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Arthur Winter Winter & Melbinger, LLP
Arthur (“Art”) Winter is a principal of Winter & Melbinger, LLP of Evanston, Illinois, he received his J.D. degree from the University of California, Berkeley (Boalt Hall) in 1980 and a B.A. degree from the University of Michigan in 1977. A member of the Illinois, California and New York bars, he practiced law from 1980 to 1992 at Sidley & Austin in the firm's Chicago and Singapore offices. Mr. Winter has particular expertise in international estate planning matters, including planning for non-U.S. citizens with U.S. spouses, U.S. children or U.S. grandchildren; planning for non-U.S. citizens who own U.S. assets; planning for U.S. citizens living outside of the United States; and planning for U.S. citizens who own assets overseas. His firm regularly drafts qualified domestic trusts for non-U.S. citizen spouses and community property agreements for married couples moving to or from community property jurisdictions. They also regularly assist families and other professional advisors in administering international estates. The firm has extensive experience advising families, businesses and financial institutions with respect to the protection of private assets from political risks (such as the expropriation of assets, "freezing" orders and exchange controls). The legal practice of Winter & Melbinger focuses on the following areas: (i) international estate planning and administration; (ii) income tax, immigration and employee benefit planning for individuals moving to and from the United States; (iii) international philanthropic matters for individuals structuring international charitable gifts and charitable institutions operating outside their home countries or raising funds abroad; and (iv) domestic estate planning and probate matters.
U.S. Estate and Income Tax Planning For International Families
With U.S. Children and Grandchildren
(Including Students) and
International Tax and Immigration Planning
STEP Silicon Valley PresentationWednesday, November 29, 2017
6:00 pm – 7:30:00 pm
Arthur WinterWinter & Melbinger, LLPEvanston, Illinois 60201Phone: (847) 492-5400
Fax: (847) 492-5444E-mail: [email protected]
INTRODUCTION TO U.S. TAX AND ESTATE PLANNING FOR
INTERNATIONAL PERSONS
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U.S. Income Tax
U.S. Estate, Gift and GST Tax
U.S. Citizens and
“Residents”
(Worldwide Tax)
NRA’s
(Tax Limited To
Certain U.S. Source Income and
Certain U.S. Situs Assets)
“Resident” Means Something Different for U.S. Income Tax and U.S. Estate and Gift Tax
Purposes
• Green card holder, or
• Someone who meets the “substantial presence” test
• A U.S. domiciliary (someone whose permanent home is in the U.S.)
• An NRA for U.S. estate, gift and generation-skipping transfer tax purposes is a non-U.S. citizen whose domicile is outside of the United States; a U.S. “resident” for such purposes is someone whose domicile is in the United States
• Distinguish domicile from “residence” for U.S. income tax purposes – domicile(that is, an individual’s “permanent home”) is determinative for transfer tax purposes
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• reasons for the presence of the taxpayer in the United States, e.g., health, pleasure or business
• the amount of time spent by the taxpayer in the United States, and between the United States and other countries, and between places abroad
• the size, cost and nature of houses or other dwellings, and whether those places were owned or rented by the taxpayer;
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• the location of the taxpayer’s family and close friends;
• the location of the taxpayer’s business interests;
• whether the taxpayer spent holiday periods with his or her family, and if so, where; and
• the location of the taxpayer’s cemetery plot (if any).
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An NRA is only subject to U.S. estate tax on certain “U.S. situs” assets.
The term “U.S. situs” is defined in the Internal Revenue Code, and taxable assets include
• U.S. real estate• Tangible personal property, such as jewelry and
household belongings located in the U.S. (with some limited exceptions);
• Equity securities (i.e., shares and stock options) issued by U.S. corporations, regardless of where the share certificates are located (except for RIC’s holding all non-U.S. assets); and
• Limited types of indebtedness issued by U.S. issuers.
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1. US$60,000isexemptfromtax,whichmaybeincreasedbyanapplicabletreaty.
2. Theexcessisgenerallytaxableatratesfrom26% to40% .
3. US$1millionofU.S.situspropertycanbesubjecttoapproximatelyUS$332,800 ofestatetax.US$2millioncanbesubjecttoapproximatelyUS$732,800oftax.
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• U.S. estate tax rules generally provide for unlimited estate tax-free transfers between spouses, but no such marital deduction is available to an NRA unless his or her spouse is a U.S. citizen, absent an applicable estate tax treaty or the use of a “qualified domestic trust.”
