International Tax – Global Estate Blog

Frequently Asked Questions

Will or Trust?

The Trust is the only Estate Plan that does not require Court involvement. A Will still requires the Executor to go through the Court Probate Process that can last years.

Any beneficiary designations on financial accounts or joint tenancy for real estate are not affected by the Will (the beneficiary designation and joint tenancy overrides the Will.)

Gift v. Primary Beneficiary?

Gifts can be a set amount of cash, a personal item, or real property.

Gifts are distributed first and satisfied “off the top”, with the remainder going to the primary beneficiaries allocated out of 100% (e.g. 50%, 20%, 30%.)

If I am establishing a Trust, why do I also need a “Will”?

The Pour Over Will is complimentary and “part and parcel” of the Trust. One of the main purposes is to act as a “catch-all” by declaring that all property not held in trust at the time of passing is deemed to be transferred and held in Trust.

What is the Difference Between a Trustee, Executor and Guardian?

The Trustee is responsible for administering (i.e. ensuring the written wishes are effectuated) the terms of the Trust. The term Trustee is exclusive to the Trust.

The Executor is responsible for administering the terms of the Will. The term Executor is exclusive to the Will.

The Guardian is the person you nominate to take over the parental responsibilities for your minor child(ren) in the event you pass prior to the child(ren) reaching 18.

Does the Trustee, Executor, and Guardian have to be the Same Set of Individuals?

Usually the Trustee and Executor is same individual in the same order/sequence.

The Guardian often is the same as the Trustee/Executor as it is administratively more efficient (no splitting of the power of the purse v. responsibility of day-to-day care among different individuals).

Who Should be the Successor Trustee or Executor?

While alive the settlor(s) or sometimes referred to as grantor(s) (individual establishing the Trust) will also be the Trustee.

For the post death successor Trustee/Executor, the settlor(s) will often look to qualified family members. (When spouses involved the surviving spouse is the first Successor Trustee/Executor.) Ideally the successor Trustee/Executor will be well organized and have a good grasp of financial and/or legal matters. The successor Trustee/Executor will be able to consult an attorney or CPA if he or she requires assistance regarding the Trust or Will administration.

Nominating a Non-U.S. citizen/resident spouse or relative should only be in conjunction with naming also a U.S. resident as co-trustee (2 Trustees acting together).

What Type of Compensation is Common for the Trustee?

While there is no set standard, commonly reasonable compensation, or an annual fee ranging from 0.5% to 5% of asset, depending on size of assets, prorated by number of days served.

Disclaimer

Gift Tax: Advantage of Foreign Investment in U.S. Stocks and Bonds

One of the foreign investor’s favorite investments is U.S. real estate. However, from a tax planning perspective there are other asset categories to consider.

In the U.S. the “estate tax” refers to taxation upon death. The “gift tax” means transfer tax, and applies to gifts made while alive.

From a gift tax perspective, intangible assets such as U.S. stocks and bonds are a preferred asset.

In the U.S. the gift tax only applies to real property and tangible property. It does not apply to intangible property.

The advantage for a Non-Resident Alien (“NRA”) acquiring stocks and bonds is that it can be gifted to anyone, including other NRAs, family, or U.S. residents, all without incurring any U.S. tax liability. There may however still be a tax reporting requirement.

There is also an opportunity to avoid U.S. estate (“death”) taxation for the NRA. As long as the NRA investor holding the intangible property has advance notice and awareness of his or her failing health, he or she can gift the asset to the preferred recipient.

The NRA can also take precaution for a sudden or unexpected death. The most common solutions include life insurance and an Estate Plan, such as a Trust.

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Naming a Foreign Relative as Trustee for a U.S. Trust

Introduction

In Metropolitan areas, such as the San Francisco Bay Area, it is common to have an estate planning client inquire about naming a foreign relative as Trustee or Co-Trustee.

Naming a Non-Resident Alien (“NRA”) relative as Trustee can cause the U.S. Trust to be re-characterized, for U.S. tax purposes, as a foreign trust due to the NRA’s exercise of substantial control of the Trustee powers.

If the goal is to maintain the Trust as a U.S. domiciled trust the requirements of Treas. Reg. Section 301.7701-7 of “court test” and “control test” must be satisfied.

Court Test

For this test to be satisfied a court within the United States must be able to exercise primary supervision over the administration of the Trust. There is a safe harbor if the following three requirements are met:

The trust instrument does not direct that the trust be administered outside the United States;
The trust in fact is administered exclusively in the United States;
The trust is not subject to an automatic migration provision described in Treas. Reg. Section 301.7701-7(c)(4)(ii).

