Foreign Nationals Financial Professional Guide

Policies issued by American General Life Insurance Company (AGL) except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Products may not be available in all states and product features may vary by state. © AIG 2016

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OpportunityAs the buying power of multicultural consumers continues to grow, so will their need for financial services.

The United States remains a popular destination for immigrants continuing to hold its stature as a world leader. Real estate is one of the bigger enticements to the U.S., coupled with mature insurance and investment markets, technology and ease of travel.

This segment is growing faster than the population generally and is more affluent as well. The Asian American market alone represents a $1 trillion opportunity.1

Overseas buyers snapped up more than $100 billion in U.S. real estate over the past year, as the foreign wealthy sought safe shelter for their fortunes.2

U.S. real estate remains a relative bargain compared to other global cities favored by the wealthy. For example, a condo that costs $1.6 million in New York would cost more than $4 million in Paris and $2 million in Moscow.2

1Pew Research Center analysis based on Elizabeth M. Hoeffel etal., The Asian Population:2010, Census Bureau, March 2012 2 Robert Frank; “Weathly foreigners bought $100 billion in US real estate”; http://www.cnbc.com/id/102777978; 06/22/2015

Chronicling more than 95 years of AIG history

1919 Began as American Asiatic Underwriters in Shanghai, China

1930-39 Operations expand in China and operations begin in Latin America

1940-49 After WWII, operations begin in new markets across the globe, including Japan and Germany

1950-59 UK and Australia markets opened

1960-69 American International Group Inc. (AIG) is formed as a unifying umbrella organization and it begins a new era as a public company

1990 AIG returns to its roots in China with the issuance of the first foreign license issued by the Chinese Government in 40 years

2013 AIG entered a joint venture with PICC Life to provide Chinese consumers life insurance and other financial products to enhance and protect their overall quality of life

Why AIG?AIG understands the growing needs of Foreign Nationals with over 95 years of servicing global citizens.

Foreign Nationals face unique U.S. planning challenges and seek estate planning assistance. AIG is committed to equip you to better serve this market to protect their families, secure their retirement and achieve their financial goals.

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Enter the Foreign National Marketplace with AIGThe complex nature of U.S. tax rules can sometimes seem overwhelming for U.S. and non-U.S. residents alike. These complex, varied and often misunderstood tax rules, coupled with the transient nature of the U.S. population, can often lead to misunderstandings as to tax obligations which can result in unintended but severe financial consequences. On the following pages, we provide a summary of some of the key income, gift and estate tax requirements that foreign nationals need to be mindful of.

AIG will keep pace with the needs of foreign nationals as they enter the U.S. marketplace and prepare you to provide them with world-class support, with our full range of protection, accumulation and income solutions.

Who is a Foreign National?A “foreign national” is a broad term used to describe a person who is not a citizen of the host country in which he or she is residing. For U.S. tax purpose, the term foreign national is not used. Instead, the tax status of a non-U.S. citizen (alien) is principally determined by whether they are deemed to be a Non-resident or Resident Alien.

Resident AlienFor tax purposes, you are a Resident Alien (RA) of the U.S. if you meet either the green card test or the substantial presence test.

Green Card Test: You will generally have this status if the U.S. Citizenship and Immigration Services (USCIS) has issued you an alien registration card (“green card”).

Substantial Presence Test: If you are physically present in the U.S. for a certain number of days during a specified time period, you will have met this test. To qualify, the number of days present in the U.S. must be at least:

1. 31 days during the current calendar year, and

2. 183 days during the 3-year period that includes the counting of all days in the current year, one-third of the days in the immediate preceding calendar year, and one-sixth the number of days in the second year before the current calendar year.1

1 A foreign national can still be treated as a Non-resident Alien even if they meet the substantial presence test if they are: (1) present in the U.S. for less than 183 days during the year, (2) maintain a tax home in a foreign country during the year, and (3) have a closer connection during the year to one foreign country in which they have a tax home than to the U.S. Do not count as days of presence in the U.S., days you: (1) commute from a residence in Canada or Mexico; (2) are in the U.S. less than 24 hours in transit; (3) are unable to leave the U.S. due to a medical condition; (4) are an exempt individual; (5) are a member of the crew of a foreign vessel.

