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Estate Tax Planning for Nonresident Aliens: Establishing

Domicile, Gifting, Treaties and Marital Transfers

TUESDAY, AUGUST 20, 2019, 1:00-2:50 pm Eastern

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August 20, 2019

Estate Tax Planning for Nonresident Aliens

Cindy D. Brittain, Partner

Katten Muchin Rosenman, Los Angeles

cindy.brittain@kattenlaw.com

Leslie Sobol, Partner

Lucas Horsfall, Pasadena, Calif.

lsobol@lhmp.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

5

Estate Tax Planning for Nonresident Aliens: Establishing Domicile, Gifting, Treaties and Marital Transfer

6

Discussion Points

Who is U.S. resident?

Who is U.S. domiciled?

How does the U.S. estate tax apply to a non-U.S. domiciled individual?

What is the impact of an applicable U.S. estate tax treaty?

What is the impact of conflicting marital regimes on tax planning?

What are some optimal planning structures for inbound wealth transfers?

7

NRAs Have Unique Needs

Political uncertainty in the client’s home country may be causing currency instability.

Institutions in the home country may lack sufficient financial strength.

Home country conditions may increase client desire for privacy.

Home country market may not offer sufficient asset diversification.

Desire access to U.S. markets directly.

Stability:

Diversification:

Access:

Stability:

Stability:

Stability:

Stability:

8

Globalization of people….

Fore

ign S

ourc

e

US-Based Children

Gifts and Inheritance

Pre-Immigration

Direct Investments

Cross Border Marriages

9

Competing Cross Border concepts…

Client in Santa Barbara purchased a home in Hope Ranch 10 years ago.

The client is domiciled and resident in the U.K.

5 years ago an attorney said the home should be contributed to a California revocable trust to avoid probate…

10 years later…they come to see you…

• Conflicting tax implications for trusts

• Conflicting application of attorney-client privilege

10

Inbound Wealth Transfers Increasing – WHY?

One Reason: The Common Reporting Standard, a.k.a. “CRS”

REAL ID on STEROIDS!

• Genesis – 2008 FATCA

• G20 leaders at their meeting in September 2013 fully endorsed the OECD proposal for a truly global model for automatic exchange of tax and financial information. They developed a new single standard for automatic exchange of information.

• Over 100 Countries are now participants.

• U.S. has bilateral bespoke agreements

• The CRS requirements are creeping into the U.S.

Certain hedge funds, private equity funds, product level bank investments…even though contracting with U.S. accounts –must comply with CRS; Privacy Erosion.

11

Inbound Wealth Transfers Increasing – (cont’d)

Preferred Income Tax Regime – Important for Immigrating Children!

• NRAs can avail themselves of a U.S. tax efficient portfolio with certain banks with an NRA investment platform.

• Legitimate planning for each Planning Scenario:

Caution:

Careful not to set up structures in the U.S. that may violate certain home country laws or require onerous disclosures! How would we know? (For example…)

We need to get counsel from the client’s home jurisdiction in order to structure investments and real estate purchases, etc. in the U.S.

Our partnership: Attorneys, Accountants, and Fiduciaries…with any client, there is always clever planning that can be done, but who will administer it!

12

Long arm of Foreign Laws that Affect U.S. Practitioners

UK Criminal Finances Act 2017

EU Trust Registration Requirements

Aggressive Transaction Disclosure

EU Succession Regulations (“Brussels IV”)

13

The UK Criminal Finances Act 2017

A criminal measure makes companies criminally liable for failing to prevent their employees from engaging in tax evasion.

Relevance: Attorneys, CPAs, financial institutions worldwide who may have the slightest nexus with the UK

We are going to examine other laws like this as we go through our planning review, but suffice to say, since we seems incapable of regulating ourselves, the European Union has decided they will do it for us….with harsh criminal penalties…

Effective September 30, 2017 – Two Corporate Criminal Offenses

An associated person (employee or agent or referral partner)

Of a relevant body (a company with even the slightest nexus to the UK)

Fails to prevent the facilitation of tax evasion.

