international estate planning issues stephen c. hartnett associate director of education american...

International Estate Planning

Issues


Issues

Stephen C. HartnettAssociate Director of Education

American Academy of Estate Planning Attorneys

Stephen C. HartnettAssociate Director of Education

American Academy of Estate Planning Attorneys



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

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



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

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



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.

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.



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

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



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” =

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” =



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

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



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

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



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

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



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)

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)



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”

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”



Estate Tax – NRAs Out of U.S. – portfolio debt (issued after 7/18/84)

1) Bonds, notes, other debts2) 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

Estate Tax – NRAs Out of U.S. – portfolio debt (issued after 7/18/84)

1) Bonds, notes, other debts2) 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



Gift Taxation of NRAs ONLY gift taxed if

1) tangible AND2) 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

Gift Taxation of NRAs ONLY gift taxed if

1) tangible AND2) 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



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

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



Treaties

Example:

Estate and Gift tax Convention and Protocol between the United States and France

Treaties

Example:

Estate and Gift tax Convention and Protocol between the United States and France



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.

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.



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

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



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

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



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)

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)



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?

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?



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 clauseNo direction to administer outside U.S.In fact administered in U.S.

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 clauseNo direction to administer outside U.S.In fact administered in U.S.



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

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



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)

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)



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.

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.



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

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



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.

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.



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

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



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.

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.



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.

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.



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)

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)



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

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



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

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



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.

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.



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

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

international estate planning issues stephen c. hartnett associate director of education american...

Documents

birth parent

prior yrs slide

parent parent

prior year

prior yrs minors

worldwide income residents

childs birth citizenship

childs birth slide