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New Haven New York Geneva International Tax Issues for the Domestic Estate Planner Greenwich New Haven New York Geneva International Tax Issues for the Domestic Estate Planner Greenwich By London Richard S. Le. Vine Estate Planning Counsel of Central Texas Milan May 9, 2016 Hong Kong IRS required statement This written advice was not intended or prepared to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.

The Internationally Connected Client § Increasing investment by foreign persons in U. S. assets The Internationally Connected Client § Increasing investment by foreign persons in U. S. assets § International families with cross-border connections, including spouses, children and businesses § Non-resident non-citizens (otherwise known as “non-resident aliens” or “NRAs”) increasingly look to the U. S. as a safe haven • Correct U. S. structuring can minimize tax and provide legitimacy § Knowledge of the rules can avoid traps for the unwary § Increased international financial transparency mandates correct U. S. and non-U. S. structuring 2

Three sources of cross-border inheritance cases in a shrinking world 2. Foreign Located Heir Three sources of cross-border inheritance cases in a shrinking world 2. Foreign Located Heir Inheritance Case 1. Foreign Located Deceased 3. Foreign Located Asset 3

International Triage § Three preliminary questions: • Who is subject to the US Federal International Triage § Three preliminary questions: • Who is subject to the US Federal estate, gift, generation skipping transfer (“GST”) and income taxes? • Which assets and income are subject to the taxes? • Is there a treaty that overrides the U. S. tax principles? 4

Who is Subject to the Estate, Gift, and GST Taxes? § These three types Who is Subject to the Estate, Gift, and GST Taxes? § These three types of taxes can be imposed on gratuitous transfers of property § But they only apply if the testator or donor: • Is a US citizen; • Is a US domiciliary for estate, gift, and GST tax purposes (different than “residency” for Federal income tax purposes); OR • Is a non-citizen/non-domiciliary who transfers certain assets that are situated in the US 5

Domiciliaries – Subject to U. S. Transfer Taxes § Two requirements for domicile, Treas. Domiciliaries – Subject to U. S. Transfer Taxes § Two requirements for domicile, Treas. Reg. 2501 -1(b): • Living in a place, even for a brief period of time • No definite present intention of leaving the place § Difficulty in determining intent § Courts look to many factors (highly subjective): • Location of residences, expensive possessions and investments • Relative amount of time spent at claimed domicile and in other countries • Location of family and friends • Location of church, business activities and club memberships • Jurisdiction of voter’s registration and driver’s license • Declarations or statements of residence or intent (visa applications, wills, trusts, letters, oral statements, tax returns, etc. ) 6

Domiciliaries – Subject to U. S. Transfer Taxes § Effect of a green card Domiciliaries – Subject to U. S. Transfer Taxes § Effect of a green card on intent • Green card application requires a statement of the applicant’s intention to stay in the U. S. • Case law indicates that holding a green card is not determinative § Estate of Nienhuys, 17 T. C. 1149 (1952) § Estate of Khan v. Commissioner, TC Memo 1998 -22 § Estate of Jack v. U. S. , 90 AFTR 2 d 2002 -7580 7

Who is Subject to U. S. Income Taxes? § Three types of persons are Who is Subject to U. S. Income Taxes? § Three types of persons are subject to U. S. income tax: • U. S. citizens • U. S. residents • An NRA, but only on U. S. source portfolio type income or net income effectively connected income with a US trade or business 8

Citizens – Subject to U. S. Transfer Taxes and Income Tax § Typical ways Citizens – Subject to U. S. Transfer Taxes and Income Tax § Typical ways to obtain U. S. citizenship (no passport needed): • Birth within the U. S. • Birth outside of the U. S. to at least one U. S. parent (subject to certain additional requirements depending on DOB) • Naturalization § Important to ask clients about their citizenship and the citizenship of their family members 9

Residents – Subject to U. S. Income Taxes § Ways to be a resident: Residents – Subject to U. S. Income Taxes § Ways to be a resident: • Green card holder (determinative) • First year election to be treated as a resident under § 7701(b)(4) • Spousal election under § 6013(g) • Satisfaction of the Substantial Presence Test 10

Residents – Subject to U. S. Income Taxes § Substantial Presence Test, § 7701(b)(3) Residents – Subject to U. S. Income Taxes § Substantial Presence Test, § 7701(b)(3) • Presence in the U. S. for at least 31 days in the test year, and • Day count: current year days + 1/3 of prior year days + 1/6 of second prior year days >= 183 days § Certain days do not count § “Closer Connection” exception under § 7701(b)(3)(B) • Must be present in US for less than 183 days in the year to qualify 11