• Treasury Regulations require that a “qualified domestic trust” have a U.S. corporate trustee or a U.S. citizen individual trustee with a “tax home” in the U.S., and that if such trust has a value in excess of US$2 million, it have either a U.S. corporate trustee or that security for payment of tax be posted with the U.S. Internal Revenue Service.
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• When one joint tenant dies, unless the surviving joint tenant is the U.S. citizen spouse of the deceased joint tenant, all (not one-half or another fraction) of the joint tenancy property is presumptively included in the deceased joint tenant’s estate.
• When a joint tenancy is severed during lifetime to avoid this trap, care must be taken to sever the joint tenancy in accordance with the joint tenants’ contributions to the joint tenancy and other special rules.
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• The “green card” test• The “substantial presence” test –the
sum of all days in a current year + 1/3 of preceding year’s days + 1/6 of second preceding year’s days equals or exceeds 183 days.
• Exceptions to “counting” days present, for example in the case of students
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• Special exemption from U.S. income tax only applies when engaged in a “full time course of study”
• Exemption is not from tax itself, but from counting days when in the U.S. in “bona fide student status”
• Exemption only automatic during the first five calendar years of studies. Thereafter, I.R.S. Form 8843 must be filed to claim student status.
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1. Typical U.S. Income Tax Treaty Residency Tie-Breaker Provisions
a) Location of Permanent Home
b) Closer Personal and Economic Relations (“center of vital interests”)
c) Habitual Abode (Sometimes a Day Count)
d) Nationality
e) Competent Authority
2. U.S. – Peoples’ Republic of China Income Tax Treaty Tie-Breaker Provisions
a) Goes Straight to Competent Authority
b) See “What Happens in China Stays in China: U.S. Tax Traps for Immigrant Investors,” by Alan W. Granwell, William M. Sharp Sr. and Ajay C. Whittemore, Tax Notes International, December 16, 2013
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An NRA is only generally subject to U.S. income tax on certain “U.S. source” income.
This includes: Dividends: Issued by U.S. corporations (subject to
withholding tax at 30% or lower treaty rate) Capital gains from the sale of U.S. real estate
interests (taxed as long-term or short-term capital gain)
Salary and deferred compensation for work performed in the United States (taxed at normal graduated rates)
Business income “effectively connected” with the conduct of a U.S. trade or business (taxed at normal graduated rates)
Most U.S. interest income (if the owner is an NRA for income tax purposes) and capital gains (other than from the disposition of U.S. real estate interests) are not subject to U.S. income tax.
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Many traps for the unwary exist under the anti-avoidance provisions of the U.S. Internal Revenue Code in connection with shares of non-U.S. corporations (“PHC’s”) held directly or indirectly by U.S. persons.
At the risk of oversimplifying matters, some of these anti-avoidance provisions tax U.S. citizens and residents on their pro rata shares of certain types of income of such corporations (CFC's) as highly-taxed dividend income, while others apply special tax rules to distributions from, or dispositions of, the shares of such corporations (PFIC's).
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Client
PHC
Investments
Client
Investments
COMPLIANCE OBLIGATIONS RELATED TO NON-U.S. TRUSTS
WITH U.S. PERSON BENEFICIARIES
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Significant reporting obligations exist for U.S. taxpayers who have non-U.S. financial accounts or who are beneficiaries of non-U.S. trusts. These include:• Foreign Account Tax Compliance Act
(“FATCA” Rules) – new I.R.S. Form 8938• Foreign Bank Account Reporting
(“FBAR”) Rules – FinCen 114 filed online by June 30 (April 15 starting in 2017)
• Foreign Trust Tax Compliance Act Rules –Forms 3520 and 3520-A, appointment of U.S. agents and preparation of Foreign Grantor Trust/Non Grantor Trust Beneficiary Statements and Foreign Grantor Trust Owner Statement
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PLANNING OPPORTUNITIES
U.S. Estate Tax Minimization
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Example of Affidavit of Domicile
I, Antonio Martinez, being duly sworn, hereby declare that my domicile is in Singapore. In support of such declaration, I state as follows:1. I was born on May 12, 1957 in Singapore. I spent my childhood and grew up in Singapore. I am a citizen of Singapore, and I am not a citizen of the United States.2. I became an employee of ABC Corporation in 1980, at age 23, in Singapore. On January 10, 2004, I was transferred by my employer, ABC Corporation, to San Francisco, California. My reason for temporarily residing in the United States is business, as my current employment with ABC Corporation requires me to live in the United States. 3. I am normally in Singapore five or six times each year. Some of these visits are for business, but I visit family in Singapore at least four times a year. Often when I am in Singapore on business, I take the opportunity to add days to see family.4. My wife and I own a residence in Singapore and a residence in California in which we temporarily reside while living in the United States.5. My major financial assets are [describe]. 6. I currently do my routine banking in the United States, and I have U.S. credit cards, but I also maintain financial accounts and credit cards in Singapore.7. I own a cemetery plot in Singapore, where I wish to be buried. 8. I am a citizen of Singapore and regard Singapore as my permanent home. I plan to return home to Singapore once I finish working in the United States. I have no intention of giving up my domicile in Singapore.
