Tax and Estate Planning Considerations for Foreign Persons Owning U.S. Assets: A Deeper Dive
Michelle B. GrahamMarnin J. MichaelsJoshua S. Rubenstein
Wednesday, January 11, 2017 Special Session II-E (3:50-5:20 p.m.)
2
Succession Planning Principles
• Gather facts on client (nationality, residency, schedule ofassets, marital agreement, business agreements, etc.)
• If married, what marital regime will apply?
• Is there a valid, enforceable Last Will & Testament?
• Gather facts on beneficiaries and heirs, in particularresidency and nationality
• Understand basic rules of home country and that ofbeneficiaries; retain local counsel
• What type of property is it (movable or immovable)?
3
Legal System of Home Country
• Common law (US, Canada, UK, Australia, NZ,Singapore)
• Judicial decisions, freedom of disposition, estate tax, trusts
• Civil law (most of EU, Africa, Asia, LatAm)• Codified laws, forced heirship, inheritance taxes, role of notary
publics, lack of use and/or recognition of trusts
• Religious law, e.g., Sharia (Saudi Arabia, Yemen,Sudan, Iran, Oman, Afghanistan)
• Combination of legal systems
4
Choice of Law & Conflicts of Law
• US courts will generally uphold choice of law
• Common law
• Domicile governs personal property
• Situs governs real property
• Civil law
• Law of person’s country of nationality
• Conflicts of law
5
Case 1
• Mr. C, a Guatemalan domiciliary, dies intestate unexpectedly in
Miami.
• He owns significant assets in both the United States and
Guatemala, including Guatemalan operating companies, Miami real
estate, a bank account in Miami and significant stocks and bonds
• The stocks and bonds are held in a foreign trust for the benefit of
his 3 children, some of whom are minors.
• His wife and children are U.S. citizens. He was separated from his
wife at the date of death, but was still legally married.
• He has a girlfriend in Guatemala and a child with his girlfriend.
6
Case 1 Issues
• Who is your client?
• Scope of representation?
• What information can you share with wife about Mr. C?
• Can you turn your files over to wife if she requests?
• Girlfriend and contested wills?
• U.S. real estate – foreclosure actions, pending sale, court action.
• What law governs the disposition of his estate? Trust?
• Who is entitled to his assets?
• Trust Issues – loans, trustee conduct, distributions (living expenses and legal fees).
• U.S. estate tax issues – what assets are subject to U.S. estate tax and how will tax be paid?
• What planning would you have done for Mr. C had he come to you for estate planning?
Case 2
• Daughter begins her freshman year at the University of
Miami in the fall term of 2017.
• Parents and Daughter are not U.S. citizens or GC
holders, and have spent fewer than 20 days in the
United States each year over the past 3 calendar years.
• Parents reside in France, but are UK domiciles of origin.
• Daughter will spend 9 months + per year in the U.S. on a
student visa.
Sample Facts (cont’d).
• Parents will buy a home in Coral Gables, FL, for the
principal use of their daughter. Parents may later retire to
Florida, so they are considering this as an investment in
a retirement home. However, Parents will not spend
significant time in the U.S. in the foreseeable future.
• The prospective home under consideration is currently
valued at USD 5 million.
Case 2 Issues
• Four main ways to take title
• Direct Ownership
• Offshore Company
• Two-Tier Partnership
• Irrevocable Discretionary Trust
• Each offers a mix of U.S. income and estate tax optimization
• Which structure the clients choose is essentially a “business
decision”
1) Direct Ownership
• Most basic method (default)
• Parents own U.S. real
estate individually or jointly
1) Direct Ownership (cont’d)
• Advantages:
• Favorable long-term capital gains treatment
• Step-up in basis at death
• Disadvantages:
• No U.S. estate tax protection
• Property owned jointly by non-U.S. husband and wife could be subject to
significant estate tax (double estate tax)
• Probate will be necessary to transfer title to the U.S. real estate after death
• No anonymity
• Tort risk
2) Offshore Company
• Parents establish a company in
an offshore tax-friendly
jurisdiction such as the BVI (the
“Offshore Company”)
• Recommended: interpose U.S.
company between the Offshore
Company and U.S. real estate
to facilitate administration of the
property.
2) Offshore Company (cont’d)
• Advantages:
• U.S. estate tax protection, but care must be taken to respect
entity
• Lower cost of implementation and maintenance
• Anonymity
• Tort liability
• Disadvantages:
• No capital gains efficiencies
• No stepped-up basis at death
• Branch profits tax may be an issue
3) Two-Tier Partnership• Create a foreign entity that will be
considered to be a partnership for
U.S. purposes (upper-tier
partnership)
• Offshore partnership creates a
U.S. or foreign partnership (lower-
tier partnership) that holds U.S.
real estate
• Interest in lower-tier partnership is
held by the upper-tier partnership
3) Two-Tier Partnership (cont’d)
• Advantages:
• Favorable capital gains rates
• Step-up in basis
• Disadvantages:
• U.S. estate tax protection not guaranteed
• High formation and maintenance costs
• Could further insulate the U.S. real estate from U.S. estate taxes by
contributing the interest in the two-tier partnership to an irrevocable,
fully discretionary trust
4) Irrevocable, Discretionary Trust
• Parents establish irrevocable,
fully discretionary trust
• Fund the trust with sufficient
capital
• Newly funded trust purchases
the desired U.S. real estate
• (Trustee may require a non-
U.S. corporate entity to hold
the real estate)
4) Irrevocable, Discretionary Trust (cont’d)
• Important Distinctions:
• Irrevocable v. Revocable
• Discretionary v. Fixed-Interest
• Advantages:
• Estate tax protection may be achieved
• Favorable capital gains rates
• Simple
• Disadvantages:
• Consequences of achieving estate tax protection
• Step-up in basis cannot be achieved
• Possible U.S. reporting issues
Other considerations• Financing
• Special state mortgage rules (e.g., CA)
• Sharia Law
• Put your structure in place before you move
• Consider the type of property
• Don’t ‘accidentally’ trigger U.S. income tax or U.S.
transfer tax regime (or both)
• Plan should be flexible in case daughter becomes
U.S. person
• What if tax laws change? What approach is best?
• What about reporting under CRS in home country?
• Can Parents elect UK law to apply to avoid France’s
forced heirship rules?
US Tax Residency
US Income Taxes
(Including Capital Gains
Taxes)
US Transfer Taxes
(Including Estate & Gift
Taxes)
Tests:
(i) “Green Card,” or
(ii) Day Counting
(“Substantial
Presence”), or
(iii) Special Election
Test: Domicile
19
Case 3
• Assume parents already own real property in Florida
that they bought for USD 250,000 and is now worth
USD 1.5 million.
• They come to you for U.S. tax and estate planning.
• What do you recommend?