Legal Tax avoidance will not trigger liability.

Affirmative Defense: Adoption of reasonable prevention procedures.

Definitions are broadly defined

14

EU Trust Registration Requirement

UK – Effective Pending….

• All trusts established anywhere in the world which have a relevant tax liability;

• Non-UK trusts must registered if the trust received UK source income or incurred a UK liability holding such UK asset directly…rather than through a blocker company

EU – Effective January 10, 2020

• Trustees must register beneficial ownership to identify the trusts and its beneficiaries;

• No tax liability is necessary;

• Applies to non-EU trustees of trusts which acquire real estate in a member state

• Broad access if a part can demonstrate a legitimate need.

15

For Example: Disclosure of Aggressive Transactions

The EU’s mandated Disclosure of Aggressive Transactions applies to any transaction that seeks to minimize tax.

Compare:

U.S. persons have the absolute right to use any legal structure to minimize tax and have the right to privacy with regard to their structures.

All enterprises and investors with any EU nexus should be aware, that the disclosure requirements will apply to all “intermediaries” and possibly their clients involved in cross border tax arrangements. This could range from third-party service providers, tax advisors, in-house tax counsel, local directors, and other in-house representatives involved in any such arrangement.

Intermediaries (EU and those with an EU nexus…possible includes your client) will have to report any cross-border tax planning arrangement that they design or promote if it bears any of the features or hallmarks listed in the Directive.

16

Hallmarks

Category A

• Generic tax planning hallmarks: (i) confidentiality agreements imposed on clients; (ii) contingent fee arrangements; (iii) the use of standardized documentation.

Category B

• Specific hallmarks related to the nature of the transaction: (i) planning the use of losses; (ii) conversion of income into an item that benefits from more favorable (or no) taxation; and (iii) circular transactions resulting in the round-tripping of funds which yield a net tax benefits…no real purposes other than tax…step transaction.

Category C

• Transactions (i) involving payments to stateless entities, to low/no tax jurisdictions, to non-cooperative jurisdictions and to taxpayers benefiting from exemptions or preferential regimes (the U.S.?); and (ii) a wide range of hybrid/dual deduction/double relief transactions.

Category D

• Transactions that are by their nature intended to circumvent transparency rules (e.g., frustrating application of CRS rules).

Category E

• Transfer pricing/restructuring with 50% decline in revenues.

17

Lived in Switzerland and moved to California

Continue to have property in Switzerland

One Child, Charity, Fiancé

• Habitual Place of Abode is now California

• Born in Switzerland

Switzerland has strict forced heirship….

EU Succession Regulation allows California to govern

Don’t forget about The Hague Convention…

• Must elect in a specified way in a California Will……

EU Succession Regulation

18

And the Moral of the Story is…

Scenarios to demonstrate the difference between Inbound and Outbound Planning and the treatment of trusts in different jurisdictions: The “why” of understanding trusts in the cross-border context.

Outbound

The California Revocable Trust Migration Story.

Gifting to UK-based children through U.S. gift trusts.

Trust planning with California community property.

Gifting to Israeli-based children through U.S. gift trusts: Example to follow.

19

And the Moral of the Story is… (cont’d)

Inbound

The California Revocable Trust for the Non-Resident, Non-Domiciled individual’s inbound activities. (Inbound)

• United Kingdom individuals, discussed above

• Canadian residents, similar issues

20

U.S. INCOME TAX FUNDAMENTALS

21

NRA Income Tax Fundamentals

Benefits to NRA Preferred Income Tax Regime…

Taxes are a real and substantial cost of earning income.

By minimizing or perhaps eliminating U.S. tax, foreign investors will improve their overall after-tax yield of securities, professionally-managed funds, and other investments held in their global portfolios.

NRAs enjoy a preferred tax regime!

This is not the same for U.S. real estate which is governed under the IRC provisions promulgating the Foreign Investment in Real Property Tax Act.

22

The NRA Preferred Income Tax Regime

Benefits, examples…

Capital gains, long term and short term, generally escape U.S. income tax under general international tax principles as well as under relevant treaties.