FURTHER, the affiant sayeth not.
IN WITNESS WHEREOF, I have signed this Declaration this _____ day of _________, 2014.
________________________Antonio Martinez
Subscribed and sworn to before methe ____ day of _________, 2014_____________________________Notary Public
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Example of “Swing Both Ways” Trust Template
• Upon the death of the Settlor, the Trustee shall hold the trust fund (including insurance proceeds and other benefits payable to the Trustee and property given to the Trustee by the Settlor's Will) as the Trust Estate upon the trusts and conditions set forth in this and the following articles.
• 3.1 Determination of Nonresident Alien Status.
• After the Settlor's death, the Trustee shall determine whether or not the Settlor was a nonresident alien of the United States for United States federal estate tax purposes (a "nonresident alien") as of the Settlor's death. If the tax authorities or courts of the United States make a final determination that the Settlor was or was not a nonresident alien as of the Settlor's death, such final determination shall be binding on the Trustee. Subject to the provisions of the preceding sentence, the Trustee's determination as to whether or not the Settlor was a nonresident alien as of the Settlor's death shall be binding on all persons.
• 3.2 Allocation of Trust Estate If the Settlor Was a Nonresident Alien and the Settlor's Wife Survives Him.
• If the Settlor was a nonresident alien as of his death and the Settlor's wife survives him, then as of the Settlor's death, the Trustee shall allocate the Trust Estate as provided in this paragraph….
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3.3 Allocation of Trust Estate If the Settlor Was a Nonresident Alien and the Settlor's Wife Does Not Survive Him.
If the Settlor was a nonresident alien as of his death and the Settlor's wife does not survive him, then as of the Settlor's death, the Trustee shall allocate the Trust Estate as provided in this paragraph….
3.4 Allocation of Trust Estate If the Settlor Was Not a Nonresident Alien and the Settlor's Wife Survives Him.
If the Settlor was not a nonresident alien as of his death and the Settlor's wife survives him, then as of the Settlor's death, the Trustee shall allocate the Trust Estate as provided in this paragraph….
3.5 Allocation of Trust Estate If the Settlor Was Not a Nonresident Alien and the Settlor's Wife Does Not Survive Him.
If the Settlor was not a nonresident alien as of his death and the Settlor's wife does not survive him, then as of the Settlor's death, the Trustee shall allocate the Trust Estate as provided in this paragraph….
PLANNING OPPORTUNITIES
U.S. Income Tax Minimization
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Certain short-term visits to the U.S. at the beginning or end of a foreign national's U.S. residency period (up to ten days in total) can be disregarded when determining the foreign national's U.S. residency starting or termination date, provided that the foreign national can establish that during that period:
- he or she maintained a “tax home” in a foreign country, and
- he or she maintained a closer connection to that foreign country than to the U.S. during that period.
• No more than ten days may be disregarded for purposes of establishing an individual's residency starting or termination date, and a given visit must be less than ten days in length (and also must not, when added to previous visits, exceed the ten-day threshold).
• Example of Residency Starting Date: If Ms. Tina Zheng was present from January 1 through January 7, then left and returned to the U.S. for good on April 1, she would (assuming that she met the necessary requirements) have a residency starting date of April 1.
- This would still be true if she was also in the U.S. for two days in February or March.
- However, if she was in the U.S. from January 1 through January 11, her residency starting date would be January 1 (notJanuary 11).
- If she was in the U.S. from January 1 through January 7, then returned for four days in February or March, Ms. Zheng’s residency starting date would be the first day she was here in February or March. 23
• Suppose Mr. Antonio Martinez has US$4millionin an investment account when he is preparing to move to Miami, consisting of
• US$3million of appreciated assets that cost Mr. Martinez US$2million, and
• US$1 million of assets held at a slight loss, having been acquired for US$1.2million.
• Planning Opportunity:
• Before Mr. Martinez’s “U.S. tax residency starting date,” he should consider selling (and buying back immediately, if he wants) the appreciated assets, as otherwise the U.S. will tax, upon sale while he is a U.S. income tax resident, the US$1million of gain that accrued before he became a U.S. income tax resident.