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Example 1 Lina first visited the U.S. in 2012, spending a total of 42 days before returning to her home country, China. On January 15, 2013, she again visited the U.S. and returned to China on October 1, 2013. Lina later decided to make the U.S. her permanent home and moved to California on July 1, 2014. Lina is unfamiliar with U.S. tax laws and has asked her new financial advisor about her U.S. income tax status as it pertains to 2014. Is Lina considered a resident under the substantial presence test?

Answer: Yes.

YEAR ACTUAL DAYS EQUIVALENT DAYS

2014 (1 x 184 days) 184 days

2013 (1/3 x 258 days) 86 days

2012 (1/6 x 42 days) 7 days

Total days for substantial presence test 277 days

You must pass both the 31-day and 183-day tests.1. 31-day test: Were you present in the U.S. 31 days or more during the current

year? (If yes, proceed to part 2 below)

2. 183 day test: (if line D below equals or exceeds 183 days, you have passed the 183-day test and will be deemed a Resident Alien (RA) for U.S. income tax purposes unless an exception applies).

A. Current year days in U.S. x 1 = ______ days

B. First preceding year days in U.S. x 1/3 = ______ days

C. Second preceding year days in U.S. x 1/6 = ______ days

D. Total Days in U.S. = ______ days (add lines A, B, and C)

SUBSTANTIAL PRESENCE TEST

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Table 1: 2016 TAX BRACKETS (for taxes due April 17, 2017)

Tax rate Single filers Married filing jointly or Married filing Head of household qualifying widow/widower separately

10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250

15% $9,276 to $37,650 $18,551 to $75,300 $9,276 to $37,650 $13,251 to $50,400

25% $37,651 to $91,150 $75,301 to $151,900 $37,651 to $75,950 $50,401 to $130,150

28% $91,151 to $190,150 $151,901 to $231,450 $75,951 to $115,725 $130,151 to $210,800

33% $190,151 to $413,350 $231,451 to $413,350 $115,726 to $206,675 $210,801 to $413,350

35% $413,351 to $415,050 $413,351 to $466,950 $206,676 to $233,475 $413,351 to $441,000

39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more

What are the income tax implications if classified as a Resident Alien?Generally, Resident Aliens are subject to income-tax in the same manner as a U.S. citizen. This means that worldwide income (all interest, dividends, wages, or other compensation and investment income from sources within and outside of the U.S.) must be reported and is subject to income tax.

Table 1 below shows the 2016 income limits for all tax brackets and all filers:

Table 2: 2016 FEDERAL ESTATE AND GIFT TAX EXCLUSION

Annual Gift Tax Exclusion Estate and Gift Tax Exclusion Top Estate and Gift Tax Rate

$14,000 $5,450,000 40%

What are the transfer tax implications if classified as a Resident Alien?With the exception of the estate and gift tax marital deduction rules, Resident Aliens are treated the same as U.S. citizens for gift and estate tax purposes. Meaning, their entire estates wherever situated is subject to U.S. gift and estate taxes. The 2016 gift and estate exclusion amounts are shown in Table 2 below:

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What are the income tax implications if classified as a Non-resident Alien?Non-resident AlienA foreign individual is classified as a Non-resident Alien (NRA) for any period that he/she is neither a U.S. citizen nor a Resident Alien for tax purposes. (See Residency Status Guideline on page 10)

NRAs are taxed differently from U.S. citizens. They are generally taxed only on their U.S. source income under a dual income tax scheme. First, the same graduated tax rates as for a U.S. person is applicable to an NRA’s income that is “effectively connected income” (ECI). ECI is personal service income or earned income from the operation of a business in the U.S. Second, income that is fixed or determinable, annual, or periodic (FDAP)2 is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.

Income Tax Treaty Countries (Source: IRS.gov)

Estate Tax Treaties: In general, treaties are designed to help avoid double taxation. The typical U.S. estate and/or gift tax treaty may limit the U.S. estate tax/gift tax to taxation of U.S. real estate and property used in a U.S. trade or business. The U.S. currently has estate and gift tax treaties with the following countries: ArmeniaAustraliaAustriaAzerbaijanBangladeshBarbadosBelarusBelgiumBulgariaCanadaChinaCyprusCzech RepublicDenmarkEgyptEstoniaFinland

FranceGeorgiaGermanyGreeceHungaryIcelandIndiaIndonesiaIrelandIsraelItalyJamaicaJapanKazakhstanKoreaKyrgyzstanLatvia

LithuaniaLuxembourgMaltaMexicoMoldovaMorocco NetherlandsNew ZealandNorwayPakistanPhilippinesPolandPortugalRomaniaRussiaSlovak RepublicSlovenia