Estate Taxation of NRAs – Overview § Gross Estate § Situs Rules § Deductions Estate Taxation of NRAs – Overview § Gross Estate § Situs Rules § Deductions § Credits 12

Estate Taxation of NRAs – Gross Estate § Gross estate of an NRA includes Estate Taxation of NRAs – Gross Estate § Gross estate of an NRA includes only assets situated in the U. S. , § 2103 § Transfers where §§ 2035 – 2038 are applicable will trigger inclusion in the NRA’s gross estate if the assets are U. S. situs assets at the time of the transfer or at the NRA’s death, § 2104(b) • § Planning note: Do not mix U. S. situs assets with non-U. S. situs assets, and consider carefully retaining “strings” in trusts Jointly Owned Property – based on actual contributions of joint owners 13

Estate Taxation of NRAs – Situs Rules § Real Property Interests § Tangible Personal Estate Taxation of NRAs – Situs Rules § Real Property Interests § Tangible Personal Property – situated where located • Includes currency, jewelry, furnishings, clothing, collectibles • Exceptions for certain artwork on loan to a public facility, on exhibition or in transit to or from an exhibition • Exception for “in transit” tangibles, Delaney v. Murchie, 177 F. 2 d 444 (1 st Cir. , 1949) 14

Estate Taxation of NRAs – Situs Rules – Intangible Personal Property § Domestic corporate Estate Taxation of NRAs – Situs Rules – Intangible Personal Property § Domestic corporate stock § Partnership interests § LLC interests (? ) § Interests in trusts • Situs of beneficial interest in a trust is determined by situs of underlying assets, Rev. Rul. 82 -193 § Life insurance proceeds are not subject to US estate tax, § 2105(a) § Debt obligations § Mutual funds 15

Estate Taxation of NRAs – Situs Rules – Debt Obligations § Debt Obligations Generally Estate Taxation of NRAs – Situs Rules – Debt Obligations § Debt Obligations Generally • Debt obligations are U. S. situs if the primary obligor is a U. S. person under § 7701(a)(30) § Exceptions swallow the rule (mostly) • Certain bank deposits § Deposits and CDs with a U. S. bank (but not brokerage house) § Deposits with a foreign branch of a U. S. commercial bank § Deposits in a U. S. branch of a foreign commercial bank • Certain OID instruments • Portfolio debt 16

Estate Taxation of NRAs – Situs Rules – Planning Notes § Hold assets with Estate Taxation of NRAs – Situs Rules – Planning Notes § Hold assets with U. S. situs (or assets where situs is in question) in a foreign corporation to avoid estate tax — can create income tax issues • FIRPTA issues if real property is involved • ECI or § 367 issues if U. S. trade or business property is involved § Estate tax remote trust is another option 17

Estate Taxation of NRAs – Deductions § Deduction for Expenses • Deductions are allocated Estate Taxation of NRAs – Deductions § Deduction for Expenses • Deductions are allocated pro rata, based on ratio of U. S. assets to non-U. S. assets • Generally requires disclosure of worldwide assets on Form 706, otherwise lose the deduction • No deductions for debts or expenses associated with property not situated in the U. S. 18

Estate Taxation of NRAs – Deductions § Deduction for Debts • Recourse debt – Estate Taxation of NRAs – Deductions § Deduction for Debts • Recourse debt – allocated pro rata, based on ratio of U. S. assets to non. U. S. assets • Non-Recourse debt – full offset so only net equity is included in the NRA’s gross estate • Example: NRA’s only U. S. property is an apartment in NY worth $5 million, subject to a recourse mortgage of $4 million. NRA has $15 million of non. U. S. property. Value includible in NRA’s estate is $5 million gross minus $1 million allocation of the recourse mortgage, or $4 million. This $4 million is $3 million more than the net equity in the NY residence. The $1 million allocation of recourse mortgage is calculated as follows: $4 million x $5 million gross estate situated in US = $1 million $20 million worldwide gross estate 19

Estate Taxation of NRAs – Deductions § Marital Deduction • Only allowed for the Estate Taxation of NRAs – Deductions § Marital Deduction • Only allowed for the proportion of U. S. situs assets passing to the surviving spouse (disclosure required) • If surviving spouse is a U. S. citizen, there is an unlimited marital deduction • If surviving spouse is not a U. S. citizen, property must pass to a Qualified Domestic Trust (QDOT) or surviving spouse must form a QDOT or must become a citizen before the filing of Form 706 20

Estate Taxation of NRAs – Deductions § Charitable Deduction, § 2106(a)(2) • Contribution must Estate Taxation of NRAs – Deductions § Charitable Deduction, § 2106(a)(2) • Contribution must be of property that is included in the NRA’s gross estate • Contribution must be made to a domestic charity or a trust (domestic or foreign) that will use the donation within the U. S. • No pro rata allocation of the deduction required 21

