International Issues. Affecting. Domestic Planners

(1)

Affecting

Domestic Planners

Houston Business & Estate Planning Council

October 22, 2009

Robert D. Colvin

(2)

Overview of Presentation

Offshore Voluntary Disclosure Initiative

Foreign Trusts

Foreign Assets Held by US Persons

US Assets Held by Foreign Persons

Impact of Foreign Investor on US business owners

Non-US Citizen Spouses

(3)

Offshore Voluntary

Disclosure Initiative

(4)

Voluntary Disclosure Initiative

October 15 Deadline

…

.oops!!!

Undeclared foreign income, accounts

& reporting

Program Framework

(5)

Prevailing Wind Blows Onshore

Domestication of Foreign Trusts

Conversion of foreign entities

Closing of foreign accounts

But foreign trusts, accounts & companies

still have their proper uses

(6)

It is illegal for a US person to

put money in a foreign trust.

You don

’

t have to pay taxes on

income earned thru a foreign

trust.

No one will know you have a

foreign trust.

Creditors can

’

t get to assets in

your foreign trust.

US residents are free to set up

foreign trusts.

“

Grantor trust

”

rules require US

settlor to pay tax on trust

’

s

income each year.

Foreign trust is reported on US

settlor

’

s annual income tax

return.

It is more difficult for creditors to

seize foreign trust assets.

(7)

(8)

Asset Protection nest egg

Access to Foreign Investments

Private placement life insurance

SEC restrictions

(9)

Asset Protection nest egg

Access to Foreign Investments

Estate planning for International

Families

(10)

Bahamas

Bermuda

Cayman Islands

Cook Islands

Guernsey

Jersey

Nevis

(11)

Foreign Trusts

During the Settlor

’

s lifetime

(12)

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

U.S. Settlor

_{U.S. Settlor}

)

U.S. Settlor +

any

U.S. Beneficiaries

=

“

Grantor

”

trust

All trust assets and income attributed to

U.S. Settlor

(13)

U.S. Settlor +

any

U.S. Beneficiaries=

“

Grantor

”

trust

All trust assets and income attributed to

U.S. Settlor

No significant income tax advantage

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

(14)

All trust assets and income attributed to

non

-

U.S. Settlor

As an NRA, the Settlor is not a U.S. taxpayer

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

(15)

All trust assets and income attributed to

non

-

U.S. Settlor

Allows tax

-

free distributions to U.S.

Beneficiaries as previously taxed income

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

(16)

“

Grantor

”

trust status

only if

:

Grantor has authority to revest trust property

in themselves:

Revocable;

or

No trust distributions during grantor

’

s lifetime

except to Grantor or spouse

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

(17)

“

Grantor

”

trust status

only if

:

Grantor has authority to revest trust property

in themselves:

Revocable;

or

No trust distributions during grantor

’

s lifetime

except to Grantor or spouse

“

Grantor

_Grantor

”

_”

Trust Rules

_{Trust Rules}

(

(18)

After Settlor

’

s Death

(U.S. or Non

-

U.S. Settlor)

Trust perfects for income tax purposes

No longer grantor trust

Taxed as separate entity

Taxable as non

-

U.S. resident alien (

“

NRA

”

)

(19)

After Settlor

’

s Death

(U.S. or Non

-

U.S. Settlor)

Trust perfects for income tax purposes

Section 684 Deemed Disposition

Exception if assets included in US taxable

estate

(20)

Nongrantor

Trust

Accumulated

Income/Gains

The

(21)

The

“

Pregnant Trust

”

Problem

Accumulated income distributions

All treated as ordinary income

Lose capital gains character

Section 668 Interest Charge

Tax & interest charge limited to 100% of

distribution

(22)

“

DNI

”

-

Current year trust income

Retains original character

“

UNI

”

-

Income accumulated in

prior years

All high tax ordinary income

Interest charge

Capital distributions

Tax-free

DNI

UNI

Capital

Trust Distribution Ordering Rules

(23)

“DNI” - Current year income of trust

Retains original character

“FAI” - Fiduciary accounting income

Tax-free in excess of current year

DNI

“UNI” - Income accumulated in prior years

All high tax ordinary income

Onerous interest charge

Capital distributions

Tax-free

DNI

FAI

UNI

Capital

Trust Distribution Ordering Rules

(24)

Split Trust Solution

Corpus

Trust

SOLELY

Corpus/Principal

U.S. Income

Trust

SOLELY

Accumulated

Income & Gains

Annually Decant

Excess Income/Gains

Investment Assets

(stocks, bonds, etc.)

