Gift & Estate Planning for Foreign Nationals

Transcription

1 1-Hour CE Seminar Gift & Estate Planning for Foreign Nationals OLA This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Importance of Estate Planning for Foreign Individuals Expanding global economy Need for planning Impact of U.S. transfer taxes 2 1

2 Defining the Market Metropolitan Area % of Population that is Foreign Born Boston 14% Miami-Fort Lauderdale, FL 38% Dallas-Fort Worth, TX 16% San Francisco, CA 34% Los Angeles, CA 33% Las Vegas, NV 21% Geoscape national DMA report 2013 *The foreign-born population includes anyone who was not a U.S. citizen or a U.S. national at birth. This includes respondents who indicated they were a U.S. citizen by naturalization or not a U.S. citizen. (U.S. Census Bureau, American Community Survey 2007 Subject Definitions). 3 Defining the Market: Foreign National Transfer Tax Planning Foreign national gift and estate tax planning targets Non-U.S. citizens Resident aliens (RA) Nonresident aliens (NRA) 5 Determining Residency Domicile Resident or nonresident status for U.S. gift and estate tax purposes determined by location of individual s domicile Domicile is defined as the location at which a person lives and at which the person intends to remain indefinitely Person with domicile outside of U.S. is NRA U.S. domicile results in RA status Domicile test is subjective test based on one s intent Income Tax Resident does not equal Estate Tax Resident 8 2

3 Primary Planning Concerns for Foreign Nationals U.S. Gift and Estate Tax Issues NRA obtains U.S. resident status Marriage to non-u.s. citizen, whether RA or NRA Liquidity to pay U.S. estate taxes 6 U.S. Tax Treaties with Foreign Countries U.S. has income, gift, and estate tax treaties with many countries that may preempt general U.S. estate and gift tax rules Some countries with which the U.S. has gift tax treaties: Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom Some countries with which the U.S. has estate tax treaties: Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, South Africa, Switzerland, and the United Kingdom 7 Estate Tax Comparison: RA vs. NRA Resident Alien (RA) Non-Resident Alien (NRA) Estate tax exemption Same as U.S. citizen $60,000 Estate tax rate Same as U.S. citizen Same as U.S. citizen Unlimited marital deduction Assets subject to U.S. estate taxes Only if assets inherited by non-u.s. citizen are transferred to QDOT All worldwide assets Only if assets inherited by non-u.s. citizen are transferred to QDOT U.S. sitused properties, including most intangible properties* * Intangible property includes stock in a U.S. corporation and interest in a U.S. partnership 9 3

4 Assets Worldwide Can Be Included Example: Maria, a Mexican Citizen with a Green Card $10 Million in U.S. Assets $15 Million in Mexican Assets $5 Million in Canadian Assets What is the value of her estate for U.S. tax purposes? 10 Why Planning Is Important: NRAs Example: Ricardo Montalbano, Brazilian national, Non-Resident Alien $10 million in U.S. property and investments No advanced planning Death in 2014 or later Tentative Federal Estate Tax ($3,945,800) Less Credit $13,000 Net Estate Taxes ($3,932,800) Net U.S. Assets $6,067,200 Estate Shrinkage = 39% 11 Gift Tax comparison: RA vs. NRA Resident Alien (RA) Non-Resident Alien (NRA) Gift tax rate Same as U.S. citizen Same as U.S. citizen Annual gift tax exclusion amount Lifetime gift tax exemption amount Assets subject to U.S. gift taxes $14,000 $145,000 for gift to non-u.s. citizen spouse Unlimited to U.S. citizen spouse * Indexed for inflation, $5,340,000 in 2014 **Tangible property includes cash, jewelry, paintings, automobiles $14,000 $145,000 for gift to non-u.s. citizen spouse Unlimited to U.S. citizen spouse $5,340,000* None All worldwide assets All U.S. sitused property including real property and tangible assets.** Intangible property is not included 12 4