Estate Taxation of NRAs – Credits or Exemptions § True credit of $13, 000 Estate Taxation of NRAs – Credits or Exemptions § True credit of $13, 000 (equivalent of ~$60, 000 exemption) OR possible treaty option for pro rata amount of applicable exclusion amount available to U. S. citizens and residents (based on proportion of U. S. situs assets) § If they have the option, NRAs often choose the $13, 000 credit to avoid disclosure § If no treaty option is available, consider arguing that the decedent was a U. S. domiciliary if assets are mostly U. S. situs (see Khan v. Commissioner, TC Memo 1998 -22) 22

Gift Taxation on Transfers by NRAs – Overview § Situs Rules § Credits and Gift Taxation on Transfers by NRAs – Overview § Situs Rules § Credits and exclusions § Deductions 23

Gift Taxation on Transfers by NRAs - Situs Rules § Property subject to gift Gift Taxation on Transfers by NRAs - Situs Rules § Property subject to gift tax • Real and tangible personal property situated in the U. S. • Gift by check? PLR 8210055 § Gifts of U. S. intangible property are not subject to gift tax under § 2501(a)(2) • Debt obligations of a US person • Stock of US corporations § Planning Point - Better to gift U. S. intangibles during life (gift tax-free) because if held until death they will be included in the estate of a non-domiciliary 24

Gift Taxation on Transfers by NRAs – Credits and Exclusions § No unified credit Gift Taxation on Transfers by NRAs – Credits and Exclusions § No unified credit available § Annual exclusion allowed ($14, 000 for 2016) § No gift splitting unless both spouses are U. S. citizens 25

Gift Taxation on Transfers by NRAs – Deductions § Charitable deduction allowed for gifts Gift Taxation on Transfers by NRAs – Deductions § Charitable deduction allowed for gifts to U. S. charities or trust using assets in the U. S. § Limited marital deduction for gifts to non-citizen spouses, § 2523(i) • No lifetime QDOT available • Expanded annual exclusion for present interest gifts is available ($148, 000 in 2016) 26

GST Tax on Transfers by NRAs § Direct Skips – Subject to GST tax GST Tax on Transfers by NRAs § Direct Skips – Subject to GST tax only to the extent that the transfer is subject to estate or gift tax § Taxable Distribution or Taxable Termination – Subject to GST tax only to the extent that the initial transfer by the NRA to the trust was subject to estate or gift tax § GST Exemption – Same as for U. S. citizens and residents ($5. 45 million for 2016) § Automatic exemption allocation rules apply § Tax is imposed at the highest rate in effect at the time of the transfer (i. e. no marginal rates) 27

Which Assets are Subject to GST Tax? § Situs rules at time of transfer Which Assets are Subject to GST Tax? § Situs rules at time of transfer control • • § A transfer by a non-domiciliary transferor is a “Direct Skip” subject to GST Tax only to the extent that the transfer is subject to Federal estate or gift tax (Treas. Reg. § 26. 2663 -2(b)(1)) The GST Tax applies to a “Taxable Distribution” or a “Taxable Termination” to the extent that transfers of property to the trust were subject to Federal estate or gift tax (Treas. Reg. § 26. 2663 -2(b)(2)) Planning Opportunities / “Remaining Out of the Net” • Gifts of U. S. situs intangibles avoid GST Tax in addition to gift tax and estate tax • Generally, as long as there is no estate or gift tax on transfers into the trust, there is no GST Tax on transfers out of the trust 28

Treaty Protections § U. S. has a small number of bilateral estate tax treaties Treaty Protections § U. S. has a small number of bilateral estate tax treaties with foreign countries § Treaty provisions in general override U. S. tax law unless U. S. tax law enacted after treaty was signed to override treaty provisions § Bilateral transfer tax treaties generally allow taxation of intangibles only to country of transferor’s residence § Bilateral transfer tax treaties generally allow tax credit to transferor in host country for taxes payable to country where property transfer is taxed to non-domiciliaries 29

US-UK Treaty Country of Fiscal Domicile Country of Citizenship US Tax UK Personalty UK US-UK Treaty Country of Fiscal Domicile Country of Citizenship US Tax UK Personalty UK Realty US Personalty US Realty US US yes (credit for UK tax paid) yes US UK yes (credit for UK tax paid) yes UK UK no no no yes UK US yes (credit for UK tax paid) yes

