Estate Planning for the Multinational Family

Steven L. Cantor

Cantor & Webb P.A.,

October 15, 2015

Discussion Points

• Introduction

• U.S. Tax Issues

• Planning Issues and Strategies

• U.S. Reporting Requirements

• Obligations of Financial Advisor/ Planner

• Common Mistakes

• Planning for A Foreign Family Member Who Will

Become A U.S. Person

Resident/Nonresident

Domiciliary/Nondomiciliary

Why a Frown?

• NONRESIDENT

• NONDOMICILIARY

Why a Smile?

• RESIDENT

• DOMICILIARY

Resident For U.S. Income Tax Purposes

• Green Card

• Physical presence

• Substantial presence

• Election

• Exceptions:

• Closer connection

• Treaty-based position

• Days not counted

Resident For U.S. Estate and Gift Tax Purposes

• Domicile: means physical presence AND

intent to remain indefinitely

• Facts and circumstances test

• Treaty-based position

U.S. Income Taxation of

U.S. Citizens and Residents

• Income taxation on

worldwide income

U.S. Income Taxation of Nonresident Aliens

• Passive Income

• Fixed or determinable annual or periodic income (i.e.

interest, dividends, rents, royalties, etc.)

• Subject to 30% withholding tax on the gross amount at the

time of payment

• Effectively Connected Income

• Taxed on a net basis (after deductions) at graduated tax

rates as they apply to United States residents

• Capital Gains

• United States Real Property Interests

• Physically present in U.S. for 183 days and U.S. tax home

U.S. Ownership of Foreign Corporations

• Controlled Foreign Corporation (“CFC”)

• More than 50% of vote or value owned by UnitedStates residents

• Applies only to 10% shareholders - a U.S. personwho owns 10% or more of the total combined votingpower

• Passive Foreign Investment Company (“PFIC”)

• At least 75% of gross income is passive income oraverage percentage of assets which produce or areheld for production of passive income is at least 50%

• No minimum threshold of ownership

U.S. Estate & Gift Tax –U.S. Citizens and Residents

• Taxed on worldwide

assets, including

certain interests in trust

U.S. Gift Tax - Nonresident Aliens

• Nonresident aliens are subject to gift tax ongifts of real property and tangible personalproperty situated within the United States.

• Gifts of intangible personal property areexempt

• Cash is tangible personal property

• Wires can be problematic

• Jointly held real estate is a gift tax trap forthe unwary

Income Taxation of Trusts

Domestic Trust vs. Foreign Trust

• Domestic Trust:

•Court Test: A court within the U.S. is able toexercise primary supervision over theadministration of the trust; AND

•Control Test: One or more U.S. persons havethe authority to control all substantialdecisions of the trust.

• Foreign Trust: all other trusts

Income Taxation of Trusts and Beneficiaries

• Grantor Trust

• Person treated as owner of assets is subject to U.S. income taxon current income (grantor trust does not have accumulatedincome)

• Non-Grantor Trust

• Trust subject to U.S. income tax except that beneficiaries aretaxed on receipt of distributions of income and income requiredto be distributed (whether or not actually distributed)

• Foreign vs. Domestic

• Accumulation Distributions from foreign trust subject tothrowback rules – U.S. income tax and interest charge

• Accumulated income loses character

• Attribution of CFCs and PFICs

Examples

Planning Issues and Strategies

Funding of Trust

• Transfer of U.S. situs property

• Transfer of foreign situs property

Gifts During Settlor’s Lifetime

• Transfers from foreign corporations or foreign partnerships

• Transfers from trust

• Transfers made by settlor personally

Step-Up in Basis

• Benefit

• How to do it?

Step-Up in Basis for Revocable Trusts

• Catch-all provision does not apply to foreign situs

property acquired from NRNC

• Step-up in basis applies to “property transferred by the

decedent during his lifetime in trust to pay the income for

life to or on the direction of the decedent, with the right

reserved to the decedent at all times prior to his death to

revoke the trust.”

• Issues related to income

• Issues related to incapacity of decedent

Step-Up in Basis for Irrevocable Trusts

• Step-up in basis also applies, with respect to decedentsdying after December 31, 1951, “to property transferredby the decedent during his lifetime in trust to pay theincome for life to or on the direction of the decedent,with the right reserved to the decedent at all times priorto his death to make any change in the enjoymentthereof through the exercise of a power to alter, amend,or terminate the trust.”