5 Non-Resident Aliens: U. S. Gift and Estate Situs Rules Type of property transferred Subject to U.S. Gift tax Subject to U.S. Estate tax Real property located in U.S. Yes Yes U.S. tangible personal property (i.e., cash, jewelry, paintings, automobiles) U.S. intangible personal property (i.e., stocks in U.S. corp., interest in U.S. partnership) Ownership interest in a U.S. life insurance policy on the life of another Ownership interest in a U.S. life insurance policy on oneself Yes No No No Yes Yes Yes No 13 Non-Resident Aliens: U.S. Gift Taxes Planning strategies that may minimize gift taxes: Remove tangible personal property from U.S. prior to gift Convert tangible property into intangible property Examples: U.S. cash deposited to a U.S. bank Contribute tangible property to a corporation or partnership, then gift intangible interest of corporation or partnership 14 Planning for the NRA: Example Example: Alicia Santoso Indonesian national, Non-Resident Alien Single $10 million in U.S.-based commercial real estate and cash Planning strategies Consider transferring commercial real estate into a business entity, such as family limited partnership, LLC, or C corporation Gifting shares of business entity as appropriate Purchasing life insurance through a grantor trust to assure estate liquidity for non-gifted assets 15 5

6 Qualified Domestic Trusts (QDOT) Creating a QDOT QDOT Requirements Additional Requirements for Large QDOTs 16 Qualified Domestic Trusts (QDOT) Creating a QDOT Can be established in the estate documents of decedent Can be created by surviving noncitizen spouse within nine months of decedent spouse s death Property transferred can qualify for the unlimited marital deduction thereby deferring payment of estate tax liability. Qualification requirements 17 Qualified Domestic Trusts (QDOT) Creating a QDOT QDOT Requirements Income Paid Annually to Non-Citizen Spouse U.S. Trustee Requirement Withholding Requirement QDOT Election Requirement Situs Requirement 18 6

7 Qualified Domestic Trusts (QDOT) Creating a QDOT QDOT Requirements Additional Requirements for Large QDOTs If the value equals or exceeds $2 million: Name a U.S. bank or trust company to act as trustee Post a bond or produce letter of credit (65% of FMV) 19 QDOT Planning Alternative Gifting Program using Super Annual Exclusion Planning option utilize a gifting program to non-u.s. citizen spouse $145,000 annual exclusion to gift funds to non-u.s. citizen spouse to purchase life insurance policy 20 Taxation of Life Insurance Death Benefits Insurance proceeds on life of NRA are not U.S. situs property and not included in decedent s gross estate NRA can own life insurance policy on own life, and death benefits will not be subject to income or estate taxes Life insurance can provide liquidity to pay estate taxes on NRA s U.S. situs property 21 7

8 Non-Resident Aliens and Life Insurance Potential problem NRA s withdrawal of income results in 30% tax and withholding Potential solution For non-mec contracts, withdraw up to basis and then take loans to avoid income taxes Tax and withholding could possibly be avoided by purchasing an offshore product 22 Summary: Planning Questions for Foreign Nationals Is the foreign national a Resident Alien or Non-Resident Alien? Is planning to minimize U.S. gift and/or estate taxes needed? If there is projected estate tax liability, does client have liquidity to pay tax, and can life insurance provide these funds? 23 All solicitation and communication (including marketing materials) concerning the sale of life insurance products, including all telephone, fax, or other electronic or delivered correspondence to a foreign national must take place in the U.S. For details, refer to Growing Your Business Through the Foreign National Market, Guide to Foreign National Underwriting and Support (OLA 1871). Transamerica Life Insurance Company ( Transamerica ) and its representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal tax laws in effect at the time of presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica s interpretations. Additionally, this presentation does not consider the impact of applicable state or foreign laws and regulations or income or estate tax treaties between the U.S. and other countries upon clients and prospects. Clients should consult with and rely on their own legal and/or tax advisor to determine the consequences, if any, of owning or receiving proceeds from a Transamerica policy. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of February Transamerica Life Insurance Company is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN In the state of New York, Transamerica Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO ) Web site:

9 1-Hour CE Seminar Gift & Estate Planning for Foreign Nationals OLA