non-u.s. person grantor, then must plan for potential throwback tax for the U.S. beneficiaries 30 30

31 U.S. tax issues of Mexicans becoming U.S. taxpayers How to become a U.S. taxpayer: a) get a Green Card b) spend too much time in the U.S. How much is too much time, depends on whether asking for income or estate tax. For Estate tax it s not defined, but depends on domicile For Income tax it s 183 days in a single calendar year or based on a 3 year average test Complex set of exceptions and elections, including a special Mexican commuter rule for a person that lives in Mexico and commutes to work in the U.S. Once you get it, it s hard to get rid of due to anti-lapse rules. U.S.-Mexico Treaty does help, but merely using the benefits of the treaty can have tax implications for anyone that ever had a green card

32 U.S. tax issues of Mexicans becoming U.S. taxpayers If you can t avoid U.S. residency: 1) Know your U.S. residency start date 2) Consider accelerating or deferring income 3) Realize gains or losses before or after start date. 4) Review non-u.s. holdings for potential traps and difficult reporting issues. 5) Consider completing gifts before start date

33 U.S. tax issues of Mexicans buying U.S. Vacation Home How confident are you that no family member will become domiciled in the U.S. Even if no concern about domicile plan ahead for reporting required when property sold. If any concern then consider owning property in either a trust or a Non-U.S. corporation to protect against potential estate tax. If no income from property then may not need to make any U.S. tax filings

34 Thank You W. Aaron Hawthorne Andersen Tax Raoul Rodriguez Pinnacle Advisory Group Charles Tibshirani MEXLAW 34