Investment Assets

(25)

Primarily used by non

-

U.S. persons

Any substantial decision by non

-

U.S. persons

= Foreign Trust

Pre

-

domestication choreography

U.S. and Foreign Trustees

Pre

-

immigration planning

The

(26)

Inheritance of Foreign Assets

Nature of the inherited asset & holding structure

Foreign trusts

Foreign companies

CFC,

PFICs

, etc.

Operating businesses

Foreign

vs

domestic estate?

Foreign source income is exempt

Big advantage over foreign trust

–

No UNI

Quirks of civil law countries

Not recognize trusts

(27)

Foreign Assets Held by US Persons

Coordinate with U.S. Will

Foreign Wills

POD Accounts

Ancillary administration

Trusts in civil law jurisdictions

(28)

U.S Assets

Held by

Foreign Persons

(29)

Basic Income Taxation of

NRAs

NRA or income tax resident?

Green card

Physical presence test

30% withholding tax on U.S. source FDAPI

Capital gains are exempt unless:

Effectively connected with a U.S. trade or business

U.S. real property interest

Special FIRPTA withholding rules

(30)

Domicile

vs

income tax residency

Unified credit exemption amount only $60,000

Not available for

inter vivos

gifts

Annual exclusion is available

Taxable on U.S. situs assets

Tangible property

Real estate, home furnishings, artwork & collectibles

Intangible property

Inter vivos

intangibles gift tax exception

Cash

vs

bank accounts

Gold in lockbox

(31)

NRA Individual

$$

U.S.

Investments

Concerns

• US estate tax

• US income & capital

gains tax

• Reporting

Investment in US Assets

(32)

(

(Traditional Solution

)

Foreign Corp

U.S.

Investments

NRA Individual

$$

• Avoids US estate tax

• Reporting only at corp level

(33)

Foreign Corp

U.S.

Investments

NRA Individual

$$

$ 100

Income or Cap Gain

<35>

Corporate tax (35%)

$ 65

<19.5>

Dividend tax (30%)

$ 45.5 Net After Tax

======

(

(34)

Foreign Corp

U.S.

Investments

NRA Individual

$$

(

(Traditional Solution

)

$ 100

Income or Cap Gain

<35>

Corporate tax (35%)

$ 65

<19.5>

Dividend tax (30%)

$ 45.5 Net After Tax

======

(35)

(Income Producing)

Foreign Ptshp

U.S.

Investments

NRA Individual

$$

US Ptshp

$$

$ 100

Income

<35>

Individual tax (35%)

$ 65

< 0 >

Dividend tax (None!!)

$ 65 Net After Tax

(36)

(Income Producing)

Foreign Ptshp

U.S.

Investments

NRA Individual

$$

US Ptshp

$$

$ 100

Income

<35>

Individual tax (35%)

$ 65

< 0 >

Dividend tax (None!!)

$ 65 Net After Tax

======

(37)

(Taxable Capital Gain)

Foreign Ptshp

U.S.

Investments

NRA Individual

$$

US Ptshp

$$

$ 100

Taxable Capital Gain

<15>

Individual LTCG (15%)

$ 85

< 0 >

Dividend tax (None!!)

$ 85 Net After Tax

(38)

(Taxable Capital Gain

)

Foreign Ptshp

U.S.

Investments

NRA Individual

$$

US Ptshp

$$

$ 100

Taxable Capital Gain

<15>

Individual LTCG (15%)

$ 85

< 0 >

Dividend tax (None!!)

