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.)

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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)?

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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

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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

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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.

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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

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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?