u.s.-mexican tax and estate planning: advanced techniques...

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U.S.-Mexican Tax and Estate Planning: Advanced Techniques for Tax ProfessionalsReconciling U.S. and Mexican Law on Trusts, Ownership of Real Property, Situs Wills, and Wealth Transfers

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Tuesday, May 14, 2019

Presenting a live 90-minute webinar with interactive Q&A

W. Aaron Hawthorne, Managing Director, Andersen Tax, Dallas

Raoul Rodriguez, CFP, EA, Wealth Manager, Pinnacle Advisory Group, Miami

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U.S. MEXICAN TAX AND ESTATE PLANNING FOR CROSS BORDER CLIENTS

5

MEXICAN ESTATE PLANNING CONSIDERATIONS

INTRODUCTION

• Legal framework

• Types of wills

• Parties to a Mexican will

• Probate Process

• Restricted Zone / Fee simple

6


INTRODUCTION

• Marriage

• Joint property

• Estate taxes

• Other estate planning documents

• U.S. considerations

• Summary

7


LEGAL FRAMEWORK

• Mexico is a federal republic whose constitution

establishes:

• Three co-equal branches of government

• Executive, Legislative, Judicial

• Mexico is divided into 32 states

• Each state has its own constitution and is divided into the

same three branches of government.

8


LEGAL FRAMEWORK

• Mexico is a civil law country

• Federal Civil Code / Federal Civil Procedures Code

• State Civil Code / Civil Procedures Code for each state

• The civil codes deal primarily with…

• People and family

• Property

• Contracts

• Successions

9


TYPES OF WILLS

• Most states allow the following types of wills…

• Ordinary wills

• Open

• Closed

• Simplified

• Holographic

10


TYPES OF WILLS

• Most states allow the following types of wills…

• Special wills

• Private

• Military

• Foreign

11


TYPES OF WILLS

• Open wills

• Granted before a Mexican notary public

• Two witnesses

• Translator if needed

• Registered at public registry

12


TYPES OF WILLS

• Planning tips for open wills

• Valid in the U.S.

• Certified copies do not have signature of testator

• Can be granted at a Mexican consulate in the U.S.

• While registered at public registry, document is not part

of the public record

13


TYPES OF WILLS

• Parties to a Mexican will

• Heirs / Universal heirs

• Legatees, bequests

• Executor

• Planning tip:

• Designate alternate executors

• Executors can hire attorneys and others to help

14


TYPES OF WILLS

Planning tips:

• If client is drafting a Mexican will and has a foreign will,

Mexican document should expressly state the desire NOT

to revoke prior will, if that is the intent

• Generally drafted to apply only for assets in Mexico

• Mexican will can act as pour over will to U.S. trust if

drafted appropriately

15


PROBATE PROCESS

• Probate process

• Extra judicial

• Judicial

• Intestate

• Minors

• Guardianship

• Disputes

Planning Tip: Mexico, unlike many civil law countries, does not

have forced heirship provisions

16


RESTRICTED ZONE / FEE SIMPLEMexico is unique for civil law countries in that it uses trusts.

Foreigners who want to acquire property within the restricted

zone (on the international borders or in beach areas) must do

so as beneficial owners of a Mexican trust.

Ownership of real property outside of the restricted zone is

held fee simple.

Planning Tips:

1. Trusts avoid probate in Mexico and the U.S.

2. U.S. LLC can be a beneficial owner.

17


JOINT PROPERTY• Mexico does not have joint ownership with rights of

survivorship (JOWRS). Joint property is held similarly to

Tenants in Common in the U.S.

• Property is assumed to be held 50/50 unless a different

percentage is specifically noted in the title

• A decedent’s share will need to go through a probate

proceeding to transfer

18


TO AVOID PROBATE IN MEXICO…• Add beneficiaries to Mexican financial accounts (similar to

TOD / POD in the U.S.)

• Some states allow beneficiary designation on title to real

property (Testamento Simplificado)

• Use Mexican trusts

• Foreign business structures

Planning Tip: U.S. IRA can own an interest in Mexican real

estate.

19


ESTATE AND GIFT TAXES• Tax residents

• No tax on gifts between descendants and ascendants

• No estate tax

• Non-tax residents

• 25% income tax on gratuitous transfers on value of entire

asset. Gifts and inheritances.

Planning Tip: Mexico is seriously considering the imposition of

an estate tax.

21


OTHER MEXICAN DOCUMENTS• Power of attorney

• Advance appointment of guardian (some states only)

• Federal Mexican end of life instructions, No Notario / 2

witnesses

• State healthcare directives (some states only)

Planning Tip:

1. There are no Durable Powers of Attorney in Mexico

2. Careful with sunset rules for some POAs

22


U.S. CONSIDERATIONS• Mexican assets are part of the gross estate for U.S.

citizens / green card holders and domiciliaries

• Tax compliance is key to help transition assets to U.S.

heirs

• Putting a non-citizen spouse on title to property in Mexico

may have U.S. gift tax consequences

23

UNDERSTANDING U.S. TAXATION

OVERVIEW OF U.S. TAXATION• For U.S. income tax purposes, an individual who is not a

U.S. citizen, is either…

• A U.S. Resident Alien or

• A Non-Resident Alien (“NRA”)

• The U.S. Internal Revenue Code contains different tests

for residence for income tax and estate and gift tax

• An alien may be a resident for income tax but not estate

and gift tax

• And vice versa (though much less likely!)