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• Now assume Mr. Martinez’s US$4million investment account is held through a PHC, Smith Investment Limited
• If Mr. Martinez does not liquidate the PHC, all municipal bond interest, dividend income and long-term capital gain income realized in the PHC after Mr. Martinez becomes a U.S. income tax resident will be taxed at 43% (rather than these three different types of income being taxed at 0%, 23.8% and 23.8%, respectively) each year as earned, whether distributed to Mr. Martinez or not, because the PHC will become a “CFC” when Mr. Martinez becomes a U.S. income tax resident
• If Mr. Martinez liquidates the PHC after his U.S. income tax residency starting date to avoid this “tax trap”, liquidating the PHC will generate a one-time inclusion of US$800,000 of income in his U.S. income tax return (because he bought the assets for US$3.2mm and their fair market value is US$4mm)
• But if he liquidates the PHC before his U.S. income tax residency starting date, the liquidation is U.S. tax-free and there is no CFC problem on a going forward basis.
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1. Obtaining a basis step-up before U.S. income tax residency begins
- “Bed and breakfasting” (selling and repurchasing) investment assets
- Creating a foreign entity and “checking-the-box”
- Shorting appreciated stock “against the box”
2. Minimizing income during the period of U.S. residence (including through the use of offshore variable annuities or private placement life insurance policies)
3. Restructuring or liquidating foreign investment corporations before U.S. income residency begins
- PHC’s- Non-U.S. mutual funds
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4. Domesticating and/or making distributions from foreign trusts
5. Timing the distribution of deferred compensation, pension benefits and other corporate-related benefits for international executives
6. Dealing with domicile issues while resident in the U.S. – preparing affidavits of domicile
7. Preparing “swing both ways” estate planning documents and qualified domestic trusts
8. Estate planning for deferred compensation and pension benefits
9. Obtaining non-recourse mortgages on U.S. residences
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26 U.S. Code § 679 - Foreign trusts having one or more United States beneficiaries
(a) TRANSFEROR TREATED AS OWNER
(1) IN GENERAL
A United States person who directly or indirectly transfers property to a foreign trust… shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust.
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(4)SPECIAL RULES APPLICABLE TO FOREIGN GRANTOR
WHO LATER BECOMES A UNITED STATES PERSON
(A) IN GENERAL
If a nonresident alien individual has a residency starting date within 5 years after directly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual transferred to such trust on the residency starting date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer.
(B) TREATMENT OF UNDISTRIBUTED INCOME
For purposes of this section, undistributed net income for periods before such individual’s residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into account.
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(b) TRUSTS ACQUIRING UNITED
STATES BENEFICIARIES IF –(1.) subsection (a) applies to a trust for the
transferor’s taxable year, and
(2.) subsection (a) would have applied to the trust for his immediately preceding taxable year but for the fact that for such preceding taxable year there was no United States beneficiary for any portion of the trust
then, for purposes of this subtitle, the transferor shall be treated as having income for the taxable year (in addition to his other income for such year) equal to the undistributed net income (at the close of such immediately preceding taxable year) attributable to the portion of the trust referred to in subsection (a).
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(c) TRUSTS TREATED AS HAVING A
UNITED STATES BENEFICIARY(1) IN GENERAL For purposes of this section, a
trust shall be treated as having a United States beneficiary for the taxable year unless—
a) Under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States person, and
b) If the trust were terminated at any time during the taxable year, no part of the income or corpus of such trst could be paid to or for the benefit of a United States person.
For purposes of subparagraph (A), an amount shall be treated as accumulated for the benefit of a United States person even if the United States person’s interest in the trust is contingent on a future event.
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On February 4, 2016 the United States Department of Justice entered into a deferred prosecution agreement with Bank Julius Baer.
“In furtherance of the scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, Julius Baer undertook, among other actions, the following:
• Opening and maintaining accounts for many U.S. taxpayer-clients held in the name of non-U.S. corporations, foundations, trusts, or other legal entities (collectively, structures) or non-U.S. relatives, thereby helping such U.S. taxpayers conceal their beneficial ownership of the accounts.” [emphasis mine]
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1. Revised in 2008, these rules subject many U.S. citizens who expatriate, and so-called “long-term permanent residents” who relinquish such status, to special U.S. tax rules.
2. A “long-term permanent resident” is an individual who holds a “green card” in at least eight out of the fifteen years before giving up or losing his or her green card.
3. The rules treat affected individuals (“covered expatriates”) as if they had sold their worldwide assets the day before expatriation. Any net gain on this deemed sale in excess of US$600,000 (inflation adjusted– US $713,000 in 2018) is taxable.