Capital Gain related to the sale of U.S. real estate does not. U.S. real estate is tax at 10% of the total amount realized under FIRPTA. But, there is a way to mitigate this. New FIRPTA rates became effective February 2017, so different rates apply depending on the value of the real estate.

Tax treaties often reduce or eliminate U.S. tax on dividend payments, interests payments, and other income for residents in such other contracting jurisdiction. Withholding can be reduced to 5% in some cases.

23

Tests: “U.S. Person” subject to WW Income

How to determine if a client is a U.S. person for U.S. income tax purposes…

Client is a U.S. citizen.

Client has a Green Card.

Client meets the Substantial Presence Test, and no exceptions apply. (a.k.a., The Day Count Test)

Client makes an election to be treated as a U.S. person for tax purposes. this may be a pre-immigration strategy to capture losses.

Eb5 Visas are essentially green card. This may surprise people who wish to come to the US, and those who decide to leave after a certain amount of time. They may have triggered the expatriation rules.

24

Fundamentals – Tests for U.S. Person Status

The Substantial Presence Test…

For example, if an individual is present in the U.S. for 300 days in year one, 195 days in year two and only 70 days in year three (the current year), she would still have substantial presence in the U.S. in year three since the weighted average for the three-year period exceeds 183 days.

25

Non-U.S. Resident Example

Exceptions…

Diplomats, students, teachers, athletes, and employees of international organizations.

Medical conditions, not a pre-existing illness or injury

Closer connections.

Sometimes individuals who have applied for a green card.

Important to include citizenship on a questionnaire or checklist.

****Look to the Treaty for Tie-Breaker options…..with a green card…there may be flexibility for planning here…for “domicile” purposes…you might be able to have a do-over!

27

DEFINITION OF A TRUST – IN THE WORLD OF GLOBAL RELATIONSHIPS

28

Concepts to Keep in Mind Regarding Inbound Planning

For this presentation we will use the following terminology.

• A person who creates a trust is the “settlor”.

• The settlor of a trust who is treated as the owner of the trust under the U.S. income tax rules is the “grantor”.

• A person is “foreign” if they are neither a citizen nor a resident of the United States (although the determination of whether a person is a resident differs depending on the type of tax in question – which is beyond the scope of this presentation).

29

Initial Classifications and Why do We Care?

What is a Trust for U.S. tax purposes?(Setting up Generational Continuity)

Lichtenstein FoundationStiftungUsufruct – We’ll Discuss Below. TreuhandEstablishmentInvestment Trust Are these all Business Trust Trusts?

30

Initial Classifications

Ordinary Trusts -- 301.7701-4(a)

In general, the term “trust” as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Internal Revenue Code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

31

Initial Classifications

Business Trusts -- 301.7701-4(b)

There are other arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Internal Revenue Code because they are not simply arrangements to protect or conserve the property for the beneficiaries. These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships under the Internal Revenue Code. However, the fact that the corpus of the trust is not supplied by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather than as an association or partnership. The fact that any organization is technically cast in the trust form, by conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change the real character of the organization if the organization is more properly classified as a business entity under Section 301.7701-2.

32

Initial Classifications

Investment Trusts -- 301.7701-4(c)(1)

An “investment” trust will not be classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders. See Commissioner v. North American Bond Trust, 122 F. 2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942). An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power under the trust agreement to vary the investment of the certificate holders. An investment trust with multiple classes of ownership interests ordinarily will be classified as a business entity under Section 301.7701-2; however, an investment trust with multiple classes of ownership interests, in which there is no power under the trust agreement to vary the investment of the certificate holders, will be classified as a trust if the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose.

33

Initial Classifications

301.7701-4(c)(2), Example 4. Business Interest versus Trust Classification.

