International Planning

Most of the clients who seek our help in the international law area are non-resident aliens who want to invest in US property and companies. The usual scenario is that a man and his wife or just one of them alone wishes to buy property in the United States. They want to make sure that upon their death or when they originally buy the property that it is not subject to any gift or estate tax.

The estate, gift and generations skipping transfer tax are three distinct transfer taxes on the gratuitous transfer of property. The gift tax applies to transfers during lifetime. The estate tax applies to transfers at death and the generation skipping transfer tax applies to transfers of property that skip a generation from the transferor to a person or persons at least two generations below that of the transferor.

Non Resident Aliens

In order to apply the correct principals with respect to the transfer taxes, it must first be determined if the individual is a US taxpayer or citizen or a permanent resident. If the person fits into any one of those modes, then their estate planning is different and unique. However, estate and gift tax planning for non-resident aliens is a completely different process. US citizens and residents are subject to worldwide estate and gift tax on death and lifetime gratuitous transfers. Individuals who are neither US citizens nor residents are only subject to US transfer tax on property that is situated in the United States. In addition, non-resident aliens may not be subject to US gift tax on the transfer of intangible property if the transfer is properly made. However, if it is deemed to be situated in the United States, then there may be some problems.

Many of our clients are non-resident aliens who want to invest in US real estate. When a mortgage is involved with respect to the property purchased, if it is non-recourse, only the equity value of the real property is includable in the US gross estate. On the other hand, if it is a recourse mortgage and a personal obligation of the non-resident alien, and is an obligation against his or her estate, the total fair market value of the US real property is included in the non-resident’s estate.

Non-resident aliens frequently use non US corporations or LLCs to acquire title to real property located in the United States. In most cases, our clients elect to set up an Offshore Trust. This gives them the asset protection that they may need later on and also provides for the beneficiaries of the Trust, usually upon the death of the maker of the Trust (the client in this case). We use Modular Structure Planning so that the Offshore Trust sets up an Offshore LLC which in turn holds a one hundred percent member interest in a Domestic US corporation or LLC that owns the property. If the non-resident alien already owns real property in the United States, it may be possible for him or her to transfer it into non US intangible personal property by converting it to a domestic corporation owned by a foreign corporation or LLC. There may be gift and income tax consequences of such action, so the client must consult with an attorney who is familiar with the required process. Such consequences require careful analysis.

As an example of the structure discussed above, we will use the following scenario:

Example of Planning For Non Resident Aliens

Sung Lee Tran is a resident of China. Mr. Tran does not meet any of the requirements for citizenship or domiciliary status for US purposes. Mr. Tran wants to buy two properties in California, one a residential and the other a commercial building. Mr. Tran should consult with an experienced attorney in this area who will form the Offshore Trust for the benefit of Mr. Tran and his heirs. The Offshore Trust will then own Offshore LLCs. LLC No. 1 will be used for offshore investment and LLC No. 2 will be used as a holding company. There are then two Domestic LLCs formed (“LLCs No. 3 and No. 4”). The properties in question are each then purchased by the two respective Domestic LLCs which are owned by the Offshore LLC No. 2, (which is, in turn, owned by the Offshore Trust). As we stated previously, it still may be possible to avoid Estate and Gift Tax with respect to these properties even if they were purchased in the individual’s name before being transferred to an LLC. In this regard, however, the risk is much greater that gift tax may occur. It is always better to purchase the property initially in the structure explained above.

As stated, if the individual has first purchased the property in his own name, as Mr. Tran did, he can still carry out the above structure, but there is risk involved. If the property is mortgaged, then the client can make a gift to the beneficiary of the Trust of the amount of the down payment. This gift will be in US dollars, but the transfer is initiated offshore. This reduces any possibility of an argument that there were gift or estate tax consequences upon the transfer of the property into LLCs No. 3 and 4.

There are a myriad of other estate gift and income tax considerations that must be considered by the non-resident alien investor. This is a specialized area of the law and not only should a top estate planning lawyer be involved, but also a CPA with knowledge of international tax consequences.

For non-resident aliens, the normal estate and gift tax credit that is available to US citizens and residents is not available. Therefore, the estate and gift tax becomes very, very significant and of great amount. Once we assist our clients in setting up the structure that we have explained here, we always recommend that they contact a CPA who is well versed in this area. With respect to the Offshore Trust, there should also be some connection to the Trust company in the sense that the Trust company is known and recommended by the attorney processing the structure. This Offshore Trust structure requires years of experience and connections in order to be properly set up.