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TAXATION OF U.S. CITIZENS

INCOME TAX• Worldwide taxation, irrespective where reside

• U.S. citizen even if have other passports

• Double taxation avoided through foreign tax credits

• Taxation of income of non-U.S. corporations if certain

requirements are met under U.S. anti-deferral provisions

(also special non-U.S. trust rules)

• MUST convert the non-U.S. financials to U.S. tax basis.

• Significant compliance: Annual Returns + Information

Returns

25


INCOME TAX INFORMATION REPORTING- SHORT LIST

• Form 8832 – Entity

Classification Election

• Form 8833 – Treaty Based

Return Position

• Form 926 – Transfers to a

Foreign Corporation

• Form 5471 – Owner/Officer

relationships with Foreign

Corporations

• Form 5472 – Foreign

ownership of U. S.

Corporation

• Form 8621 – Passive Foreign

Investment Companies

• Form 8865 – Ownership of

Foreign Partnerships

• Forms 3520/3520-A –

Foreign Trusts/Gifts

• Form 8858 – Foreign

Disregarded Entities

• Form 8938 – Statement of

Specified Foreign Financial

Assets (for 2011 and going

forward)

• Form 5713 - International

Boycott Report

• Form 8854 – Initial and

Annual Expatriation

Statement

• FBAR – Form 114/114A

Report of Foreign Bank and

Financial Accounts

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HOW DOES A NON-U.S. CITIZEN BECOME SUBJECT TO THE SAME TAX FUN?

Two tests…

1. Lawful Permanent Resident (“Green Card”) Test: At any

time during taxable year (See §7701(b)(1)(A)(i) and (6))

1. Initially based on U.S. immigration law, but then

applies for tax purposes even if holder is ineligible to

enter U.S.

2. Thus, an alien who receives a Green Card is

considered a U.S. resident until the green card is

“revoked (and has not been administratively or

judicially determined to have been abandoned).”

27


HOW TO BECOME A U.S.INCOME RESIDENT2. Substantial Presence Test” (See §7701(b)(1)(A)(ii) and (3))

In the U. S. for 31 days in current year and…

Current Year Days

1/3 First Prior Year Days

1/6 Second Prior Year Days+

183 Days

Never round up, Reg. §301.7701(b)-1(c)(1)

28


HOW TO BECOME A U.S.INCOME RESIDENTWill not meet the test if…

• Never present in U.S. more than 122 days; or

• Never filed a U.S. return and

• Meets the “Closer Connection” exception

§7701(b)(3)(B).

• Certain specified types of visas are exempt from day

count (diplomats, students, teachers, medical,

charitable sport) § 7701(b)(5).

29


HOW TO BECOME A U.S.INCOME RESIDENT

If meet either statutory test, then consider

residency definition under any applicable

income tax treaty.

30


U.S. TRANSFER TAXATION OF NRAS

• Nonresidence = Not domiciled within the U.S. Reg §

20.0-1(b)

• Not taxed on worldwide gratuitous transfers of assets

• Gift Tax: U.S. situs tangible or real property

• Still eligible for annual exclusion of $14,000 per

donee

• No gift splitting with spouse

31



• Estate Tax: U.S. situs property, including intangible,

tangible and real property, with exemption of only

$60,000. §2101-2108

• Beware: Revocable transfers and transfers within 3

years of death of any U.S. situs property which the

decedent has transferred, by trust or otherwise, if the

property is situated in the U.S. at the time of transfer

or at the time of the decedent’s death

• Use of “blocker” corporations requires careful

planning

32



• No unlimited marital deduction but allowed

annual exclusion gift to non-citizen spouse of

$149,000 (inflation indexed). §2523(i)

33



• Australia (Estate Treaty, Gift

Treaty)

• Austria (Estate & Gift Treaty)

• Belgium (Estate Treaty)

• Canada (1995 Protocol)

• Denmark (Estate & Gift

Treaty)

• Finland (Estate Treaty)

• France (Estate & Gift Treaty)

• Germany (Estate & Gift

Treaty)

• Greece (Estate Treaty)

• Ireland (Estate Treaty)

• Italy (Estate Treaty)

• Japan (Estate & Gift Treaty)

• Netherlands (Estate Treaty)

• Norway (Estate Treaty)

• South Africa (Estate Treaty)

• Sweden (Estate & Gift Treaty)

• Switzerland (Estate Treaty)

• United Kingdom (Estate &

Gift Treaty)

The United States has Estate, Gift or Estate & Gift tax treaties with the

following countries:

34


SUMMARYTax Immigrant Status Income Transfer Exit

Citizen* Worldwide Worldwide Yes

Long-term Resident Alien (LTRA) Worldwide ? Yes

Resident Alien (RA) Worldwide ? No

Resident Non-Citizen (RNC) ? Worldwide No

Nonresident Alien (NRA) U.S. Only ? No

Nonresident Non-Citizen (NRNC ? U.S. Only No

* Some variations for citizens of American possessions (Puerto Rico, Guam, etc.)

