Property & Succession Matters
1. Local Counsel. Because property and succession laws vary so widely across the world, where foreign properties or beneficiaries are involved it is prudent to engage local counsel to review applicable property, succession and tax issues. This will be invaluable in assessing the optimal method for transferring foreign property.
2. Trusts Not Widely Available. Although trusts are a commonly used estate planning tool in the U.S., they are not recognized or available throughout the world. Further even in jurisdictions trust laws can differ significantly.
3. Forced Heirship. Many civil law countries have forced heirship laws which prescribe the disposition of a decedent’s property, leaving little to dispose of under an estate plan.
4. Situs Will. Factors to consider in determining whether to use a situs will include:
(a) the value of the property located in the foreign jurisdiction; (b) the difficulty of effectuating a
232 See Treas. Reg. § 301.7701-2(b)(8)(i) for a list of per se corporations.
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testamentary transfer using a U.S. will, including whether a will must be probated to transfer title;
(c) the succession laws of the foreign country (e.g. whether forced heirship laws apply) and (d) whether the country has adopted the Washington Convention or Hague Convention regarding the validity of wills.
Tax Matters
5. Worldwide Taxation. U.S. citizens and residents are subject to U.S income taxation on their worldwide income. Similarly, U.S. citizens and residents are also subject to wealth transfer taxation on transfers of their worldwide property. Note that the definition of “U.S.
resident” differs for purposes of income and wealth transfer taxes.
6. Marital Transfers. Transfers to, or transactions, with non-citizen spouse are subject to estate and gift tax limitations and may create traps for the unwary.
Annual Exclusion. There is no marital deduction for gifts to non-citizen spouses. Instead gifts to a noncitizen spouse are permitted an enhanced annual exclusion amount of $100,000, indexed for inflation.233 This exclusion is $147,000 in 2015.234
Joint Property. Use joint accounts with caution to prevent inadvertent gifts on the withdrawal of funds from a joint account between spouses at least one of whom is not a citizen. Further separate property avoids complex accounting needed to trace contributions made by each spouse.
Marital Deduction Planning. Although there is no marital deduction for gifts to a non-citizen spouse, an estate tax marital deduction is permitted for transfers to a QDOT.
A QDOT is unnecessary if the surviving spouse becomes a U.S. citizen before the date the U.S.
estate tax return is filed and the surviving spouse was a U.S. resident at all times after the death of the decedent and before becoming a citizen of the United States. Keep in mind, however, that no QDOT election may be made on any return filed more than one year after the due date for the return, including extensions, in the event citizenship cannot be obtained prior to the filing of the return.
7. Mitigating Double Taxation. Property located abroad may be subject to foreign estate or inheritance tax. As a U.S. person, that property is also subject to U.S. estate tax. Look to the credit for foreign taxes under section 2014 or an applicable treaty for relief.
Reporting Matters
233 § 2523(i)(2).
234 Rev. Proc. 2014-61, § 3.35(2).
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8. Foreign Financial Assets. If a client has foreign bank and investment accounts, insurance, interests in foreign trusts or business entities consider highest balance in light of the filing thresholds for FBAR and Form 8938 filings.
9. Gifts From Foreign Persons. Although gifts from a nonresident or a foreign estate are generally income tax free to a U.S. donee, there is a Form 3520 reporting requirement if the value of such gift exceeds $100,000 on an aggregated basis. Further, if the donee receives gifts from a foreign business entity that reporting threshold is $10,000 (adjusted for inflation to $15,601 for 2015). A U.S. donee must report any distribution, regardless of amount, from a foreign trust on a Form 3520. Finally, note that gifts from a covered expatriate are not necessarily tax-free.
Instead, the donee with bear tax at the highest gift tax rate for amounts received in excess of the annual exclusion amount.
10. Foreign Business Entities. Ownership of foreign business entities raises complex income tax and reporting issues. Inquire about your client’s interest in foreign entities and whether such interests have been reported.