Corporation N purchases a portfolio of bonds and transfers the bonds to a bank under a trust agreement. At the same time, the trustee delivers to N certificates evidencing interests in the bonds. These certificates are sold to public investors. Each certificate represents the right to receive a particular payment with respect to a specific bond. Under section 1286, stripped coupons and stripped bonds are treated as separate bonds for federal income tax purposes. Although the interest of each certificate holder is different from that of each other certificate holder, and the trust thus has multiple classes of ownership, the multiple classes simply provide each certificate holder with a direct interest in what is treated under section 1286 as a separate bond. Given the similarity of the interests acquired by the certificate holders to the interests that could be acquired by direct investment, the multiple classes of trust interests merely facilitate direct investment in the assets held by the trust. Accordingly, the trust is classified as a trust.

34

Why is Trust Classification Important?

Stiftung -- Great Analysis of trust factors…In Estate of O.T. Swan, 24 T.C. 803 (1981, acq. 1981-2 C.B. 1., the Tax Court determined that stiftungsshould be treated as trusts for U.S. tax purposes.

In PLR 9121035, a citizen of Germany died and left her son a life estate in certain property in Germany – a usufruct interest. Upon the son’s death the assets were to pass to his children who were U.S. citizens. In this case, the parties wanted the interest to be classified as a trust so that upon the death of the son, his U.S. children would simply become U.S. beneficiaries and the interest would not pass into the U.S. estates for U.S. estate tax purposes.

This became a very fact sensitive case which turned on the rights the children had and the duties of their father vis a vis his children as a trustee.

But, what about when there is undistributed net income!

35

Trust uses for Other Purposes….

In certain Muslim countries, the forced heirship rules may be applicable. Sharia Law may apply which means that the inheritance rules under that country’s specific interpretation of Sharia Law will apply to inheritance. The application of Sharia Law may differ from country to country.

The benefit of a trust (that is Sharia law approved): In some Sharia Law countries, lifetime transfers into trust may assist to bypass the strict forced inheritance laws of the specific country.

Certain transfers may depend on under what regime a couple were married…..

36

U.S. TRANSFER TAX FUNDAMENTALS(ESTATE, GIFT, AND GENERATION-SKIPPING TAXES)

37

Test for U.S. Domicile

Who is a U.S. domiciled individual? The test is different from income tax test!!

U.S. domiciled individual is subject to estate tax and gift tax on his or worldwide assets.

Test for Domicile – The test for domicile is a subjective test focused on the intentions of the individual. As such, the test relies on an evaluation of the facts and circumstances of an individual’s intentions. No intention of remaining in the U.S. indefinitely.

Example – Consider the circumstances of a husband and wife, where the husband is a U.S. citizen, but the wife is a UK resident. If the wife is living in the U.S. at present, but intends to return to the UK, she is a resident for purposes of U.S. income tax, but may still be a UK “resident” or domicile for U.S. transfer tax purposes.

See Estate of Kahn!!! Very fact sensitive.

38

Estate of Barkat A. Khan, Mohammed Aslam Khan v. Commissioner, Tax Court 1998

Issue Presented: Was Mr. Khan domiciled for U.S. estate tax purposes to avail himself of the higher U.S. estate exemption amount in 1998?

Facts Presented: Mr. Khan moved to the U.S. in 1971, at age 61. His wife and two daughters remained in Pakistan. His son had come to the U.S. earlier and had married. Mr. Khan continued to extend his temporary U.S. visa. Once, on February 4, 1974, his request was denied. He had to return to Pakistan where he attempted to obtain a permanent visa. Mr. Khan owned substantial property in California which was an operating ranch. He was told he could get his permanent visa when his son became a U.S. citizen. Mr. Khan was granted a permanent visa based on his status as the parent of a U.S. citizen. So, Mr. Khan came back to the U.S. in 1985. Mr. Khan lived with his son in California. Mr. Khan obtained a social security number. Mr. Khan filed form 1040s. Before leaving for Pakistan, for a visit, in 1986, Mr. Khan applied for a permit to re-enter the U.S.. However, his accountant filed a return in 1986, stating that Mr. Khan had left the U.S. permanently and the accountant filed a Form 1040NR. Soon after his arrival into Pakistan, however, Mr. Khan fell ill. The petition provides that decedent wanted to return to the U.S., but his health failed. His accountant continued to file 1040NRs for tax years 1987 through 1990. Mr. Khan died in Pakistan in 1991.

