Estate Planning for the International Family: Opportunities for Delaware

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Estate Planning for the International Family
Opportunities for Delaware
Washington, DC ? New York, NY ? New Haven,
CT ? Chicago, IL

• Stanley A. Barg Estate Planning Council of
  DelawareKozusko Harris Duncan November 13, 2013

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Importance of Estate and Tax Planning

• Persons subject to US taxation can realize
  substantial savings through estate and asset
  planning.
• US recognizes broad range of trusts and trusts
  play an important role in many structures.
• Particularly effective for non-US persons to take
  professional advice before coming to or investing
  in the US.
• Also important for US persons who acquire assets
  overseas or who have family members who reside
  overseas and may not be US persons.
• Asset Protection Planning

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Citizens and Residents

• Must pay U.S. income taxes on their worldwide
  income
• Citizens There are said to be 6 million
  American citizens who live outside the US
• Residents for Income Tax Purposes
• Green Card Holders
• Substantial Presence Test

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Substantial Presence Test

• An individual is considered a resident alien
  under the substantial presence test if he or she
  was in the U.S. 183 days or more during any
  calendar year.
• Resident alien status can also be established
  under a three-year test which counts 183 days to
  include
• each day in the current year plus
• during the first preceding year, 1/3 days in the
  U.S. plus
• during the second preceding year, 1/6 days in the
  U.S.
• General rule to avoid resident alien status,
  average annual days lived in the US should not
  exceed approximately 120 days.

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Exemptions

• Certain individuals such as students who enter
  the U.S. on an F-1 visa, or other student visa
  are exempt from the substantial presence test for
  a period of time, usually five years.
• Closer connection test
• Use of treaties

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Non-Resident Aliens

• A non-resident alien is usually subject to US
  income tax only on US source income.
• Critical for students and other temporary visa
  holders to plan as status changes.
• Termination of Green Card status.

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Liability for US Estate and Gift Tax

• US citizens and those deemed resident in the US
  for Estate and Gift Tax Purposes are subject to a
  complex tax regime on worldwide assets.
• US Non-residents are subject to Estate and Gift
  Tax on US situs assets such as US real estate,
  tangible personal property (e.g. art) located in
  the US and securities of US companies (estate tax
  only).
• Residency for this purpose is based on domicile
• Domicile where one lives with the intent to
  remain
• Green Card Holders are generally presumed to be
  residents but can in certain circumstances rebut
  the presumption.
• Similarly, one with a temporary visa may
  nevertheless be regarded as domiciled in the US.

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Choice of Law What Does it Mean to Have a US
Trust ?

• Importance of State Law
• Creation
• Taxation
• Rights of Parties
• US Trust for Tax Purposes
• Control Test
• Court Test

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US Trusts for US Tax Purposes

• Objective Rule A trust is considered domestic
  for US tax purposes only if
• a US court can exercise primary supervision over
  its administration (the court test), and
• the US fiduciaries have the authority to control
  all substantial decisions relating to the trust
  (the control test).
• A trust that does not satisfy both tests is a
  foreign trust for US tax purposes

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The Court Test

• A US court must be able to exercise primary
  supervision over the administration of the trust.
• Safe Harbor
• The trust instrument does not direct that the
  trust be administered outside of the US
• The trust is actually administered exclusively in
  the US
• The trust is not subject to an automatic
  migration provision

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The Control Test

• One or more US persons must have the authority to
  control all substantial decisions of the trust.
• Substantial decisions include
• Whether and when to distribute income or corpus
• The amount of any distributions
• The selection of a beneficiary
• Whether a receipt is allocable to income or
  principal
• Whether to terminate the trust
• Whether to compromise, arbitrate or abandon
  claims
• Whether to sue on behalf of the trust or to
  defend suits against the trust
• Whether to remove, add or replace a trustee
• Investment decisions

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Grantor Trusts with Foreign Grantors

• Grantor Trust Rules
• Who is the Grantor?
• Foreign Grantors
• A trust (foreign or domestic) is treated as a
  grantor trust only if the person deemed to own
  the trust is a US citizen or resident or a
  domestic corporation.
• Designed to preclude the use of the grantor trust
  rules to eliminate all US income taxation on
  foreign-source income of a foreign grantor trust
  distributed to US beneficiaries
• Grandfather Rules

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Exceptions

• Revocable Trusts
• Irrevocable Trusts Benefiting Only the Grantor
  and/or the Grantors Spouse
• Compensatory Trusts

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Non-Grantor Foreign Trusts

• Reporting requirements
• Tax on Current Income
• Throwback Tax and Interest Charge
• Minimization
• Isolate Tainted Income with Cleansing
  Distribution
• Permanent Income
• Use of Default Method
• Life Insurance Products
• Domestication

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The Use of Business Entities in Estate Planning

• LLCs The use of US Disregarded Entities
• Purchasing property
• Foreign taxpayers with foreign assets
• Family Limited Partnerships
• Partnerships and LLCs
• Facilitation of Transfers of Interests
• Used with trusts

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Check the Box Entities

• Election out of default classification
• Made on Form 8832, Entity Classification Election
• Generally effective on date filed
• 75-day retroactive election
• 12-month prospective election
• Timing Issues
• 60-month moratorium on change after election

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Foreign Bank Account Reports (FBAR)

• Treasury Department Form TD F 90-22.1.
• On February 24, 2011 new rules were issued
  applicable to FBARs due by June 30, 2011 with
  respect to accounts maintained in 2010 and
  subsequent years.
• The rule addresses
• who must file FBARs
• the types of account which must be reported and
• exemptions from filing that may apply.

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Foreign Bank Account Reports (FBAR)

• Trusts are included under the definition of 'US
  person' in the same manner as corporations and
  limited liability companies i.e., a trust that
  has been created, organized or formed under the
  laws of the United States must file.
• A beneficiary of a discretionary trust does not
  have a financial interest in a foreign account
  simply because of his or her status as a
  discretionary beneficiary. A beneficiary has a
  financial interest in the assets of the trust
  only if he or she has a 'present beneficial
  interest although it is unclear how 'present
  beneficial interest' may be defined.

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Foreign Bank Account Reports (FBAR)

• A US person has a financial interest in a
  financial account in a foreign country for which
  the owner is a trust
• if the US person is the trust grantor and has an
  owner interest in the trust under the grantor
  trust rules, or
• if the US person either has a present beneficial
  interest in more than 50 of the assets or from
  which such person receives more than 50 of the
  current income.
• Anti-avoidance rule
• Delaware LLCs

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US Trusts in International Planning

• The domestication of trusts to the US
• Use of foreign grantor trusts in international
  planning
• Death of the grantor
• The use of US trusts that are not US trusts for
  US tax purposes
• Could be grantor or non-grantor
• May be domesticated in the future
• Subject to US tax only on US income
• The use of US trusts to acquire US assets
• Qualified Domestic Trusts The need for an
  institutional US trustee
• Foreign non-citizen spouse
• Foreign taxpayer with US assets - Limited to
  60,000 exemption
• US persons living overseas who want a living
  trust without subjecting the trust to local tax

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Estate Planning for the International Family
Opportunities for Delaware
Washington, DC ? New York, NY ? New Haven,
CT ? Chicago, IL

• Stanley A. Barg Estate Planning Council of
  DelawareKozusko Harris Duncan November 13, 2013