CROSS-BORDER ESTATE PLANNING: MEXICO AND U.S. Enrique Hernandez Procopio San Diego, CA 13 Th Annual International Estate Planning Institute NYC, March, 2017 Agenda o Overview of Tax and Legal Framework o Hypothetical Scenarios &Planning Alternatives o Q&A 1
Overview of Tax and Legal Framework U.S. Income Tax Issues Mexican Income Tax Issues U.S.-Mexico Income Tax Treaty U.S. Transfer Tax issues Mexican Income Tax on Gifts/Inheritances Other Mexican Legal issues U.S. Income Tax Issues Tax Residency Citizen Green Card Substantial Presence Test WWI vs. U.S. Source Income Different tests for income tax and transfer tax 2
Mexican Income Tax Issues Focus on tax residency (not citizenship) Resident if dwelling home in Mexico If dwelling home in Mexico and abroad, then center of vital interests (domestic law concept) U.S.-Mexico Income Tax Treaty Residency tie-breaker rules Reduced withholding tax rates Capital Gains Immovable Property Foreign Tax Credit Source rules 3
U.S. Transfer Tax issues U.S. Citizens and Domiciliaries Worldwide property subject to Transfer Tax 2017: $5,490,000 exclusion amount Non-domiciliaries U.S. situs property subject to Transfer Tax 2017 exclusion amounts: $60,000 estate tax Non-Domiciliaries Gift Tax Applies to U.S. situs real property and tangible personal property located in the U.S. No tax on gifts of intangibles by non-domiciliary U.S. citizen spouse: unlimited marital deduction Non-U.S. citizen spouse: $149,000 annual exclusion in 2017 (indexed) 4
Non-Domiciliaries - Estate Tax U.S. situs property Real property located in the U.S. Personal property located in the U.S. Stock in U.S. corporations Non-U.S. situs property Life insurance proceeds Certain deposits with U.S. banks Post-Death: Form 706-NA U.S. situs property: $60,000 or more U.S. Executor: appointed, qualified, acting in the U.S. File Form 706-NA Possible personal liability Transferee liability Special estate tax lien: automatic General tax lien: assessment and demand for payment 5
Mexico: Income Tax on Gifts No gift tax, but income tax could apply to certain gifts Gifts between spouses or ascendants/descendants are generally exempt from income tax Other gifts are generally taxable income to recipient Income tax paid by recipient/donee (compare to U.S. gift tax where tax is paid by donor) Most gifts to non-mx residents not subject to Mx withholding tax Mexico: Income Tax on Gifts and Inheritances by Non-Mx Residents Gifts and Inheritances and bequests received by Nonresidents of Mexico subject to income tax if: shares of Mexican entities real estate located in Mexico Exception: Gifts to spouses and descendants Rate: 25% on gross value No step-up in basis Real estate transfer tax: 2%-6% 6
Other Mexican Tax and Legal Issues Death Benefit proceeds from Non-Mx Life insurance fully taxable in Mexico. Mexican CFC anti-deferral rules and reporting requirements Application of Treaty Source Rules (personal property) for FTC purposes Executor of Mx Estate personal civil and tax related liability Marital Property Regime: Separate property or community property Real Estate in Restricted Zone Restricted Zone: no foreign ownership near the border (100 km) and the beach (50 km) Mexican fideicomiso: Mexican bank must be fiduciary PLR 201245003: no Form 3520/3520A required Beneficiary rights under fideicomiso, Real or Personal Property under Mx law? Hypothetical Cases & Planning Alternatives o Case 1: MX w/us Investments and MX o Case 2: MX w/us Investments and US o Case 3: Mx w/mx Investments and US o Case 4: US w/mx Investments and US 7
Case 1: MX with US Investments & MX MX resident MX USA Mexican Tax o Inheritances Considerations income is tax exempt, in the hands of Mexican beneficiaries. o No threshold on exemption. o No step up in basis. o Must be declared to be tax exempt. o Family relationship not relevant. Foreign Life insurance policy and pension funds Shares Real estate Life insurance policy o 100% taxable, provided the policy was issued by a foreign insurance company. US Considerations o U.S. situs property o Not Life Insurance o Probate on Real Estate o Step up basis Case 1: Potential Alternative MX resident MX Blocker USA Shares Real estate Life insurance policy 8
Case 2: MX with US Investments & US MX resident Shares Real estate Life insurance policy US USA -Dual Citizenship Mexican Tax Considerations No tax consequences, provided the beneficiaries of the Estate are not Mexican residents and there are no assets in Mexico. Mexican citizenship not relevant, unless the beneficiaries have a home in Mexico (vacation homes not considered) US Considerations o U.S. situs property o Probate on Real Estate o Step up basis o No income tax Case 2: Potential Alternative MX resident US USA -Dual Citizenship Gift (complete / life estate) - US gift tax?! Mexican fideicomiso U.S. Trust Shares Real estate Life insurance policy 9
Case 3: MX with Mx Investments & US Mexican Tax Tax residency Considerations of decedent is not as relevant as the residency of the beneficiaries of the Estate. MX resident US -Dual Citizenship In general terms, Mexico taxes foreign resident s income to the extent it qualifies as Mexican source income. Shares Real estate Mx Transfer of Property (Stock and Real Estate) Stock of Mexican companies subject to wht at 25%. Exempt only if acquired as a gift. Real Estate subject to wht at 25%. Exempt only if acquired as a gift. Mexican probate US Considerations o Non-U.S. situs property o Step up basis o No income tax o Reporting Requirements (form 3520) o US executor? (form 56 / FBAR, etc.) Case 3: Potential Alternative MX resident US USA -Dual Citizenship Gift (complete / life estate) Mexican fideicomiso U.S. Trust Shares Real estate Life insurance policy 10
Case 4: US Person with MX Investments & US Mexican Tax Considerations Tax residency of decedent is not as relevant as the residency of the beneficiaries of the Estate. In general terms, Mexico taxes foreign resident s income to the extent it qualifies as Mexican source income. US resident US Mexico Transfer of Property (Stock and Real Estate) Stock of Mexican companies subject to wht at 25%. Exempt only if acquired as a gift. Real Estate subject to wht at 25%. Exempt only if acquired as a gift. Shares Real estate US Tax Considerations o Estate Tax on Worldwide Assets o No credit for Mexican income taxes o Step up basis o No income tax o Reporting Requirements (form 3520) o US executor? (form 56 / FBAR, etc.) Case 4: Potential Alternative Transfer of Legal Title (e.g., life estate) US resident US Mexico Shares Real estate 11
Questions & Answers August, 2016 Contact Information Enrique Hernandez Enrique.hernandez@procopio.com T. (619) 515-3240 @ehrdz 12