US Estate Tax Exposure Non-US Citizen Spouse – Transfers at Death § Transfers to US Estate Tax Exposure Non-US Citizen Spouse – Transfers at Death § Transfers to non-US citizen spouse estate taxable unless transfer into Qualified Domestic Trust (‘QDOT’) (§ 2056 A) • Timely Election Must be Made • Income Automatically Payable Only to Surviving Spouse • Principal Payable Only to Surviving Spouse During Lifetime • Payout of Principal attracts US Estate Tax Charge • Principal Remaining at Spouse’s Death subject to US Estate Tax • Must Have One ‘US Trustee’ with the power to withhold the tax imposed on distributions from a QDOT – if assets > $2 million must be a bank or must furnish bond or letter of credit QDOT almost always requires corporate trustee; bond or letter of credit requirement are expensive for individual trustees • Surviving non-US citizen spouse can “self-settle” a QDOT before the filing 31 date of the decedent’s US estate tax return (§ 2056(d)(2)(B)) • Taxed as part of decedent spouse’s estate

US Estate and Gift Tax Exposure Non-US Citizen Spouse § Jointly Owned Property – US Estate and Gift Tax Exposure Non-US Citizen Spouse § Jointly Owned Property – Trap for the Unwary § ‘Consideration Provided Rule’ (§ 2040(a)) - Full value of property included in the US decedent's estate, except to the extent that estate proves consideration was provided by surviving non-US citizen spouse § Depends on Type of Property § Real Estate – Generally no deemed gift on creation of joint tenancy. May have estate tax consequences. Gift upon sale or severance if proceeds are divided § Joint Accounts – Generally deemed gift on purchase of joint property (if non-contributing spouse can “sever” the joint tenancy under applicable law) 32

Income Taxation of NRAs § U. S. Source Fixed or Determinable, Annual or Periodical Income Taxation of NRAs § U. S. Source Fixed or Determinable, Annual or Periodical (“FDAP”) income • Includes U. S. source interest, dividends, rents, salaries, wages, annuities and debts • Generally does not include interest on portfolio debt • 30% withholding on FDAP, subject to treaty benefits § Income “effectively connected” to a U. S. trade or business (“ECI”) • Income derived from a U. S. trade or business • Generally taxed on a net basis, at regular graduated rates • Treaty benefits may be available • FIRPTA § Generally not subject to tax on capital gains (unless effectively connected with a U. S. trade or business or FIRPTA asset) 33

FDAP § Subject to a flat 30% gross tax unless reduced by treaty § FDAP § Subject to a flat 30% gross tax unless reduced by treaty § No deductions § Typically satisfied through withholding at source § Includes dividends, rents, royalties and other investment income Note: virtually all capital gains are excluded and interest income is rarely taxed as FDAP (due to portfolio and bank interest exceptions as well as relevant treaty provisions). However: an additional withholding tax may apply to FDAP income or the gross proceeds upon the sale or disposition of FDAP producing assets unless certain additional reporting requirements are met under FATCA 34

Effectively Connected Income § ECI – Net tax at graduated rates applicable to individuals, Effectively Connected Income § ECI – Net tax at graduated rates applicable to individuals, trusts or corporations § Requires a foreign person to have a US trade or business (USTB) § Only income effectively connected to the USTB is taxed § Deductions and credits available against ECI only if a tax return is timely filed (subject to a good faith exception) 35

FIRPTA – Foreign Investment in Real Property Tax Act § Enacted in 1980 to FIRPTA – Foreign Investment in Real Property Tax Act § Enacted in 1980 to eliminate the perceived tax advantage of foreigners purchasing U. S. real property over U. S. taxpayers § FIRPTA applies to U. S. real property interests, other than interests held solely as a creditor (“USRPI”) • Also applies to U. S. real property holding corporations (“USRPHC”) if more than 50% of the FMV of the corporation over 5 years is USRPI • § Certain exceptions to USRPHC: publicly traded companies, certain REITs, etc. Gain on the disposition of USRPI is treated as ECI • Must file a U. S. income tax return and pay tax on a net basis at graduated rates • Transferee must withhold 15% of gross sale proceeds (including transferred liabilities), unless an exception applies 36

Trust Status in International Planning § Foreign or Domestic § Grantor or Non-Grantor § Trust Status in International Planning § Foreign or Domestic § Grantor or Non-Grantor § Taxation of trust and beneficiaries is dependent on both characteristics 37

“Foreign Trust” § A trust is a “Foreign Trust” (§ 7701(a)(31)) unless: • A “Foreign Trust” § A trust is a “Foreign Trust” (§ 7701(a)(31)) unless: • A Court within US exercises primary supervision over administration of the trust (the “Court Test”); and • One or more US persons have authority to control all substantial decisions of the trust (the “Control Test”) § Watch special power of appointment holders, protectors * If you fail either test then have a Foreign Trust 38