Foreign Clients with U.S. Interests
Property & Succession Matters
1. Foreign Counsel. As discussed above, property and succession laws across the world vary widely, and an individual’s estate plan should reflect the laws of his or her country of domicile. Thus, foreign counsel should be engaged to determine the optimal means for transferring U.S. property in the context of that individuals overall estate plan.
2. Use U.S. Revocable Trusts With Caution. Although an effective probate avoidance vehicle, transfers to a U.S. revocable trusts by foreign domiciliary may trigger transfer taxes in the home country or may subject the transfer to forced heirship claims. Revocable trusts may also cause unintended estate tax results by causing taxation of non-U.S. situs property that was formerly U.S. situs property under section 2104(b).
Tax Matters
3. Avoiding U.S. Tax Pitfalls. Foreign individuals are not subject to U.S. income or transfer taxation. However, in establishing contacts with the United States the domestic estate planner should advise clients on the consequences of transactions or activities that will result in
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acquiring U.S. residency and source income (for income tax purposes) or U.S. domicile and situs property (for wealth transfer tax purposes).
Tax Definitions of Nonresident. In order to avoid U.S. taxation, foreign persons generally seek to preserve their “nonresident” status. However, the definition of
“nonresident” for income and wealth transfer tax purposes differs. Thus, an individual who is not a citizen of the United States may be subject to income and wealth transfer tax.
4. $60,000 Estate Tax Exclusion. Nonresidents are only permitted an estate tax exclusion of $60,000 for U.S. situs property. Often their investments in real property a far in excess this amount.
Nonrecourse Debt. Because a nonresident is only permitted a partial deduction for recourse debt encumbering real property, to the extent feasible, the nonresident should seek nonrecourse debt, for which a full deduction is allowed
Foreign Corporations. Due to the situs rules for estate and gift tax purposes, many foreign persons acquire or hold U.S. situs assets through a foreign corporation, thus transforming an interest that is included in a U.S. gross estate, or treated as a taxable gift, into one that is excluded from tax. The cost of such planning is a potential increase in the amount of U.S. income tax and reporting obligations. Take care so that a solution intended to adress an estate tax problem does not also create an income tax problem.
5. Marital Transfers. Care must be exercised where non-citizen spouses transfer, or transact in, property located in the United States. See limitations described above with respect to transfers to non-citizen spouses by U.S. clients.
6. Pre-Immigration Planning. With proper planning, a nonresident alien who is contemplating a move to the United States may be able to minimize the U.S. tax impact of his change in residence.
Accelerate Income. Consideration should be given to accelerating the realization of income that is not subject to U.S. income tax by a cash method nonresident, such as receivables, licensing fees, royalties or deferred compensation, or by exercising stock options.
Retain Loss Property and Postpone Deductions. Consideration should be given to retaining any depreciated property of the nonresident that may generate a loss upon sale. Ordinary and necessary payments of expenses may be postponed until after U.S. residency is established so that deductions are available for U.S. income tax purposes
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Gifts to U.S. Persons. Consideration should be given to making irrevocable gifts to U.S. persons and trusts for the benefit of U.S. persons so as to avoid subsequent gift, estate and GST taxes. Any gifts made in trust should be made at least five years before the nonresident becomes a U.S. resident. Income from assets transferred to a trust within five years of immigrating to the United States may, upon establishment of U.S. residency of the grantor, be attributed to the grantor of the trust if the trust has U.S. resident or citizen beneficiaries.
Estate Tax Treaties
1. Current Treaties. The United States currently has entered into estate tax treaties with Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Switzerland, and the United Kingdom.
2. Applicability of Treaty. Citizenship in another country is not necessarily sufficient to invoke treaty benefits. In general, a treaty will apply to a nonresident alien’s estate or beneficiaries would be subject to unlimited estate or inheritance tax in the other (foreign) country.
3. Treat Provisions May Override. In order to mitigate the effects of double estate taxation, a treaty may override situs rules by offering an exemption for certain types of property.
The credit offered under a treaty may also differ from the credit for foreign death taxes offered under section 2014.
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