South AfricaSpainSri LankaSwedenSwitzerlandTajikistanThailandTrinidad & TobagoTunisiaTurkeyTurkmenistanUkraineUnited KingdomUzbekistanVenezuela

Example 2 Chris is a citizen of a non-U.S. income tax treaty country. In 2014, he visited the U.S. for the first time and spent a total of 60 days. During that time, he opened an investment account and bought U.S. equity securities. At the end of 2014, Chris was perplexed as to why his year-end account statement showed that 30% of his $15,000 gross dividends were withheld for taxes. Since Chris is a resident of a non-U.S. income tax treaty country, the flat 30% tax is not reduced and was appropriately withheld.

Chris is also contemplating the acquisition of real estate that would generate rental income. He is concerned that 30% of his gross rental income would be withheld for taxes and therefore would not be an economical investment. Generally, gross rental income is subject to the 30% withholding tax. Chris can, however, elect to treat the rental activity as “trade or business” income. This will allow the rental activity to be taxed on a net basis. In other words, the gross rental income would be reduced by deductible expenses.

2 Include passive income such as interest, dividends, rents or royalties.

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What are the transfer tax implications if classified as a Non-resident Alien?Unlike the objective criteria to determine residency for income tax purposes, gift and estate taxation of NRAs depend on a subjective determination of domicile. U.S. domicile for gift and estate tax can be established by living in a place, for even a brief period, with no definite, present intention of moving.3 It is therefore possible for an NRA to acquire income tax residence without establishing a domicile in the U.S. for gift and estate tax purposes. If, however, an NRA is deemed to be domiciled in the U.S., then U.S. transfer taxes will apply to the NRA’s U.S. situs property.

• Gift tax Generally, an NRA is subject to U.S. gift tax on gifts of real or tangible personal property that is located in the U.S. Intangible property, such as securities in a brokerage account although considered located in the U.S., are not included.

• Annual Exclusion Amount: An NRA is entitled to the annual gift tax exemption amount ($14,000, indexed). Gift splitting with a spouse is not allowed.

• Lifetime Exemption Amount: NRAs are ineligible for the $5,450,000 (indexed) lifetime exemption amount.

• Unlimited Marital Deduction: The unlimited marital deduction for gifts to a spouse is not available for property that is transferred to a non-U.S. citizen spouse. An enhanced annual gift exemption amount of $148,000 (indexed) is available, however.

• Estate tax While intangible property are excluded for gift tax purposes, the U.S. estate tax applies to both tangible and intangible property situated or deemed situated in the U.S. at the death of an NRA.4 Certain assets, including securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., stock in foreign corporations, and proceeds from life insurance on the life of an NRA are exempted.

• Exclusion Amount: An NRA’s estate is entitled to a credit of $13,000. This credit effectively eliminates the estate tax on the first $60,000 of assets. The $5,450,000 estate exemption amount that is available to U.S. citizens and Resident Aliens is not available to an NRA.

• Unlimited Marital Deduction: The availability of the marital deduction for the estate of an NRA depends on the surviving spouse’s citizenship. A U.S. citizen’s surviving spouse is entitled to the unlimited marital deduction; whereas, a non-U.S. citizen’s surviving spouse is only eligible for the unlimited marital deduction if the property is transferred into a “qualified domestic trust” (QDOT).5 A QDOT is an irrevocable trust that allows the deferral of estate tax on property passing to a non-U.S. citizen spouse until the death of the non-citizen spouse.6

Example 3 Juan, a Mexican national, maintains a U.S. bank account and wishes to make a $50,000 gift to his daughter living in Texas. Juan would like to wire the fund directly to his daughter, but he is concerned about the potential U.S. gift tax. Is Juan’s concern valid?

Yes. A wire transfer from a U.S. bank is treated the same as cash or a check, and is subject to the gift tax. To avoid the U.S. gift tax, the funds should come from an offshore bank account. See Table 4 on page 8 for type of assets subject to the U.S. gift tax.

3 Regs. Sec. 20.0-1(b)(1). Domicile is separate from income tax residency and requires a facts and circumstances analysis that looks at other factors such as where driver’s license is issued, voter registration, bank accounts, frequency of travel abroad, etc.

4 IRC §§ 2101(a); 2103, 2106(a). Even if a taxpayer has no connection with the United States (i.e., is not a citizen or domiciliary) but passes away owning certain types of property located in the United States, the estate tax applies to the U.S. situs property regardless of the taxpayer’s citizenship or residency, as long as an estate tax treaty does not supersede. Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to NRAs by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation.