In conclusion then, if Mr. Tran follows this structure and recommendations, he would form the Offshore Trust with the assistance of an experienced attorney in this area. He will then form the Offshore LLCs and the Domestic LLCs. Finally, he would meet with a qualified CPA who is well versed in dealing with non-resident aliens who own property in the United States. If he follows the above mentioned process correctly, then Estate and Gift Tax will be avoided and any beneficiary will receive the Trust assets tax free.

It should be stated that a complete discussion in this area is really the subject of a much more detailed and longer review. Determining if a non-resident alien is a US taxpayer is a subject that requires study in and of itself. There is also the issue of corporate and LLC interests held in the US.

To avoid any issue relevant to gifts of money from a non-resident alien to a US taxpayer, the gift should be made offshore, either in an offshore bank account of the donee or by wire transfer from an offshore account to the US account.

The QDOT

Important estate planning can be accomplished by setting up what is denominated a Qualified Domestic Trust (“QDOT”), for the benefit of the surviving spouse. The marital deduction is allowed for transfers to the non US citizen spouse if the property transferred is held in QDOT for the benefit of the spouse. The QDOT provisions are highly technical and require much experience by the attorney in this area.

Gift Tax

Gift Tax considerations must always be addressed. The tax does not apply to intangible personal property such as corporate stock. It is obviously better, if the gift is generated offshore and not in the US. Every transaction needs to be carefully reviewed to determine its estate, gift and income tax issues.

Offshore Entities

Independent of tax consequences, setting up an offshore entity requires careful and experienced skill. One has to be aware of the laws of the desired country in which the entity will be domesticated and, at the same time, have connections in that country who are honest and knowledgeable. Setting up the offshore company is similar to the requirements for setting up a US domestic company except that there are various additional requirements that need to be complied with in order to have the entity properly organized. The offshore countries and the agencies working under them for entity supervision require due diligence documents that are not required in US. FATCA has imposed very strict comprehensive requirement on offshore jurisdictions.

These due diligence documents include bank reference letters, biographical sketches, a detailed explanation of source of original funds, a detailed description of the business that will be carried on by the entity and some information about the owner of the entity which would include a copy of passport or driver’s license and other personal information about the proposed owner.

Like a domestic entity, the name has to be approved and dissimilar to other names utilized in the country involved, and an agent for service of process in the relevant jurisdiction has to be appointed. This may not be as easy as it seems because one has to have had experience and have confidence in dealing with the offshore agent. There are many such agents who advertise on the Internet, many of whom are not qualified and should not be considered as viable alternatives for the agent selection. The preferred process would be to hire an experienced US attorney who can then work with an attorney that he knows and has confidence in the country involved, who will also know a legitimate agent to be appointed. Although this Section does not directly deal with the tax consequences of operating offshore, they must be considered and reviewed by an experienced professional.

Income Tax Considerations

Many people are under the impression that income tax can be avoided by setting up an offshore entity. This is generally not true. There are certain guidelines that have to be met in order for the tax consequences to be mitigated which include actual management offshore and a non-resident alien owning at least 50% of the entity.

We have some clients who do business internationally over the Internet and they have offshore entities to complement their domestic entities. Of course, it is easier for the attorney involved if the entities have not been formed so that they set up the structure in the way the client desires. However, even if the client has set up some of the structure, the attorney can then take it from there and add to or adjust the structure as needed.

In most countries there is no domestic tax on international entities. However, registration and continuing annual fees are much more expensive in some countries than in others. Also the amount of compliance documentation may be greater in some jurisdictions than in others. It is very important to have a US attorney coordinate this so that a complete analysis of the situation can be made including US and the offshore laws and US tax consequences.

Conclusion

With respect to the offshore entity and the process set forth above and in the creation of any offshore entity for purposes of carrying on business, one of the chief challenges is to be able to open a bank account which can operate as the disbursement and receiving source for the funds that are acquired. It is now extremely difficult to open such an account if there is an American connection. The account does not have to be in the country of the jurisdiction for the formation of the entity. The entity can open a business account in another country, which may be more economically sound and make for better business practice.

Anyone who already has an offshore trust or desires to set one up needs to be aware of the laws of the jurisdiction involved and the consequences and ramifications of utilizing that jurisdiction rather than another jurisdiction which may have more favorable laws. Expenses of setting up and maintaining such trust and annual compliance fees have to carefully be reviewed because there can be a large disparity between countries in this regard. Moreover, there may be US income tax ramifications that have to be reviewed and analyzed before the process can be created and structured.

For more information on International Planning In California, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (714) 384-6500 today.

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