4. A “covered expatriate” is a person whose net worth is US $2,000,000 or more, who has an average U.S. income tax liability for the five years ending before the expatriation date of more than US $165,000 (in 2018) or who has not been fully U.S. tax compliant in the five years before expatriation. There are additional exceptions for dual citizens at birth who are tax residents of their other citizenship of birth and who have not lived in the United States for more than ten of the preceding fifteen years, and for individuals relinquishing their U.S. citizenship before age 18 ½ who have not been resident in the United States for more than ten years.
5. Specified tax deferred accounts (such as an IRA) are also deemed distributed the day before expatriation, as well as deferred compensation such as pensions that are not elected to be treated as “eligible” deferred compensation.
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6. “Eligible” deferred compensation (which includes most pensions, if elected) and any distributions from a non-grantor trust to a covered expatriate are subject to a flat 30% U.S. income tax, which is paid by means of mandatory withholding by the U.S. payor or by any trustee.
7. Finally, a new U.S. inheritance tax applies to gifts and bequests U.S. persons receive from covered expatriates. This tax is applied at the highest U.S. estate tax rate in effect when the transfer is made. Recently issued proposed Treasury Regulations define “resident” as US domiciled, not income tax residency. Planning opportunities exist to minimize the impact of this new inheritance tax.
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• On June 18, 2014 the I.R.S. announced a new program – OVDP 2014, which will remain open indefinitely.
• There were similar programs in 2009, 2011, and 2012.
• Taxpayer files amended returns and FBAR’s for eight years, pays the taxes owed, interest, a 20 percent accuracy-related penalty (regarding offshore-related underpayments of U.S. tax), and an “in lieu of” penalty of 27.5 (or in some cases 50) percent of the highest aggregate unreported account values during the prior eight tax years
• “Opting Out”• New expansion of “streamlined” program for
“nonwillful” taxpayers• Three years of back returns and six years of FBAR’s
need to be filed and back taxes and interest paid• And 5% “in lieu of” penalty of highest aggregate
unreported account value during six years if taxpayer is U.S. resident
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• Oracle• Oracle Website
• IBM• IBM Website
• "Every two days now we create as much information as we did from the dawn of civilization up until 2003.” -- Eric Schmidt, former CEO Google
• Google Buys a Quantum Computer• “For most problems, it was 11,000 times faster”• NY Times Bits Blog, May 16, 2013
• See the international edition of Time Magazine dated February 17, 2014 entitled The Infinity Machine
• IGA’s, OECD and other automatic international exchanges of tax data are proliferating dramatically
• At the State level, too. “California is investing $670 million over five years to improve tax collections, an effort that is expected to raise an additional $1 billion a year in revenue.” Business Week, April 03, 2014 Business Week Article
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IMMIGRATION-RELATED OPPORTUNITIES
1. Immigrant Visa (Permanent Resident Alien, or Green Card)
2. Nonimmigrant Visasa) B Visa – Business Visitor or Visitor for
Pleasure
b) H-1B Visa – Specialty Occupations in Fields Requiring Highly Specialized Knowledge
c) E Visa – Treaty Trader and Treaty Investor Visas
d) F and J Visas-Student and Exchange Visitor Visas
e) L Visas – Intra-Company Transferee Visas
f) O Visas – Foreign National with Extraordinary Ability or Achievement in Sciences, Arts, Education, Business or Athletics
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• These are for foreign nationals with extraordinary ability or achievement in the sciences, arts, education, business or athletics.
• For most business people using them, have to plan several years in advance because obtaining an O visa requires evidence that the beneficiary has received a major, internationally-recognized award, such as a Nobel Prize, or evidence of at least (3) three of the following:
• Receipt of nationally or internationally recognized prizes or awards for excellence in the field of endeavor
• Membership in associations in the field for which classification is sought which require outstanding achievements, as judged by recognized national or international experts in the field
• Published material in professional or major trade publications, newspapers or other major media about the beneficiary and the beneficiary’s work in the field for which classification is sought
• Original scientific, scholarly, or business-related contributions of major significance in the field
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• Authorship of scholarly articles in professional journals or other major media in the field for which classification is sought
• A high salary or other remuneration for services as evidenced by contracts or other reliable evidence
• Participation on a panel, or individually, as a judge of the work of others in the same or in a field of specialization allied to that field for which classification is sought
• Employment in a critical or essential capacity for organizations and establishments that have a distinguished reputation
If the above criteria do not readily apply to the beneficiary’s occupation, the petitioner may submit comparable evidence in order to establish the beneficiary’s eligibility.
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