Washington, DC
◊
New York, NY
◊
New Haven, CT
◊
Chicago, IL
ESTATE PLANNING FOR
THE INTERNATIONAL
FAMILY: OPPORTUNITIES
FOR DELAWARE
Stanley A. Barg
Kozusko Harris Duncan
Estate Planning Council of Delaware
November 13, 2013
Importance of Estate and Tax Planning
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Persons subject to US taxation can realize substantial
savings through estate and asset planning.
US recognizes broad range of trusts and trusts play an
important role in many structures.
Particularly effective for non-US persons to take
professional advice before coming to or investing in the
US.
Also important for US persons who acquire assets
overseas or who have family members who reside
overseas and may not be US persons.
Asset Protection Planning
Citizens and Residents
Must pay U.S. income taxes on their worldwide
income
 Citizens – There are said to be 6 million
American citizens who live outside the US
 Residents for Income Tax Purposes
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 Green
Card Holders
 Substantial Presence Test
Substantial Presence Test
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An individual is considered a resident alien under the
substantial presence test if he or she was in the U.S. 183 days
or more during any calendar year.
Resident alien status can also be established under a threeyear test which counts 183 days to include:
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each day in the current year; plus
during the first preceding year, 1/3 days in the U.S.; plus
during the second preceding year, 1/6 days in the U.S.
General rule: to avoid resident alien status, average annual
days lived in the US should not exceed approximately 120
days.
Exemptions
Certain individuals such as students who enter
the U.S. on an F-1 visa, or other student visa
are exempt from the substantial presence test
for a period of time, usually five years.
 Closer connection test
 Use of treaties
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Non-Resident Aliens
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A non-resident alien is usually subject to US income
tax only on US source income.
Critical for students and other temporary visa
holders to plan as status changes.
Termination of Green Card status.
Liability for US Estate and Gift Tax
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US citizens and those deemed “resident” in the US for Estate
and Gift Tax Purposes are subject to a complex tax regime
on worldwide assets.
US “Non-residents” are subject to Estate and Gift Tax on US
situs assets such as US real estate, tangible personal
property (e.g. art) located in the US and securities of US
companies (estate tax only).
Residency for this purpose is based on domicile
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Domicile: where one lives with the intent to remain
Green Card Holders are generally presumed to be residents but
can in certain circumstances rebut the presumption.
Similarly, one with a temporary visa may nevertheless be
regarded as domiciled in the US.
Choice of Law – What Does it Mean to
Have a US Trust ?
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Importance of State Law
 Creation
 Taxation
 Rights of Parties
US Trust for Tax Purposes
 Control Test
 Court Test
US Trusts for US Tax Purposes
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Objective Rule – A trust is considered domestic for US
tax purposes only if:
a
US court can exercise primary supervision over its
administration (the court test), and
 the US fiduciaries have the authority to control all
substantial decisions relating to the trust (the control
test).
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A trust that does not satisfy both tests is a foreign
trust for US tax purposes
The Court Test
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A US court must be able to exercise primary
supervision over the administration of the trust.
Safe Harbor:
 The
trust instrument does not direct that the trust be
administered outside of the US
 The trust is actually administered exclusively in the US
 The trust is not subject to an automatic migration
provision
The Control Test
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One or more US persons must have the authority to control
all substantial decisions of the trust.
Substantial decisions include:
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Whether and when to distribute income or corpus
The amount of any distributions
The selection of a beneficiary
Whether a receipt is allocable to income or principal
Whether to terminate the trust
Whether to compromise, arbitrate or abandon claims
Whether to sue on behalf of the trust or to defend suits against
the trust
Whether to remove, add or replace a trustee
Investment decisions
Grantor Trusts with Foreign Grantors
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Grantor Trust Rules
 Who is the “Grantor”?
Foreign Grantors
 A trust (foreign or domestic) is treated as a grantor trust
only if the person deemed to own the trust is a US citizen or
resident or a domestic corporation.
 Designed to preclude the use of the grantor trust rules to
eliminate all US income taxation on foreign-source income
of a foreign grantor trust distributed to US beneficiaries
 Grandfather Rules
Exceptions
Revocable Trusts
 Irrevocable Trusts Benefiting Only the Grantor
and/or the Grantor’s Spouse
 Compensatory Trusts
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Non-Grantor Foreign Trusts
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Reporting requirements
Tax on Current Income
Throwback Tax and Interest Charge
 Minimization
 Isolate
Tainted Income with Cleansing Distribution
 Permanent Income
 Use of Default Method
 Life Insurance Products
 Domestication
The Use of Business Entities in Estate
Planning
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LLCs – The use of US Disregarded Entities
 Purchasing
property
 Foreign taxpayers with foreign assets
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Family Limited Partnerships
 Partnerships
and LLCs
 Facilitation of Transfers of Interests
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Used with trusts
Check the Box Entities
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Election out of default classification
Made on Form 8832, Entity Classification Election
Generally effective on date filed
 75-day
retroactive election
 12-month prospective election
 Timing Issues
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60-month moratorium on change after election
Foreign Bank Account Reports (FBAR)
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Treasury Department Form TD F 90-22.1.
On February 24, 2011 new rules were issued
applicable to FBARs due by June 30, 2011 with
respect to accounts maintained in 2010 and
subsequent years.
The rule addresses:
 who
must file FBARs;
 the types of account which must be reported; and
 exemptions from filing that may apply.
Foreign Bank Account Reports (FBAR)
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Trusts are included under the definition of 'US person' in
the same manner as corporations and limited liability
companies; i.e., a trust that has been created,
organized or formed under the laws of the United
States must file.
A beneficiary of a discretionary trust does not have a
financial interest in a foreign account simply because of
his or her status as a discretionary beneficiary. A
beneficiary has a “financial interest” in the assets of the
trust only if he or she has a 'present beneficial interest’
although it is unclear how 'present beneficial interest'
may be defined.
Foreign Bank Account Reports (FBAR)
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A US person has a financial interest in a financial
account in a foreign country for which the owner is a
trust:
 if
the US person is the trust grantor and has an owner
interest in the trust under the grantor trust rules, or
 if the US person either has a present beneficial interest
in more than 50% of the assets or from which such
person receives more than 50% of the current income.
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Anti-avoidance rule
Delaware LLCs
US Trusts in International Planning
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The domestication of trusts to the US
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The use of US trusts that are not US trusts for US tax purposes
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Could be grantor or non-grantor
May be domesticated in the future
Subject to US tax only on US income
The use of US trusts to acquire US assets
Qualified Domestic Trusts – The need for an institutional US trustee
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Use of foreign grantor trusts in international planning
Death of the grantor
Foreign non-citizen spouse
Foreign taxpayer with US assets - Limited to $60,000 exemption
US persons living overseas who want a living trust without subjecting
the trust to local tax
Washington, DC
◊
New York, NY
◊
New Haven, CT
◊
Chicago, IL
ESTATE PLANNING FOR
THE INTERNATIONAL
FAMILY: OPPORTUNITIES
FOR DELAWARE
Stanley A. Barg
Kozusko Harris Duncan
Estate Planning Council of Delaware
November 13, 2013