5 IRC §§ 2056(a); 2106(a)(3).6 A QDOT must satisfy certain requirements. They include: (1) all income must be paid to the spouse for life; (2) at least one trustee must be a U.S. citizen or domestic corporation; (3) the U.S. trustee

must have the right to withhold estate tax from any distribution of trust principal; (4) the decedent’s executor must make an election to treat the trust as a QDOT; and (5) the trust must satisfy the rules applicable to marital deduction trusts.

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Example 4 Pedro currently lives in California. He is a Panamanian national and plans to return to Panama when his work assignment ends. He owns no real property in the U.S., but maintains a U.S. brokerage account with non-U.S. equity investments valued at $750,000 and a U.S. bank account with $250,000 in cash. Pedro is also the owner and insured of a $2 million death benefit permanent life insurance policy. His daughter is the named beneficiary. Pedro would like to know whether these assets will be subject to U.S. estate tax.

No. Since Pedro is a NRA for estate tax purposes, the cash and non-U.S. equities will not be subject to U.S. estate tax. The life insurance proceeds will also be excluded. See Table 4 for type of assets subject to U.S. estate tax.Table 4: Asset Subject to U.S. Gift Tax Subject to U.S. Estate Tax

Annuities No Yes

Currency in U.S. safe deposit box Yes Yes

Cash deposit in bank (checking/savings) Yes No

Intangible personal property No Yes, if enforceable against U.S. person

Life insurance on life of insured No No

Tangible personal property Yes, if located in U.S. Yes, if located in U.S.

Retirement plan benefits N/A Yes

Stock in U.S. corporation No Yes

ADRs No No

U.S. real property Yes Yes

Estate & Gift Tax Treaty Countries (Source: IRS.gov)

In general, treaties are designed to help avoid double taxation. The typical U.S. estate and/or gift tax treaty may limit the U.S. estate tax/ gift tax to taxation of U.S. real estate and property used in a U.S. trade or business.AustraliaAustriaBelgiumCanadaDenmarkFinland

FranceGermanyGreeceIrelandItalyJapan

NetherlandsNorwaySouth AfricaSwedenSwitzerlandU.K.

SummaryTable 3 below provides a summary of estate and gift tax requirements for Resident Aliens and Non-resident Aliens.

Table 3 Resident Alien (RA) Non-resident Alien (NRA)

Lifetime estate tax exemption $5,450,000 $60,000

Top estate and gift tax rate 40% 40%

Unlimited marital deduction Same for each: Only if inherited assets are transferred to QDOT

Assets subject to U.S. estate taxes All worldwide assets Property situated or deemed situated in the U.S.*

Gift tax annual exclusion amounts Same for each: $148,000 spouse and $14,000 for non-spouse

Assets subject to U.S. gift taxes All worldwide assets Real or tangible property situated in the U.S.

*U.S. situated property includes: real and tangible personal property located in the U.S. as well as certain intangible property deemed situated in the U.S. (example, stock issued by a U.S. corporation)

Table 4 below provides a summary of certain asset classes that are subject to U.S. gift and estate tax, respectively.

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GuidelinesNon-resident Alien clients are at a high risk of unintentionally running afoul of U.S. income and transfer tax rules. Advisors must be wary of these rules and must tailor client solutions to meet the desired objectives of each client. While the needs of these clients are varied and complex, there are some planning opportunities that all NRA clients should be aware of.

Life InsuranceWhile NRAs are subject to U.S. estate tax on their U.S. situs property, life insurance issued by a U.S. life insurer, on the life of an NRA, is excluded from the estate of the NRA. This is the result even when the policy is individually owned by the NRA. Also, the tax advantages of life insurance that are available to U.S. citizens are also available to NRAs. These advantages include tax deferred growth, income tax free death benefit, and the ability to access cash values during lifetime. Life insurance offers a simple, yet flexible solution that can be utilized to meet potential future tax obligation associated with an NRA’s ownership of U.S. situs property. See page 11 for AIG’s NRAs general underwriting guidelines.