35

U.S. TAX COMPLIANCE

ANDPLANNING

37

U.S. TAX COMPLIANCE AND PLANNING

OBLIGATIONS OF U.S. CITIZENS AND U.S. RESIDENTS FOR THE YEAR

• Taxed on worldwide income

• Individual Income Tax Reporting (Form 1040), tax due

April 15

• Informational Reporting:

• Form 8938 (FATCA) & Foreign Entities (Forms 926,

5471, 8621, 8858 and 8865) – generally due with

Form 1040

38


OBLIGATIONS OF U.S. CITIZENS AND U.S. RESIDENTS FOR THE YEAR

• FBAR (FinCEN Form 114) - Note FBAR is not a tax

return - due Oct. 15

• Receipt of Large Gifts/Bequests from Foreign Persons

and Transactions with/Distributions from Foreign Trusts

(Form 3520) – due March 14 or April 15

• Impact of Treaty Residency Tie-breaker on informational

reporting

39


OBLIGATIONS OF NON-RESIDENT ALIEN

• Taxed on U.S. Source Income

• Income Tax Reporting (Form 1040NR), required when

any business in the U.S. – tax due April 15

40


OBLIGATIONS OF NON-RESIDENT ALIEN

• Informational Reporting:

• Must file to claim

• Closer Connection Exception

• Tax Treaty benefits

• Exempt days in the U.S. for any status other than in

the U.S. on visa as foreign government related status

(diplomatic visas).

41


CURRENT ALTERNATIVES TO CORRECT U.S.TAX AND REPORTING NON-COMPLIANCE

• Newest version of the IRS program, described in a

November 2018 memo (LB&I-09-1118-014).

• Voluntary Disclosure Practice: Internal Revenue Manual

Disclosure (9.5.11.9)

• Streamlined Foreign/Domestic Offshore Procedures

• Delinquent FBAR Submission Procedures

• Delinquent International Information Return Submission

Procedures

42


U.S. TAX REPORTING RELATED TO MEXICAN TRUSTS

• Typical “fideicomiso” or “Mexican Land Trust” not a trust

for U.S. tax purposes, Rev. Rul 2013-14

• For a U.S. person who is beneficiary, trustee, grantor or

deemed grantor must carefully consider U.S. reporting

and income tax implications

• If only a beneficiary, then the U.S. person will need to

report a distribution with Forms 3520-A and 3520 at time

of distribution

43


U.S. TAX REPORTING RELATED TO MEXICAN TRUSTS

• Must determine if trust is a grantor or non-grantor trust,

considering 672(f), and whether the actual or deemed

grantor is a U.S. person

• If a U.S. person grantor then the grantor will have Form

3520 filing obligations and treatment of the trust as a

grantor trust, that is all activity reportable by the grantor

• If a non-U.S. person grantor, then must plan for

potential “throw-back tax” for the U.S. beneficiaries

44


U.S. TAX ISSUES OF MEXICANSBECOMING U.S. TAXPAYERS• How to become a U.S. taxpayer:

• a) Get a “Green Card”

• b) Spend too much time in the U.S.

• How much is “too much” time, depends on whether

asking for income or estate tax

• For estate tax it’s not defined, but depends on

“domicile”

45


U.S. TAX ISSUES OF MEXICANSBECOMING U.S. TAXPAYERS• For income tax it’s 183 days in a single calendar year or

based on a 3 year average test

• Complex set of exceptions and elections, including a

special Mexican commuter rule for a person who lives in

Mexico and commutes to work in the U.S.

• Once you get it, hard to get rid of due to anti-lapse rules

• U.S.-Mexico Treaty does help, but merely using the

benefits of the treaty can have tax implications for

anyone that ever had a green card

46


U.S. TAX ISSUES OF MEXICANSBECOMING U.S. TAXPAYERSIf you can’t avoid U.S. residency…

1. Know your U.S. residency start date

2. Consider accelerating or deferring income

3. Realize gains or losses before or after start date

4. Review non-U.S. holdings for potential traps and

difficult reporting issues

5. Consider completing gifts before start date

47


U.S. TAX ISSUES OF MEXICANSBUYING U.S. VACATION HOME• How confident are you that no family member will

become “domiciled” in the U.S.?

• Even if no concern about domicile plan ahead for

reporting required when property sold

• If any concern then consider owning property in either

a trust or a Non-U.S. corporation to protect against

potential estate tax

• If no income from property then may not need to

make any U.S. tax filings

48

Thank you!

W. Aaron Hawthorne

Anderson Tax

[email protected]

Raoul Rodriguez

Pinnacle Advisory Group

[email protected]

49

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