39

Estate of Barkat A. Khan (cont’d)

Factors:

Most of Mr. Khan’s business interests were in the U.S.

Mr. Khan owned substantial land.

Mr. Khan’s family had a long history of immigrating to the U.S.

Mr. Khan’s eldest son was a U.S. naturalized citizen.

Mr. Khan’s second son moved to the U.S.

That he had no library card or driver’s license was not weighed heavily.

He didn’t join social clubs, but he didn’t speak English.

That his wife did not move to the U.S. was not weighed heavily.

Mr. Khan had a bank account in the U.S. as early as 1976.

40

Estate of Barkat A. Khan (cont’d)

Factors:

Mr. Khan was a citizen of Pakistan at his death.

Presumption: Once a domiciled is acquired, it is presumed to continue until it is shown to have been changed

If there is doubt, the presumption is that it has not changed.

A person acquires a domicile by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intent to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.

Must haves: (1) lived in the U.S. and (2) had the intent to remain indefinitely.

41

VISAS!

EB5 – Green card status

E2 – Must have a treaty to get this one!

O

L

H

Green card

Each of these designations carries with it its own tax implications….

You need to consult with an immigration attorney in some instances because you can jeopardize someone’s visa status with certain tax planning decisions…

42

Tangible Versus Intangible Assets

The U.S. Transfer Tax System Applies to All U.S. Situated Assets: Gift, Estate, GST…however, but…

Gift Tax=Only Tangible Assets in the U.S. subject to tax; Intangibles when transferred are not.

Estate tax= U.S. situs Tangible and Intangible assets are subject to tax.

House = Tangible

Stock = Intangible

43

The Basic Gift Tax Rule – Tangible Versus Intangible Assets – Report Foreign Gifts on Form 3520…

Gifting strategies…

Gifts of intangible property, i.e., stock, bonds, T-bills, mutual fund shares and partnership interest) are not subject to U.S. gift tax upon transfer.

This creates a great planning opportunity:

• A NRNC may gift stock prior to death without incurring gift tax. The U.S. stock is out of the decedent’s U.S. taxable estate. The same may also apply to U.S. partnership interest – subject to § 2035 through § 2038.

Cash is highly controversial. (T-Bill solution) Otherwise, cumbersome.

U.S. real property is tangible property. Intangible conversions? P/S versus Corporation

44

The Basic Gift Tax Rule – Tangible Versus Intangible Assets – Report Foreign Gifts on Form 3520… (cont’d)

Note: Gifts to non-U.S. citizen spouse. Use an increased annual exclusion amount at $155,000, adjusted for inflation. (2019)

But, consider intra-spousal loans. (No interest required – estate freeze technique, as non-U.S. resident or domiciled spouse can invest under the preferred income tax regime – See example.)

A married foreign donor may not take advantage of gift-splitting elections.

3520s: Individual gift ($100k or more); foreign trust ($1); Foreign corporation ($15k)

45

U.S. Estate Tax on U.S. Situs Assets of Non-U.S. Domicile

Non-U.S. domicile: Taxed on U.S. Assets

Applicable exclusion amount shields only $60,000 from tax, a unified credit amount of only $13,000

An applicable treaty may increase that amount if it includes a pro rata formula which we will see shortly.

• The United States has estate and gift tax treaties with a number of countries including Australia, Austria, Canada (note – this is an income tax Treaty but addresses some estate/gifting issues), Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, United Kingdom.

46

Impact of an Estate Tax Treaty

A Canadian resident dies in 2019 owning U.S. real estate valued at $1mand a worldwide estate value at $10m. No estate tax is due.

47

The Non-U.S. Domiciled Individual’s U.S. Taxable Estate (cont’d)

The value of the gross estate shall not include certain property, even though physically in the U.S.

• Examples:

U.S. bank accounts, as defined, good option to start moving assets over…..unless large amounts….

Works of art on loan in the U.S.