$ 85 Net After Tax

======

(39)

So you have a Foreign

Partner in your US business?

(40)

If you are operating as a US corporation

30% withholding on dividends

(41)

US corporations

If you are operating as a US LLC or

Partnership

Quarterly tax withholding and remittance

Impact on venture

’

s cash flow

Foreign partner must file US tax return

Foreign partner may establish US corp as

its investment vehicle

(42)

US corporations

US

LLC

’

s

& Partnerships

Portfolio Interest Exception

No US tax on the interest payment

Interest deductible by US business

10% ownership limitation

(43)

US corporations

US

LLC

’

s

& Partnerships

Portfolio Interest Exception

US Estate Tax concerns

Certain countries have no estate tax

US situs assets such as stocks & real estate

(44)

Planning for

Non

(45)

Problem (Non

-

Citizen) Spouses

No unlimited Marital Deduction on gifts or

bequests to a non

-

citizen spouse

Annual gift exclusion of $133,000

Qualified Domestic Trust (

“

QDOT

”

)

But $3.5mm unified credit exemption if decedent is

US citizen or domiciliary

(46)

Transfers of Property Between Spouses

General rule:

No gain on transfers of property between spouses

Non

-

US citizen spouse exception:

Gain (but not loss) is recognized on transfers to NC

spouse

…

but only if gain would otherwise be

recognized.

(47)

Low Interest Loan to NC Spouse

No requirement to impute interest between

spouses

No specific condition that spouse be US citizen

Bona fide debt obligation

Guarantees, collateral, adequate interest, economic

substance

Objective: Shift earnings in excess of loan

interest rate to non

(48)

Private Placement

Insurance & Annuities

(49)

Trust Framework

Settlor

Trustee

Beneficiaries

contribution

(50)

Insurance Parallel Framework

Settlor

Trustee

Policy Holder

Insurer

Beneficiaries

contribution

(51)

Income Tax Benefits

$$

Portfolio

Investments

Trust, LLC or FLP

PPLI Policy

$$

Tax Free

Inside

Build-Up

(52)

PPLI Policy

A

Trust, LLC or FLP

$$

B

C

X

D

E

Y

Tax Free

Shifting

Among

Investments

Income Tax Benefits

(53)

PPLI Policy

$$

Trust, LLC or FLP

$$

Tax Free

Access to

Policy

Values

$$

Portfolio

Investments

Income Tax Benefits

(54)

Tax Free Death

Benefit:

• Portfolio

Investments

• True Insurance

Benefit

PPLI Policy

$$

Portfolio

Investments

Trust, LLC or FLP

$$

Income Tax Benefits

(55)

DVA

or Life Policy

US Investor

$$

No Attribution

through

Insurance

Products

(56)

Objectives

1.

1. Avoid U.S. tax and

Avoid U.S. tax and

interest charge on

distributions to U.S.

beneficiaries.

2.

2. Avoid home country

Avoid home country

tax issues for NRA

settlor.

3.

3. Establish dynasty

Establish dynasty

trust free of U.S. gift,

estate and GST taxes.

NRA

Offshore Trust

Non-MEC Life Policy

U.S. Beneficiaries

Separate Account Investments

(57)

Insurance as Estate Tax Blocker

DVA or Life Policy

$$

US Portfolio

Investments

NRA Individual

$$

Scenario

• No US income tax on portfolio

income

• Concerns re home country

income taxation

• Home country concerns re trusts

• US estate tax concern

(58)

Robert D. Colvin & Associates

12 Greenway Plaza, Suite 1100

Houston, TX 77046

Direct: (713) 666-6045

[email protected]

(59)

Circular 230 Legend

This presentation is intended to be a general discussion of

complex planning principles and does not constitute legal or

tax advice with respect to any specific transaction. Pursuant to

requirements related to practice before the Internal Revenue

Service, any tax advice contained in this presentation is not

intended to be used, and cannot be used, for purposes of (i)

avoiding penalties imposed under the United States Internal

Revenue Code or (ii) promoting, marketing or recommending

to another person any tax-related matter.