Control Test

This test requires that one or more U.S. persons have the authority to control all substantial decisions of the trust. Treas. Reg. Section 301.7701-7(d)(1)(ii).

“Control” means “the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.”

Tax Impact of Foreign Trust Status

Depending on the circumstances, capital gain realization may be imposed on the transfer of property to the “now foreign trust”, i.e. forced sale treatment.

One Year Period to Cure Unintended Loss of U.S. Trust Status

If a U.S. Trust becomes a Foreign Trust due to the nomination of a NRA Trustee, the Trust has 12 months from the date of cessation of U.S. Trust status to reassert U.S. status by satisfying the aforementioned requirements of the “court test” and “control test”.

Conclusion

While it is not impossible to have a NRA relative act as Co-Trustee, the NRA relative should never be nominated as sole acting Trustee.

Even if a NRA relative is nominated as Co-Trustee, the Trust terms must make clear that any tie breaking decision is made by the U.S. Co-Trustee.

Disclaimer

The Dangers of Naming a Foreign Relative a Co-Owner On Title to U.S. Real Property

A common occurrence is for a U.S. citizen or permanent resident to buy U.S. real estate with the assistance from a Non-Resident Alien (“NRA”) relative such as a parent, sibling, or grandparent.

Usually the initial contact person will be a real estate broker. In California, the vast majority of real estate brokers will use standard California Association of Realtor (“CAR”) forms.

It is important to know that the standard CAR disclaims responsibility for any legal or tax advice. This obligation and risk is contractually put onto the purchaser or seller, meaning the purchaser or seller is obligated to separately consult and arrange for any legal or tax advice.

Since the real estate broker is being paid on commission, his or her main interest will be to complete the sale of the property as soon as possible. Any due diligence regarding the condition of the property, tax planning, or consideration of legal implications will be viewed by the realtor as a potential risk of causing the sale to be delayed or fall through.

One question that will have to be decided at the time of purchase is who and how to take the title to the real property. Often the NRA relative who is contributing money will want to have some control or interest and be named as co-owner to the real property.

The impact of this decision, without proper legal and tax planning, runs a significant risk of a surprise tax hit or legal claims. Depending on the objectives there may be alternate solutions to meet the objectives of the contributing NRA relative.

The best time to properly structure an acquisition or sale of California real property is prior to the acquisition, or immediately thereafter. As one builds equity over time, the longer the wait, the higher the risk of the tax implication. Another factor is how the property is transferred, by gift or by sale, or a combination of both.

If you are a foreign investor interested in acquiring California real property, there are significant and complex tax, legal, and business cost considerations. You do not want to be caught unaware and wind up paying more money than is necessary, with less remaining for your family members.

For additional information on structuring a California real property investment, please contact the Law Offices of Hanlen J. Chang.

Additional information can also be found in this prior post.

Disclaimer

Pre-Immigration Tax Planning to the United States

Purpose of Pre-Immigration Planning

Because a U.S. citizen or resident alien is taxed on his or her worldwide assets and income, a prospective immigrant from a lower territorial tax country needs to seriously consider pre-immigration tax planning.

U.S. Residence for Income Tax Purposes

An individual is considered a Non-Resident Alien, and is thus not considered a resident for U.S. tax purposes, if the weighted number of days spent in the U.S. within the last 3 years combined is less than 183 days, or the individual spent less than 31 days in the U.S. in the most current year.

U.S. Domicile for Transfer Tax Purposes

For transfer tax purposes, an individual is a U.S. resident if he or she intends to remain in the U.S. indefinitely as determined by the totality of circumstances.

Taxation of Non-Resident Alien

If one is neither a resident for U.S. income tax or transfer tax purposes, one is considered a Non Resident Alien (“NRA”) and is subject to taxation on income effectively connected with a U.S. trade or business or from passive U.S. sourced investments such stocks, bonds, and rental income.

Mitigating the Impact of U.S. Taxation

For those seeking to mitigate or avoid higher U.S. taxes or in some circumstances double taxation from two jurisdictions, there are various strategies. The most commonly utilized strategy is pre-immigration gifting of assets, including partial disposition with retention of income stream through an Non-U.S. irrevocable trust or legal entity. Other options include capitalizing on the home country’s lower capital gains tax rate by selling assets with substantial appreciation.

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