Life insurance

Qualified debt obligations

By treaty, sometimes shares of domestic companies

Beware of U.S. real estate with no foreign blocker!

48

The Non-U.S. Domiciled Individual’s U.S. Taxable Estate

A Non-U.S. Domiciled Individual’s U.S. Taxable Estate, continued:

Deductions: The value of the gross estate may be reduced by applicable deductions; however, the use of such deductions is subject to a formula which requires disclosure of the NRNC’s worldwide assets. This may not be something the NRA family wishes to do.

Tainted Property: The value of the gross estate shall also include property deemed situated in the U.S. if it was situated in the U.S. either at the time of the gift or at the time of the death of the donor/decedent. Section 2104(b). The sequence of purchase and subsequent planning makes a difference.

Additionally, the United States has estate and gift tax treaties with various countries.

49

PLANNING CONSIDERATIONS

50

Pre-Immigration Planning

• Consider accelerating (realize and recognize) any and all income earned by the immigrating taxpayer prior to becoming a U.S. resident.

• Possible income to accelerate includes compensation, pension plans, stock options, prepaid rents, royalties, dividends, interest, annuities and capital gains.

• Elect out of installment sales treatment; defer recognizing losses; review for PFIC or CFC status; explore strategies to step up tax basis in assets

Income Tax

• Consider transferring assets to an NCND spouse before establishing a U.S. domicile.• Determine if accelerating gift planning would be appropriate – dynasty trusts! • Gifts of tangible personal property located within the U.S. will be subject to U.S. gift

tax.• The immigrating NCND can gift any intangible assets either inside or outside the U.S.

Transfer Tax

• Consider a foreign or U.S. trust for estate planning prior to moving to the U.S. • For the NCND who is not immigrating, but who has immigrating children, foreign

grantor trusts may be a viable planning strategy.• The NCND parents remain the deemed owners of the underlying trust assets for U.S.

income tax purposes. • When the NCND parents pass away, the trust assets remain available for the benefit

of the U.S.-based children but will forever escape US estate tax net.• Drop-off Trust Conundrum….other options.

Trusts

52

The Goal: No U.S. income tax, U.S. transfer tax, and

Step-Up in Basis

International Trust Structures – Case Study

53

Planning for U.S.-based Child – Domestic Solution Planning Option #1.

Mom and Dad (In China)

Child’s Domestic Dynasty Trust (In United States)

• Mom and Dad do not want U.S. estate tax on what they give to child when they pass away.

• Mom and Dad do not want U.S. gift tax on what they give to child.

• Mom and Dad do not ever want to trigger U.S. estate tax.• Technique: Mom and Dad set up a domestic dynasty

trust. Parents transfer funds as their practitioner directs into the domestic trust. (Funding Issue!) -- T-Bill Option

• This technique should shield future generations from U.S. estate tax and avoid U.S. gift tax currently. Subject to U.S. income tax on trust income and gains.

• No Basis Step-Up.

54

Benefits of Child’s Domestic Dynasty Trust…

With proper gift and trust design, it is possible for a foreign person to achieve a number of wealth-planning goals with an irrevocable U.S. domestic non-grantor trust.

Unlimited lifetime transfers of foreign assets and intangible U.S. assets for the benefit of U.S. beneficiaries may be made free of U.S. gift and GST taxes – into a dynasty trust.

No U.S. estate tax going forward!

U.S. Intangible assets may be removed from a foreign person’s U.S. estate, and from the reach of U.S. estate and GST taxes, gift tax free.

While the trust will be subject to U.S. Federal income tax, it may be established in a state free of state income tax, possibly subject to California’s throwback rules….

55

Benefits of Child’s Domestic Dynasty Trust… (cont'd)

No Basis Step-Up.

