Individuals who are not US citizens and are not domiciled in the United States for transfer tax purposes (non-resident aliens) are subject to US gift tax only on gifts of real property and tangible personal property located in the United States. On death, a significantly broader list of property is subject to US estate tax. This article provides examples of certain specific assets that are often part of a non-resident alien's investment portfolio.
Individuals who are not US citizens and are not domiciled in the United States for transfer tax purposes (non-resident aliens) are subject to US gift tax only on gifts of real property and tangible personal property located in the United States. On death, a significantly broader list of property is subject to US estate tax. Advisers to families with international investments should familiarise themselves with the basic US situs rules and options for owning US-situs assets that may shelter them from gift and estate tax.
The Section 962 election has become one of the most common planning tools for tax professionals over the past couple of years. However, it is important to keep in mind that each situation is different. With variables ranging from projected actual future distributions to local country tax rates, it is always important to consider making a Section 962 election among other planning alternatives, not as the only planning alternative.
A limited liability company (LLC) that is created under the laws of a US state and wholly owned by a single non-US person is required to report transactions with its non-US owner and other related parties to the Internal Revenue Service (IRS) on Form 5472, which must be submitted with a pro forma Form 1120. In response to the COVID-19 outbreak, the IRS has automatically extended the filing due date from 15 April 2020 to 15 July 2020.
Using Form BE-10, the Bureau of Economic Analysis (BEA) conducts a survey on US direct investment abroad. The survey is conducted every five years and currently covers fiscal years ending in 2019. The gathered data is used to produce statistics on the scale and effects of US-owned business activities abroad. All US persons subject to the reporting requirements must file, even if they are not contacted by the BEA. Families and their advisers should not ignore correspondence from the BEA.
On the evening of 9 April 2020, the Inland Revenue Service (IRS) issued Notice 2020-23 postponing additional tax deadlines to 15 July 2020. The notice clarifies that the extended deadline relief includes not just the filing of specified income tax forms, but also all schedules, returns and other forms that are filed as attachments to income tax forms or are required to be filed by the due date of a specified income tax form.
The Internal Revenue Service (IRS) is ramping up compliance initiatives targeting failures to file US tax and information returns. US tax attorneys and accountants are increasingly seeing IRS notifications and penalty assessments. As the new year begins, family advisers and trust officers should review succession planning structures to determine whether any entity or individual has a 15 April US reporting requirement.
US gift, estate and generation-skipping transfer tax exemption amounts have been updated for tax year 2020. Advisers to international families must be able to recognise when a family member has come in contact with the US tax net and plan accordingly. For family members domiciled in the United States, special attention should be paid to the estate tax exemption amount which is scheduled to be automatically reduced at the end of 2025.
Non-US entities, even when not conducting a business in the United States, must sometimes apply for a US tax identification number, known as an employer identification number. Properly completing Form SS-4 will result in smoother processing and support the entity's tax classification and residency position.
The tax drag and unsatisfactory options to deal with accumulated income often result in moving an offshore trust to the United States and giving up the tax deferral. However, there is an alternative method, suitable for very long-term trusts, that takes an almost diametrically opposite approach. Rather than restricting the US beneficiaries to the value of the original trust capital and virtually giving up on future tax deferral, this method sacrifices the original trust capital to a final payment of taxes and interest (or a gift to charity) and tries to maximise the duration of the deferral.
US beneficiaries of foreign trusts are subject to a throwback tax regime and an interest charge when they receive distributions of accumulated income from the trust. To avoid these punitive payments, families often choose to convert or decant the trust to a US domestic trust. However, the easy answer may not be the best answer, as a trust that tries to rebound from an ill-considered move to the United States may face a tax on the way out – a toll charge that precludes returning offshore.
Over the past decade, matriarchs and patriarchs of successful families have increasingly been concluding that their children are sufficiently provided for and have thus shifted the focus of their family's largess to a broader group of individuals by creating so-called 'family banks'. Such banks provide capital to that broader group of individuals for business ventures, public-spirited projects and knowledge in a way that fosters personal commitment, accountability and multi-generational mentoring.
It is important for trustees of foreign trusts not to miss US tax filing deadlines or, if unable to file by the due date, to submit a request for an extension to file. Careful attention should be paid to where and how to submit the request, as procedures are not necessarily the same for all returns. This article sets out the various requirements that must be met by trustees of foreign trusts.
Trusts classified as foreign for US tax purposes, whether established under the law of a US state or of an offshore jurisdiction, must review whether they have any US tax or information reporting filings to make in 2019 with regard to income earned and distributions made in 2018. This article provides trust officers and family advisers with a summary checklist.
Keeping in mind US tax basis and estate tax issues while establishing and maintaining a succession planning structure can protect the estate of a non-US settlor from US estate tax and prove beneficial after the settlor's death where a branch of the family moves to the United States or a family member marries a US citizen. Recent changes to the US Tax Code have prompted some US tax advisers to suggest additional layers of entities to the structure, the additional cost and complexity of which may not result in substantial tax savings.
Trusts remain a flexible succession planning tool for families wishing to pass wealth to future generations in a responsible manner and can include philanthropic goals. The wealth-creating settlor wants to establish such a trust in a jurisdiction with well-established trust laws, a stable business environment, responsive and efficient trust officers and clearly stated comprehensive annual fees. When comparing jurisdictions, the United States should be included.
US citizens and US residents are subject to income, gift and estate taxes. Non-US persons are subject to tax on certain US income and property transfers. Advisers to international families must be able to recognise when a family member has come in contact with the US tax net and plan accordingly. This will often mean seeking advice from competent US tax counsel. Even if no tax is due, running the gauntlet of US reporting obligations requires specialised knowledge.
A limited liability company (LLC) created under the laws of a US state that is wholly owned by a single non-US person (a foreign-owned LLC) will be required to report transactions with its non-US owner and related parties to the Internal Revenue Service. Advisers to families with succession planning structures that use US foreign-owned LLCs should familiarise themselves with Form 5472 and determine whether the LLC has had any reportable transactions with its sole non-US owner or a related party.
The Internal Revenue Service (IRS) recently released an updated Form W-8BEN-E and Form W-8IMY. Non-US entities should use these new forms when requested to certify their status under the Foreign Account Tax Compliance Act. Among other things, the new forms clarify confusion over which global intermediary identification number should be reported for the trustee of a trustee-documented trust.