Taxation of Foreign Non-Grantor Trusts § Income taxation of the trust § § § Taxation of Foreign Non-Grantor Trusts § Income taxation of the trust § § § Taxed as if the trust were an NRA under income tax rules Difference in treatment of capital gains if accumulated Income taxation of NRA beneficiaries § Trust is a conduit, so all items of income are carried out with the same character to each beneficiary, pro rata 39

Taxation of Foreign Non-Grantor Trusts § Income taxation of U. S. beneficiaries • Distributions Taxation of Foreign Non-Grantor Trusts § Income taxation of U. S. beneficiaries • Distributions carry out DNI; DNI includes capital gains • Distributions in excess of DNI (“UNI”) are subject to the “throwback rules” • Accumulated long-term capital gain income and dividend income are taxed at ordinary rates when distributed § 65 -day rule for distribution planning 40

Foreign Non-Grantor Trusts – Distributions to U. S. Beneficiaries § Indirect Distributions • Indirect Foreign Non-Grantor Trusts – Distributions to U. S. Beneficiaries § Indirect Distributions • Indirect distributions are treated as if they were made directly from the foreign trust to the U. S. beneficiary, if for the principal purpose of tax avoidance (conduit rules) § Use of Property • Use of personal property (residences, jewelry, artwork) is deemed to be a distribution at market value of use unless rented for fair rental value § Loans to a U. S. Person • Loans of cash or securities to a U. S. beneficiary, U. S. grantor or U. S. persons related or subordinate to the beneficiary or grantor are treated as distributions • Exception for loans satisfying certain requirements of IRS Notice 97 -34 and regulations (qualified obligations) 41

Throwback Rules § Throwback rules apply whenever a distribution of accumulated income from a Throwback Rules § Throwback rules apply whenever a distribution of accumulated income from a prior year (UNI) is made in excess of the current year’s DNI § Draconian rules aimed to recapture tax that was deferred offshore • Prior accumulations all treated as ordinary income • Capital gains and dividends lose character and are taxed as ordinary income • Interest charge based on accumulated income from past years “thrown back” to year of accumulation on a FIFO basis 42

Foreign Non-Grantor Trust Accumulation Distribution Planning § Avoid throwback rules by: • Distribute DNI Foreign Non-Grantor Trust Accumulation Distribution Planning § Avoid throwback rules by: • Distribute DNI currently • Structure Trust to qualify for “ 3 gift rule” • Using Total Return Trust – Manipulate FAI vs. DNI • Using offshore Private Placement Variable Universal Life (“PPVUL”) • “Carve-off” undistributed net income (“UNI”) to a new foreign trust and the remainder of the trust can make distributions to US beneficiaries • “Default Method” three year rolling average • Migrate Trust to US 43

Grantor Trust Status for Foreign Grantors § Section 672(f) - special grantor trust rules Grantor Trust Status for Foreign Grantors § Section 672(f) - special grantor trust rules apply to trusts with non-U. S. grantors § For non-U. S. grantors, there are generally two ways to create “Grantor Trust” status: • The grantor has the power to revest the property in himself – can require the consent of a related or subordinate party subservient to grantor (power of revocation), or • Distribution of income or principal can only be made during the grantor’s lifetime to the grantor or the grantor’s spouse 44

Taxation of Foreign Grantor Trusts - Planning Opportunities § If Section 672(f) requirements are Taxation of Foreign Grantor Trusts - Planning Opportunities § If Section 672(f) requirements are satisfied, substantial opportunities for efficient income tax planning foreign grantors of trusts with US beneficiaries § All income is deemed taxable income of foreign grantor – US beneficiaries can receive distributions free of tax § Foreign grantor only taxed on ECI or US source FDAP, so trust can invest in the US and generate capital gains (excluding FIRPTA gains) and interest income, as well as non-US income, without incurring an income tax burden in the US § Can be US transfer tax free if properly structured § Planning necessary with respect to estate and income tax consequences following grantor’s death § Need to understand taxation of grantor in grantor’s jurisdiction 45

Planning when Foreign Grantor Dies § Benefits of Foreign Grantor Trust cease when Grantor Planning when Foreign Grantor Dies § Benefits of Foreign Grantor Trust cease when Grantor dies; trust becomes a Foreign Non-Grantor Trust § Plan to avoid the Throwback Rules and reporting requirements • • § Purge DNI each year (outright or to a “mirror” foreign or U. S. trust) Domesticate the foreign trust Plan to avoid CFC and PFIC status • When the grantor dies it may be necessary to make a “check-the-box” election to treat underlying foreign corporations as partnerships or disregarded entities 46