Lifetime GiftsThe U.S. gift tax does not apply to an NRA’s gifts of intangible personal property. Real property and tangible personal property located in the U.S. are, however, subject to the gift tax. It should be noted that cash is considered tangible personal property for gift tax purposes; thus, a gratuitous transfer by check drawn on a U.S. bank, or the transfer of funds from one U.S. bank account to another U.S. bank account will be considered a gift subject to the gift tax rules. To avoid running afoul of the gift tax rules, an NRA should avoid gifts of U.S. real property and limit gifts to intangible property such as shares of stock in U.S. corporations or U.S. treasury obligations. A tremendous opportunity exists for NRAs to make gifts of intangible property, of any amount, in trust for the benefit of U.S. citizen and resident beneficiaries.

Qualified Domestic TrustThe estate of a decedent that passes to a non-U.S. citizen surviving spouse will not receive the unlimited marital deduction unless the assets pass to a qualified domestic trust (QDOT). The purpose of the QDOT is to ensure that the federal estate tax that was deferred at the death of first spouse will be paid following the death of the surviving non-U.S. citizen spouse. Where the NRA’s spouse is not a U.S. citizen, a QDOT should be established to receive any U.S. situs property that is subject to U.S. estate tax. A QDOT is not necessary if the surviving spouse lives in the U.S. following the death of the decedent and becomes a U.S. citizen before the decedent’s estate tax return filed.

What are the requirements for a valid QDOT?

A valid QDOT must meet the following basic requirements:

1. The executor must make an irrevocable election on the estate tax return.

2. The trust instrument must provide that at least one trustee be a U.S. citizen or domestic corporation.

3. The U.S. trustee must be able to withhold tax from distributions of principal to the non-citizen spouse.

4. A QDOT with assets greater than $2 million must have a U.S. bank as one of its trustees.

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What is my status for U.S. income tax purposes?

Do you possess an alien registration card (green card)?

Were you physically present in the U.S. on at least 31 days during the current year?

Were you physically present in the U.S. on at least 183 days during the three-year period that includes all days in the current year, plus 1/3 the number of days in the prior calendar year, plus 1/6 the number of days

in the second previous calendar year?

Do you still meet the 183 day test if you disregard exempt days? Exempt days are days you are: 1) commuting to work from Canada or Mexico; 2) in the U.S. for less than 24 hours;

3) in the U.S. as a crew member of a foreign vessel; 4) unable to leave the U.S. due to a medical condition; or 5) an exempt individual.

Were you physically present in the U.S. on at least 183 days during the current year?

During the current year, did you maintain a tax home in a foreign country in which you had a closer connection than with the U.S.?

You are aResident Alien

(RA) for U.S. income

tax purposes

You are aNon-resident Alien (NRA)

for U.S. income tax purposes

YES

YES

NO

YES

YES

YES

NO

NO

NO

NO

YES

NO

Non-resident AlienA foreign individual is classified as a Non-resident Alien (NRA) for any period that he/she is neither a U.S. citizen nor a Resident Alien for tax purposes.

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Non-resident Alien (NRA) Underwriting Guidelines The chart below provides an overview of AIG underwriting guidelines as they pertain to your foreign national clients.

Does the prospect have documented substantial contacts with the U.S.?

Prospectmay be eligible

for coverage(additional

requirements must be satisfied).

Prospectis not eligible

for coverage.

YES

YES

YES

YES

YES

NO

YES

NO

NO

NO

NO

NO

Is the prospect a visa holder intending to reside permanently in the U.S.?

Is the prospect in the U.S. for a purpose other than to buy insurance and has a U.S. bank account?

Is the prospect a Non-resident Alien? (A non-green card holder residing outside the U.S. or visiting the U.S. temporarily)

Did solicitation take place in the U.S.?

Does the prospect meet one of the following requirements?1) Owns real property in the U.S.2) Has ongoing business activities in the U.S.3) Maintains investment interest in the U.S.4) Employed by a U.S. based company5) Annual travel to the U.S. to visit immediate family6) Annual travel to the U.S. to manage financial or real estate assets7) Regular travel to the U.S., at least 15 days minimum, for doctor visits

SummaryFor U.S. tax purposes, Resident and Non-resident Aliens are treated differently. The risks of unintentionally violating these rules are high, and careful investigation is needed to determine proper tax status for each situation. Income, transfer and estate tax planning for foreign nationals also provide unique opportunities that may enable them to optimize future U.S. tax obligations.

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This information is general in nature and may be subject to change. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning individual circumstances, clients should consult a professional attorney, tax advisor or accountant. © AIG 2016. All rights reserved.

FOR FINANCIAL PROFESSIONAL USE ONLY- NOT FOR PUBLIC DISTRIBUTION

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