Possible Creditor Protection, in whole or part, depends on State jurisdiction…especially under marital dissolution regime…

56

Planning for U.S.-Based Child Option #2…

Foreign Mom and Dad

Foreign Grantor Trust: Irrevocable – Lifetime to Parents; orRevocable – Children can be beneficiaries

ForeignCoUS Assets

ForeignCoFor Assets

ForeignCoUS Assets

ForeignCoUS Assets

• Mom and Dad do not want U.S. estate tax on what they give to child.• Mom and Dad do not want U.S. gift tax on what they give to child.• Mom and Dad do not ever want to trigger U.S. estate tax. • Mom and Dad would like to minimize U.S. income tax during their

lifetimes, if they can. Basis Step-Up!So, Mom and Dad set up a foreign grantor trust. There are a number of scenarios, but child is usually named as one of the beneficiaries along with the parents. Child could participate as the Investment Advisor.

57

What Structure is Best?

The answer truly depends on the facts and circumstances.

Must consider the multi-jurisdictional aspects of planning.

You may want a separate structure for U.S. versus non-U.S. beneficiaries…or you may want a single structure so you can leverage with the non-U.S. beneficiaries…when considering UNI!

The check the box election can be very effective when the election is made and considered effective prior to death for non-U.S. assets!!!

If you have U.S. assets, you don’t want a check the box prior to death! It creates U.S. estate tax inclusion.

58

Establish a Drop Off trust – Purpose: U.S. estate tax efficiency• A trust for incoming nonresident aliens – Extremely Tricky!!!

Should the trust be foreign or domestic…can’t be a California Trust!!!• If the settlor is a beneficiary, the trust will be classified as a grantor trust so it doesn’t

matter.• If the settlor is not a beneficiary and the trust is foreign, and the settlor moved to the

U.S. within five years of formation, the trust is a grantor trust (§ 679), unless the trust prohibits any U.S. person from receiving any Income or corpus, during life of trust or at its termination.

• If the settlor is moving permanently to the U.S., and the trust will benefit family already in the U.S., and the trust is domestic, and the settlor is not a beneficiary, then §§ 671-678 apply. Might as well make it a U.S. Trust

IRS reporting rules • More stringent reporting for foreign § 679 trusts.• Potentially file forms 3520-A, 3520, 8938, and 114

If a foreign trust – possible § 684 at settlor’s date of death, there is no tax on a domestic trust at settlor’s death, though no step up.

No U.S. estate tax: TRY to create the drop off trust well in advance of moving to the U.S.

MAY NOT WORK FOR IN-COMING CALIFORNIA RESIDENCE!!!

(BNA: 42 Tax Mgmt. Int’l – Should a ‘Drop-off trust’ for an incoming AlienBe Domestic or Foreign?/Premier Tax Library, Thomas S. Bissell, CPA)

How can Mom and Dad fund a trust that is U.S. transfer tax efficient when they, too, want to come to the U.S.?

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Marital Regime Example:

Facts: Decedent and wife were born and married in Uganda. At that time, Ugandans were British subjects. As such, they were citizens of the U.K., a separate property country.

In 1972, they were forced out of Uganda by Idi Amin. They were exiled and fled to Belgium, a community property marital regime. They had to leave everything behind in Uganda, and acquired their wealth in Belgium.

They lived together for over 30 years in Belgium. Belgium law permits married couples to change their marital regime to recast all assets as community property.

The United States ultimately reasoned that since they were married in Uganda and didn’t change their status, that U.K. law governed the character of their property, thus they were subject to U.S. estate tax at the death of husband on his U.S. situs assets.

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COMPLIANCE IN CROSS BOARDER FOREIGN DIRECT INVESTING

Leslie S. Sobol LSobol@LHMP.Com

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Ask and Ask Again

Then explain and Ask Once more

Finally document the answer

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Let’s Get Personal – US Persons Defined

US Citizens

Entities formed in any of the US States and the District of Columbia

Any Trust if a US Person has control, or a US Court can exercise supervision

Citizens of other Countries – Resident Aliens who have met either the:

Visa test – right to work in the US

Physical Presence test (about ½ a year)

Leslie S. Sobol LSobol@LHMP.Com Lucas Horsfall Accountants + Advisors

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A US PERSON IS SUBJECT TO TAXATION ON ALL INCOME FROM

WHATEVER SOURCE

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Reporting – Primary Tax Filings