• Issues of qualifying trust as a grantor trust when onlygrantor or spouse may be a beneficiary

Dealing with Foreign Corporations

• Basis

• Retained earnings

• CFC and PFIC rules

Incapacity of the Settlor

• Power to revoke or otherwise revest

• Dispositive provisions

• Pitfalls to avoid

Jointly-Settled Trusts

• General Power of Appointment for

Surviving Spouse:

• Power must be exercised to

transfer to another trust

• Surviving spouse must have a

power over the new trust to be

treated as an owner

• Distribution and recontribution

Accountings

• Typical method

• U.S. standards

Community Property

• U.S. spouse treated

as owning or

transferring half?

United States Reporting Requirements

Important Forms• FinCen Form 114 (June 30)

• IRS Form 3520

• IRS Form 3520-A (March 15)

• Foreign Grantor/Nongrantor Trust Beneficiary Statement

• IRS Form 5471

• IRS Form 8621

• IRS Form 8938

• FATCA Compliance

Obligations of Financial Advisor

• Planning with PFICs

• Elections

• Exit Strategy

Common Mistakes

• Failure to spot a U.S. beneficiary

• Unrestricted power to remove and replace the trustee

• Failure to file timely reporting requirements

• Failure to maintain companies properly

• Failure to recognize and plan for the CFC or PFIC issues

• Transfer from account owned by foreign corporation or foreign

partnership

• Failure to treat certain loans or property use as distributions

• Unintentionally creating a nongrantor trust

• Failure to take timely advice

Planning for A Foreign Family Member Who Will Become A U.S. Person

Objectives • Minimize United States and Home Country taxes

• Consult with local counsel

• Consider interim residence

• Least aggregate amount of taxes in both countries and avoiddouble taxation to the greatest possible extent

• Coordinate tax and estate plan with non-tax issues

• Family relationships

• Cash flow

• Access to assets

• Understand United States financial disclosure and otherrelevant laws

• Maximize protection from creditors

• Address spousal rights, if any

• Address forced heirship rights, if any

Accelerate Income and Gains

• Income and gains realized prior to becoming aresident will not be subject to United States incometax if not ordinarily subject to such tax

• Identify key assets and income sources

• Determine expected time of ownership

• Difficulty in determining historic cost

• Appreciated marketable securities

• Rents and royalties

• Review existing life insurance and deferred compensation products/plans

Defer Deductions and Losses

• Sale of assets having built-in losses should be

deferred until after becoming a resident

• Deductible expenses should be paid after

becoming a resident

• Mortgage payments

• Charitable contributions

U.S. Pre-Immigration Planning – Basis Step-Up

• Step up the basis of assets which have large

built-in gains

• Check-the-Box Election technique for existing

companies

• Additional gain recognition techniques

Gifts in Trust

• May avoid inclusion in donor’s gross estate (depends upon

powers retained or given, i.e., power to revoke or power of

appointment)

• Donor may not be subject to tax on income from assets (i.e., if

irrevocable domestic trust or foreign trust, but no U.S.

beneficiaries)

• Not subject to United States gift tax if assets transferred to

trust are not situated in the United States and donor not

domiciled in the United States at time of gift

Gifts in Trust (Continued)

• Grantor can be a discretionary beneficiary of irrevocable

trust

• Foreign vs. Domestic trusts

• Citizenship and residence of beneficiaries is important

• Reporting requirements

• Ensure gift is “complete”

• Dominion and control

• Claim of creditors

Action Items• Make sure foreign trusts are drafted, funded and

administered properly

• Maintain and respect structures owned by trusts as well

• Help foreign families spot U.S. beneficiaries to ensure accurate reporting

• Help foreign families identify estate planning opportunities

• Help foreign families identify pre-immigration planningopportunities

• Help foreign families plan for the death and incapacity offoreign grantor

• Review FATCA Compliance Plan

The information contained herein is provided forinformational purposes only and is not intended toconstitute the rendition of legal advice. No personshould act upon this information without obtainingthe opinion of United States legal counselspecializing in the area of international taxation.

CAVEAT

Steven L. Cantor

Cantor & Webb P.A.

1001 Brickell Bay Drive

Suite 3112, Miami, FL 33131

Contact Information

Phone: (305) 374-3886

Fax: (305) 371-4564

Email: steve@cantorwebb.com

Website: www.cantorwebb.com