Logo  

 

 

 

 International Business, Tax, Estate and Asset Preservation Planning

 

November 2012

Stephen A. Malley
Malley photo
 
Stephen A. Malley has for over 40 years specialized in the areas of international business, tax and finance, transnational estate, tax, and asset protection planning,  and pre-immigration and expatriation planning. Mr. Malley's  practice includes domestic and foreign licensing of intellectual property,  and  the formation of  captive liability insurance companies.

 

Clients include:

 

*U.S. companies with or developing foreign operations

 

*U.S. citizens with foreign assets or conducting business and investing overseas

 

*Foreign individuals with U.S. assets and/or U.S. business.

 

*Transnational Estate and asset preservation planning.

Learn more about Stephen A. Malley

 

Click here


Prior Newsletters

ESTATE PLANNING FOR INTERNATIONAL

ASSETS AND BENEFICIARIES

A BRIEF DISCUSSION 

 

Estate and gift planning for individuals and families with assets and/or beneficiaries in more than one country present complex and specialized issues and planning opportunities.

  

The U.S. imposes estate tax on worldwide assets. The U.S. has only a few estate or gift tax treaties which can mitigate estate tax exposure (see the list at the end of this letter). Most developed countries impose either estate or gift tax on local assets of foreigners, but subject to various Treaties and exemptions.  

 

A "U.S. person" includes a U.S. Citizen, a Green Card holder, and one who, generally, is present in the U.S. for 183 days in any year or over a three year period, determined as follows:

  

All the days in the U.S. in the current year, and1/3 of the days present in the first year before the current year, and 1/6 of the days present in the second year before the current year.

  

Although a U.S. person pays U.S. Income tax on worldwide income, subject to tax credits and applicable Treaty exceptions, U.S. Estate tax, for non-U.S. Citizens, is based on domicile, not residency. "Domicile", or the ultimate intended place of a permanent abode, is a subjective test. For example, a Green Card holder may, with advance planning, establish a foreign domicile, despite being a U.S. resident for income tax. The result could be that foreign based assets are excluded from U.S. Estate Tax.

  

Many, if not most, countries have residency rules, which are now becoming more stringent in the pursuit of tax dollars. The U.K., for example, has proposed rules that an individual will be considered a U.K. resident for all tax purposes if present in the U.K. 183 days or by having just one home in the UK. Furthermore, the U.K. proposes to tax non-resident companies on capital gains, including from sale of U.K. real estate, which is not now the case.

 

The EU and some Asian countries are increasing income, estate or inheritance taxes on foreign owned property. France, for example, has decreased its inheritance and gift tax exemptions, and increased the taxes on real estate and other "immovable property" owned by non-residents.

 

Most civil law countries, like Germany, Spain, Italy, Switzerland, the Benelux and Scandinavian Countries, and Greece, to name a few, do not recognize Trusts as effective estate planning tools. France, however, has a recently adopted Trust law which nevertheless imposes the highest tax rate (60%) on transfers out of Trust to other than the Decedent's descendents.

 

Some countries, like France, Germany, India and Spain, impose mandatory succession rules and severe tax penalties for violation of those rules. It may be difficult for a citizen or resident of such country to plan around succession laws. However, the EU Commission has recently passed a rule (not yet ratified by all EU Countries) to facilitate estate planning for EU citizens who die with assets in another EU country by providing that the decedent's habitual place of residence will control the estate wherever located. For example, it appears that an EU Citizen living in the U.S. could, under this Rule, control by Trust or Will the disposition of assets in a Country which would otherwise be subject to succession laws.

 

Estate Tax traps abound. For example, German beneficiaries (even if U.S. Citizens) of a U.S. Trust can incur a very high rate of tax (up to 60%) because German law treats the distribution as from an "unrelated party"; a lifetime gift might avoid this high tax.   Some countries, like Japan, have an inheritance tax not an estate tax, so the Japanese beneficiary might inherit assets already taxed in the U.S, potentially not subject to a tax credit.

 

Assets in many countries are subject to various "situs" rules, which determine if they are subject to estate and gift taxes. The U.S. has extensive "situs" rules of which foreigners must be aware. As an example, stock in a U.S. company is considered a U.S. sited asset and subject to estate tax. That stock could, however, be gifted tax free to a foreign beneficiary, as an "intangible". Note that owning U.S. stock or intangibles through a foreign corporation has to be carefully structured as the IRS has taken the position, (erroneous I think) in at least one case that if the foreign corporation is a "mere holding company" the non-resident and deceased alien was the "beneficial owner" and the stock was included in the U.S. estate.

 

U.S. partnership or LLC interests held by a foreign person can be problematic. A partnership interest is considered situated where the partnership business is carried on. Furthermore, if a foreign partnership is dissolved because of a partner's death, his U.S. estate can include that partner's share of partnership assets located within the U.S.

 

Life insurance with a foreign beneficiary is not considered sited in the U.S., but a Promissory Note from a U.S. Citizen is. Each asset must be analyzed.

 

It must be emphasized that a non- U.S. Citizen Spouse is not entitled to inherit  tax-free from a deceased U.S. Citizen spouse. The exemption is currently limited to $1mm, and to avoid estate tax the balance of the estate must be placed in a "qualified domestic trust" which restricts the surviving spouse's access. Lifetime gifts to the non-citizen spouse are limited to an annual $110,000. There are, however, planning opportunities. For example, domestic or off-shore life insurance policies can be structured to deliver proceeds tax free directly to the surviving non-citizen spouse. A surviving non-citizen spouse planning to leave the U.S. may have particularly interesting planning opportunities.

 

Pre-immigration planning for a wealthy individual or family can yield huge benefits. For example, it is possible for a U.S. immigrant to keep non-U.S. assets out of the U.S. tax system through properly planned trusts or offshore "private placement" life insurance policies. Advance planning is key.

 

Emigration from a country may also require special planning. Expatriating from the U.S. can incur an exit tax on market values of world wide assets over $2mm, with other limited exceptions. This exit tax applies to long term Green Card holders as well as to U.S. Citizens.

 

Estate and gift tax planning is important and planning for international assets and beneficiaries present special issues and opportunities.

 

U.S. Estate or Gift Tax Treaties:

  • Australia-Estate and Gift Tax
  • Austria-Estate and Gift Tax
  • Denmark-Estate and Gift Tax  
  • Finland-Estate Tax
  • France-Estate and Gift Tax
  • Germany-Estate and Gift Tax
  • Greece-Estate Tax    
  • Ireland-Estate Tax
  • Italy-Estate Tax
  • Japan-Estate and Gift Tax  
  • Netherlands-Estate Tax
  • Norway-Estate Tax
  • South Africa-Estate Tax
  • Sweden-Estate and Gift Tax

 

 

 

This Newsletter is not intended as and should not be relied upon as legal advice.

Stephen A. Malley
A Professional Corporation
310-820-7772 

 

�2012 Stephen A. Malley, J.D.