F 1040 – US Individual Income Tax, Including resident aliens

F 1040NR - US Non-resident Alien

F 1120 US Corporate income tax

F 1120-F US Income tax return of a foreign corporation

F 1065 US Partnership return, (also LLC)

F 1041 US Income tax return for estates and trusts

FinCen114 / FBAR Report of Foreign Bank and Financial Accounts

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Foreign Tax Credit Form 1118 & 1116

Leslie S. Sobol LSobol@LHMP.Com Lucas Horsfall Accountants + Advisors

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Reporting Foreign Activity – Attach to Primary Forms

F 8992 US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)

Form 5471 Information Return of US Persons with respect to Certain Foreign Corporations

F 8858 Return of US Persons with respect to Foreign disregarded entities

F 8865 Return of a US persons with respect to Foreign Partnerships.

F 926 Return by a US Transferor of Property to a Foreign Corporation

F 8938 Statement of Specified Foreign Assets

F 5472 Information Return of US a 25% Foreign-owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business

F 8804, & 8805 Foreign Partner’s Information Statement

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As of January 1, 2018, US Shareholders of a CFC’s will include earnings from active businesses income in the year it is earned.

Applies broadly to certain income generated by a controlled foreign corporation (CFC).

“U.S shareholders” are required to include on a current basis the aggregate amount of certain income generated by its CFC(s), regardless of actual repatriation.

U.S. shareholders who are domestic - C corporations are eligible for up to an 80 percent deemed paid foreign tax credit (FTC) and a 50 percent deduction of the current year inclusion plus the full amount of the Section 78 gross-up (subject to certain limitations).

GILTI

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IRS “Comparison of Form 8938 and FBARRequirements”

F 1120-F US Income tax return of a foreign corporation.

US Branch

Foreign Corp which invested in a domestic LLC

Foreign owned DRE file form 5472

Disclosures

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ONCE THE US GOVERNMENT CAN IDENTIFY THE PERSON (OR ENTITY)

AS A US PERSON, THEY BECOME SUBJECT TO TAXATION ON ALL

INCOME FROM WHATEVER SOURCE.

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Cindy D. BrittainKatten Muchin Rosenman LLP310.788.4499 | cindy.brittain@kattenlaw.com

Cindy helps international families who often have global business operations to avoid tax traps as the family or the childrenconsider relocating to the United States. The global family requires a succession plan that incorporates a cross-border perspective, which Cindy brings to her work. She has lived and practiced in London, Hong Kong, and California, and her expertise bridges individual and corporate tax issues with elegant cross-border strategies. Clients call Cindy to optimize foreign and multi-state techniques to mitigate US income, estate, and California state taxes. Cindy also assists start-ups, from inception and as they consideration foreign jurisdictions. Cindy has vast experience in international cross-border planning and advising large global families on wealth transfer strategies. Based in Los Angeles, she frequently works with entrepreneurs, for whom she provides creative solutions through advanced planning techniques. She counsels all of her clients on the effective use of multi-state jurisdictions for effective California state income tax planning. She also addressesfiduciary issues that arise during trust administration and currently represents both domestic and international financial services firms with trust related matters.

Before joining Katten, Cindy served as the director of inbound wealth at a top-tier international financial institution. There, she administered foreign trusts with interposed foreign corporations and advised internally on international compliance issues. Cindy worked as an international corporate tax consultant at a Big Four accounting firm where she advised on international mergers and acquisitions. Cindy implements pre-immigration strategies, such as check-the-box elections and defective section 351 transactions with possible non-qualified preferred stock, for cost-basis step-up. Interestingly, Cindy began her career as a financial crimes prosecutor in a large market.

Practice focus

Advanced domestic and international estate and tax planning; Transactional tax and corporate cross-border design

Pre-immigration strategies for corporate assets; Multi-generational succession and entity planning

Trust and legacy design; Multi-state trust strategies to mitigate California state income tax

Charitable planning for effective tax and philanthropic goals; Family governance and family retreats for NextGenEducation

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