Overview of Tax Hurdles § Historic Deferral Opportunities • Foreign holding companies • Foreign Overview of Tax Hurdles § Historic Deferral Opportunities • Foreign holding companies • Foreign trusts § Section 679 for U. S. grantors of certain foreign trusts § Section 684 for transfers by U. S. persons to foreign non-grantor trusts § Anti-Deferral foreign holding companies – CFCs and PFICs 47

Section 679 – Foreign Grantor Trusts - U. S. Grantor § U. S. person Section 679 – Foreign Grantor Trusts - U. S. Grantor § U. S. person who transfers property to a foreign trust will be treated as the income tax owner of the portion of the trust attributable to that property if: § the trust is an inter vivos trust; and § there is a current, future or contingent U. S. beneficiary of any portion of the trust § § Trust agreement should specifically identify class of persons who can receive distributions Presumption of a U. S. beneficiary for new trusts unless information is submitted to the IRS § Five year look-back period for transfers in trust by a foreign grantor who then becomes a U. S. person if foreign trust has U. S. beneficiaries 48

Section 679 – Foreign Grantor Trusts - U. S. Grantor § Section 679 creates Section 679 – Foreign Grantor Trusts - U. S. Grantor § Section 679 creates potential traps for the unwary • Loans of cash or securities by a U. S. person to a foreign trust with U. S. beneficiaries is treated as a contribution, triggering grantor trust status unless qualified obligation is used • Loss of grantor trust status (e. g. no more U. S. beneficiaries) under Section 679 would trigger Section 684 mark to market taxation 49

Section 684 – Transfers by U. S. Persons to Foreign Non-Grantor Trusts § A Section 684 – Transfers by U. S. Persons to Foreign Non-Grantor Trusts § A U. S. person must recognize gain (but not loss) on transferring property to a foreign trust unless the transferor is treated as the owner of the trust for grantor trust purposes • Indirect transfers through certain third parties • Constructive transfers – paying or assuming an obligation of the trust, or certain guarantees of an obligation of the trust § Applies only if a U. S. person is not treated as the owner of the foreign trust § Does not apply to assets passing at death that are includible in the transferor’s estate 50

Foreign Holding Companies § Controlled Foreign Corporations (CFCs) • CFC is a (i) foreign Foreign Holding Companies § Controlled Foreign Corporations (CFCs) • CFC is a (i) foreign corporation where (ii) U. S. shareholders have more than 50% by vote or value, (iii) with each U. S. shareholder each owning at least 10% of the vote • Controlling shareholders are taxed on (i) Subpart F income which includes (ii) passive income, even if not distributed from the CFC to the shareholder • Subpart F income, generally, is income from the CFC's nonoperating or passive assets or certain income derived with respect to related party transactions • Reporting Requirements 51

Foreign Holding Companies § Passive Foreign Investment Companies (PFICs) • • Taxation occurs only Foreign Holding Companies § Passive Foreign Investment Companies (PFICs) • • Taxation occurs only on actual distributions or dispositions absent a Qualified Electing Fund • Draconian rules on “excess distributions” and upon disposition of PFIC shares: (i) subject to an interest charge and (ii) treated as ordinary income, regardless of underlying character in a manner similar to foreign nongrantor trust distributions • § PFIC is a foreign corporation where (i) 75% or more of its gross income for a taxable year is passive income, or (ii) 50% or more of its assets produce or are held for production of passive income Reporting Requirements CFC rules trump if a company is both a CFC and a PFIC 52

Typical Structure – During Grantor’s Life NRA Grantor § § Foreign Grantor Trust (may Typical Structure – During Grantor’s Life NRA Grantor § § Foreign Grantor Trust (may have U. S. beneficiaries) Foreign Holding Company Underlying Assets (may be U. S. situs) 53 Foreign holding company avoids U. S. estate tax Foreign grantor trust (with a foreign grantor) avoids PFIC and CFC issues

Typical Structure – After Grantor’s Death § Foreign holding company may be treated as Typical Structure – After Grantor’s Death § Foreign holding company may be treated as a PFIC or CFC Foreign Non-Grantor Trust (may have U. S. beneficiaries) § Use of check-the-box elections after the death of the NRA foreign grantor § Can be used retroactively up to at least 75 days before filing date Foreign Holding Company Underlying Assets (may be U. S. situs) § Careful of U. S. situs assets § Foreign Non-Grantor Trust may be subject to Throwback rules § Purge trust of DNI each year or domesticate the trust 54

Income Tax Basis Issues § Rules for step up in basis may not apply Income Tax Basis Issues § Rules for step up in basis may not apply to non-domiciliary decedent's estate when property is held in trust unless property is subject to U. S. estate tax § Foreign trusts when property not subject to U. S. estate tax at grantor’s death need special provisions to allow asset basis step-up § Foreign trusts must be revocable (or amendable, terminable) and decedent must have right to receive or control payment of income during lifetime § Testamentary general powers of appointment can also be exercised 55

