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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

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International Estate Planning Issues

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  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

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