Tax and Estate Planning Considerations for Foreign Persons Owning U.S

Tax and Estate Planning Considerations for Foreign Persons Owning U.S. Assets: A Deeper Dive

Michelle B. Graham Marnin J. Michaels Joshua S. Rubenstein

Wednesday, January 11, 2017 Special Session II-E (3:50-5:20 p.m.) Succession Planning Principles • Gather facts on client (nationality, residency, schedule of assets, marital agreement, business agreements, etc.) • If married, what marital regime will apply? • Is there a valid, enforceable Last Will & Testament? • Gather facts on beneficiaries and heirs, in particular residency and nationality • Understand basic rules of home country and that of beneficiaries; retain local counsel • What type of property is it (movable or immovable)?

2 Legal System of Home Country • Common law (US, Canada, UK, Australia, NZ, Singapore) • Judicial decisions, freedom of disposition, estate tax, trusts • Civil law (most of EU, Africa, Asia, LatAm) • Codified laws, forced heirship, inheritance taxes, role of notary publics, lack of use and/or recognition of trusts • Religious law, e.g., Sharia (Saudi Arabia, Yemen, Sudan, Iran, Oman, Afghanistan) • Combination of legal systems

3 Choice of Law & Conflicts of Law

• US courts will generally uphold choice of law • Common law • Domicile governs personal property • Situs governs real property • Civil law • Law of person’s country of nationality • Conflicts of law

4 Case 1

• Mr. C, a Guatemalan domiciliary, dies intestate unexpectedly in Miami. • He owns significant assets in both the United States and Guatemala, including Guatemalan operating companies, Miami real estate, a bank account in Miami and significant stocks and bonds • The stocks and bonds are held in a foreign trust for the benefit of his 3 children, some of whom are minors. • His wife and children are U.S. citizens. He was separated from his wife at the date of death, but was still legally married. • He has a girlfriend in Guatemala and a child with his girlfriend.

5 Case 1 Issues

• Who is your client? • Scope of representation? • What information can you share with wife about Mr. C? • Can you turn your files over to wife if she requests? • Girlfriend and contested wills? • U.S. real estate – foreclosure actions, pending sale, court action. • What law governs the disposition of his estate? Trust? • Who is entitled to his assets? • Trust Issues – loans, trustee conduct, distributions (living expenses and legal fees). • U.S. estate tax issues – what assets are subject to U.S. estate tax and how will tax be paid? • What planning would you have done for Mr. C had he come to you for estate planning?

6 Case 2

• Daughter begins her freshman year at the University of Miami in the fall term of 2017. • Parents and Daughter are not U.S. citizens or GC holders, and have spent fewer than 20 days in the United States each year over the past 3 calendar years. • Parents reside in France, but are UK domiciles of origin. • Daughter will spend 9 months + per year in the U.S. on a student visa. Sample Facts (cont’d). • Parents will buy a home in Coral Gables, FL, for the principal use of their daughter. Parents may later retire to Florida, so they are considering this as an investment in a retirement home. However, Parents will not spend significant time in the U.S. in the foreseeable future. • The prospective home under consideration is currently valued at USD 5 million. Case 2 Issues

• Four main ways to take title • Direct Ownership • Offshore Company • Two-Tier Partnership • Irrevocable Discretionary Trust • Each offers a mix of U.S. income and estate tax optimization • Which structure the clients choose is essentially a “business decision” 1) Direct Ownership

• Most basic method (default) • Parents own U.S. real estate individually or jointly 1) Direct Ownership (cont’d)

• Advantages: • Favorable long-term capital gains treatment • Step-up in basis at death • Disadvantages: • No U.S. estate tax protection • Property owned jointly by non-U.S. husband and wife could be subject to significant estate tax (double estate tax) • Probate will be necessary to transfer title to the U.S. real estate after death • No anonymity • Tort risk 2) Offshore Company

• Parents establish a company in an offshore tax-friendly jurisdiction such as the BVI (the “Offshore Company”) • Recommended: interpose U.S. company between the Offshore Company and U.S. real estate to facilitate administration of the property. 2) Offshore Company (cont’d)

• Advantages: • U.S. estate tax protection, but care must be taken to respect entity • Lower cost of implementation and maintenance • Anonymity • Tort liability • Disadvantages: • No capital gains efficiencies • No stepped-up basis at death • Branch profits tax may be an issue 3) Two-Tier Partnership • Create a foreign entity that will be considered to be a partnership for U.S. purposes (upper-tier partnership) • Offshore partnership creates a U.S. or foreign partnership (lower- tier partnership) that holds U.S. real estate • Interest in lower-tier partnership is held by the upper-tier partnership 3) Two-Tier Partnership (cont’d)

• Advantages: • Favorable capital gains rates • Step-up in basis • Disadvantages: • U.S. estate tax protection not guaranteed • High formation and maintenance costs

• Could further insulate the U.S. real estate from U.S. estate taxes by contributing the interest in the two-tier partnership to an irrevocable, fully discretionary trust 4) Irrevocable, Discretionary Trust • Parents establish irrevocable, fully discretionary trust • Fund the trust with sufficient capital • Newly funded trust purchases the desired U.S. real estate • (Trustee may require a non- U.S. corporate entity to hold the real estate) 4) Irrevocable, Discretionary Trust (cont’d)

• Important Distinctions: • Irrevocable v. Revocable • Discretionary v. Fixed-Interest • Advantages: • Estate tax protection may be achieved • Favorable capital gains rates • Simple • Disadvantages: • Consequences of achieving estate tax protection • Step-up in basis cannot be achieved • Possible U.S. reporting issues Other considerations • Financing US Tax Residency • Special state mortgage rules (e.g., CA) US Income Taxes US Transfer Taxes • Sharia Law (Including Capital Gains (Including Estate & Gift • Put your structure in place before you move Taxes) Taxes) • Consider the type of property Tests: Test: Domicile (i) “Green Card,” or • Don’t ‘accidentally’ trigger U.S. income tax or U.S. (ii) Day Counting transfer tax regime (or both) (“Substantial • Plan should be flexible in case daughter becomes Presence”), or U.S. person (iii) Special Election • What if tax laws change? What approach is best? • What about reporting under CRS in home country? • Can Parents elect UK law to apply to avoid France’s forced heirship rules? Case 3

• Assume parents already own real property in Florida that they bought for USD 250,000 and is now worth USD 1.5 million. • They come to you for U.S. tax and estate planning. • What do you recommend?