Income Tax Basis Issues – CFCs and PFICs § CFCs may receive step-up in Income Tax Basis Issues – CFCs and PFICs § CFCs may receive step-up in basis but need to liquidate within 30 days after death § PFICs may not receive step-up in basis § PFIC/CFC overlap rule for entities held prior to 1998 56

Pre-Immigration Planning § Basis step-up through asset churning prior to establishment of U. S. Pre-Immigration Planning § Basis step-up through asset churning prior to establishment of U. S. income tax residency § Drop-off foreign trust planning for estate/gift/GST tax protection prior to establishment of U. S. transfer tax domicile § Review investments and eliminate CFCs or PFICs before moving to the U. S. § Section 679 can pull income from trusts into U. S. person’s tax base if foreign trust formed within 5 years of U. S. residency § Use of deferred variable annuity and private placement variable life insurance to “wrap” income 57

Expatriation Regime § Section 877 A applicable to certain persons expatriating or relinquishing long-term Expatriation Regime § Section 877 A applicable to certain persons expatriating or relinquishing long-term U. S. residency after June 16, 2008 § Old rules may still apply to those who expatriated earlier § Who is subject to the rules? “Covered Expatriates” § US citizens and “long term” green card holders (8 out of 15 tax years) who meet one of the following tests: § (i) Net Worth Test § (ii) Income Tax Liability Test; or § (iii) Failure to certify tax compliance on Form 8854 § For green card holders, tax year requirement includes partial years (e. g. , 6 years and 2 days could constitute 8 years) § Two exceptions: (i) certain minors before age 18½ and (ii) certain dual citizens 58

Expatriation Regime - Taxation of Covered Expatriates § Exit Tax or “Mark-to-Market” Tax § Expatriation Regime - Taxation of Covered Expatriates § Exit Tax or “Mark-to-Market” Tax § Deemed sale of worldwide property for its fair market value on the date prior to the expatriation, with an exclusion of $600, 000 of gain, indexed for inflation ($693, 000 in 2016) § Lingering U. S. Tax Effects of Expatriation: § 30% withholding tax on distributions from: (i) certain deferred compensation arrangements and (ii) trusts that are non-grantor trusts immediately before expatriation § The U. S. donee (including U. S. trusts) of any gift or bequest from a covered expatriate is responsible for U. S. transfer tax at highest marginal rates (currently 40%). § Exceptions for annual exclusion gifts, gifts to qualified charities or gifts to a U. S. spouse 59

Expatriation Regime – Re-entry into the U. S. § Reed Amendment § Ex-PATRIOT Act Expatriation Regime – Re-entry into the U. S. § Reed Amendment § Ex-PATRIOT Act (proposed) § Immigration Reform Bill in Senate (proposed) 60

Expatriation Regime – 2801 Inheritance Tax § Proposed 2801 regulations were issued in September Expatriation Regime – 2801 Inheritance Tax § Proposed 2801 regulations were issued in September of 2015 § 40% tax on a U. S. domiciliary (or a U. S. trust) who receives a gift or bequest from a covered expatriate § 40% tax on a U. S. domiciliary (or a U. S. trust) who receives a distribution from a foreign trust that was funded by a covered expatriate § A foreign trust only partially funded by a covered expatriate has a 2801 ratio and a portion of each distribution to a U. S. domiciliary (or a U. S. trust) would be subject to tax under 2801 § Exceptions § Transfers otherwise subject to U. S. estate or gift tax § Transfers that would qualify for an estate or gift tax charitable deduction § Each donee can exempt one annual exclusion ($14, 000 in 2016) § A non-citizen spouse who is U. S. domiciled can exempt $148, 000 (inflation adjusted) when receiving gifts from a covered expatriate spouse § There is no exception for medical or tuition payments 61

Expatriation Regime – 2801 Inheritance Tax § Form 708 - Receipt of a covered Expatriation Regime – 2801 Inheritance Tax § Form 708 - Receipt of a covered gift or bequest will be reported on Form 708, which will not be issued until the proposed regulations are finalized § Presumption- The proposed regulations create a presumption that every distribution from a foreign trust and every gift is subject to tax under 2801. The taxpayer must have a reasonable basis for not paying the tax § Foreign Trusts § Was the trust funded after June 16, 2008? § Was a person who donated to the trust a covered expatriate? § What is the 2801 ratio of the trust? § Gifts and Bequests § Was the donor a US citizen or otherwise US domiciled? § Did the donor surrender her citizenship or green card after June 16, 2008? § Did they exceed the income or net worth limits? § Did they file Form 8854 when they expatriated? 62

