Wealth Planning For The Multinational Family

While members of Generation One may remain in their home country, thus maintaining their U.S. income tax status as nonresident aliens and their U.S. estate and gift tax status as nondomiciliary aliens, members of Generation Two and subsequent generations may have either moved to, been born in or married citizens of the United States, resulting in family members now being U.S taxpayers. Utilizing that fiscal diversity in order to minimize or avoid current income tax during the lifetime of Generation One and to escape any diminution in wealth by successive imposition of U.S. estate and gift taxes upon the demise of Generation One are goals of the international wealth planner.

Some of the common situations that we encounter in our practice include (1) pre-residency planning for the wealthy family moving to the United States, (2) planning gifts for foreign-based parents of children who have moved to the United States, (3) structuring the acquisition of U.S. real estate (whether a condo apartment in New York or Miami or a substantial income producing asset) by a foreign investor family, and (4) planning for the foreign-based couple which consists of one spouse being a U.S. citizen and the other spouse a nonresident alien.

While “no one size fits all” when it comes to proper planning, the following are basic considerations for each of the foregoing situations which often require a planning structure using a trust, a non-domestic company or other type of entity.

(1)    Pre-residency planning.  Unlike in other countries, a new immigrant to the United States does not obtain a “step up” in the basis (historic cost) of their assets.  Often, when much of the wealth is in a family business founded some time ago and the value of which has substantially appreciated, it is necessary to work with home country counsel in advance of moving to the United States to reorganize the structure of the business into a new entity to achieve a step up to current fair market value.

(2)    Gifts to U.S. Children. While the receipt of a gift by a U.S. taxpayer from a foreign parent may generally not be considered taxable income, how that gift is given (personally or from a foreign entity controlled by the parent) may result in unintended income and gift tax consequences. Gifts of funds to purchase U.S. real estate made after a binding contract has been signed by the U.S. child may be considered to be taxable gifts of the U.S. real estate.

(3)    U.S. Real Estate Purchase.  While journalists banter the phrase “shell companies”, the use of an offshore company through which to hold title to U.S. real estate is a common and basic planning tool for foreign purchasers to convert what would otherwise be U.S. situs tangible property subject to U.S. estate tax and a probate proceeding upon the death of the foreign owner into foreign situs intangible property not subject to U.S. estate tax or a probate administration.

(4)    Mixed Couple.  When a U.S. taxpayer marries a nonresident alien and moves to his/her home country, not only are there income, gift and estate tax and reporting consequences, but also community property considerations if the country in which they live is governed under a civil law regime and the couple has not entered into a separation of property prenuptial agreement.

Much of international estate planning is like three-dimensional chess.  One has to consider the cross border impact of alternative strategies in order to achieve a tax efficient structure which meets the wealth transfer needs of the family.  In doing so, the proper and legal use of various non-domestic entities is often essential.