Reporting Requirements § Form 3520 – Transfers involving foreign persons and foreign trusts § Reporting Requirements § Form 3520 – Transfers involving foreign persons and foreign trusts § Form 3520 -A – Foreign trust annual reporting § Form 8621 – PFIC ownership § Form 5471 – CFC ownership § Form 8938 – Foreign Financial Assets § Fin. CEN Report 114 (“FBAR”) § Form 8865 – Foreign Partnerships ownership § Form 8858 – Foreign single member disregarded entities ownership 63

Form 3520 – Foreign Gifts and Trusts § Required to be filed by any Form 3520 – Foreign Gifts and Trusts § Required to be filed by any U. S. person (or the estate of a U. S. person) who: • Received a gift of more than $100, 000 from an NRA; • Received more than $15, 601 (in 2015) of gifts from foreign corporations and partnerships; • Received a distribution from any foreign trust or estate; • Created or funded a foreign trust; • Is treated as the owner of any foreign trust under Sections 671 through 679; or • Dies as the owner of a foreign trust or with assets of the foreign trust includible in his estate. § Due on the same due date as income tax return, with extensions 64

Form 3520 – Penalties § Failure to report foreign gifts § Penalty is equal Form 3520 – Penalties § Failure to report foreign gifts § Penalty is equal to 5% of the amount of such foreign gifts, applied for each month for which the failure to report continues § Total penalty not to exceed 25% of the amount of unreported foreign gifts § Failure to file or incorrect filing § Minimum $10, 000 penalty § If greater, the penalty will be 35% of the property transferred to trust, 35% of the value of distributions received from a foreign trust, or 5% of the value of any trust treated as owned by the U. S. person 65

Form 3520 -A – Annual Reporting of Foreign Trusts with U. S. Grantors § Form 3520 -A – Annual Reporting of Foreign Trusts with U. S. Grantors § Required to be filed by the trustee of a foreign trust that has a U. S. owner for grantor trust purposes § Disclosure of trust income during the year § Due date of March 15 § Penalty for failure to file or an incorrect filing is the greater of $10, 000 or 5% of the gross value of the portion treated as owned by the U. S. person 66

Form 8621 - PFIC § Required to be filed by a U. S. person Form 8621 - PFIC § Required to be filed by a U. S. person who is a direct or indirect shareholder of a PFIC § Also used to disclose (i) receipt of a distribution, (ii) disposition of PFIC stock or (iii) certain elections relating to the PFIC § Due on the same due date as income tax return, with extensions 67

Form 5471 - CFC § Required to be filed by a U. S. person Form 5471 - CFC § Required to be filed by a U. S. person who controls, transacts with or has certain relationships with the CFC § Due on the same due date as income tax return, with extensions § Minimum $10, 000 penalty for each failure to file or late filing plus loss of certain foreign tax credits 68

Form 8938 – Foreign Financial Assets § Any U. S. person with an interest Form 8938 – Foreign Financial Assets § Any U. S. person with an interest in “specified foreign financial assets” must file, if the value of those assets exceeds a certain threshold § Broad definition of foreign financial assets, including interests in certain foreign trusts § Threshold varies from $75, 000 to $600, 000 depending on residence and filing status § Currently only individual filing is required; anticipated regulations on filings required by U. S. entities and trusts so filings by non-individuals still not required § Due on the same due date as income tax return, with extensions § Minimum $10, 000 penalty for each failure to file or late filing § No duplicative reporting is required if information is reported on Form 3520, Form 8621, Form 5471 or Form 8865 69

Fin. CEN Report 114 - FBAR § U. S. owners with beneficial interests in, Fin. CEN Report 114 - FBAR § U. S. owners with beneficial interests in, or signature authority over, foreign bank accounts must file FBARs if aggregate value of the accounts exceeds $10, 000 at any time in the calendar year • FBAR requires disclosure of the highest balance in the year § For tax year 2015, FBAR is due on June 30, 2016 § For tax years beginning after 12/31/2015, FBAR is due on the same date as the income tax return, with extensions § FBAR must be filed electronically 70

Form 8865 – Foreign Partnerships § Required to be filed by a U. S. Form 8865 – Foreign Partnerships § Required to be filed by a U. S. person who is a 10% partner (measured by capital or profit share) of the foreign partnership § Due on the same due date as income tax return, with extensions § Minimum $10, 000 penalty for each failure to file or late filing plus loss of certain foreign tax credits 71

Form 8858 – U. S. Owned Foreign Single Member Disregarded Entities § Generally created Form 8858 – U. S. Owned Foreign Single Member Disregarded Entities § Generally created with foreign entity check the box election § Due on the same due date as income tax return, with extensions § Minimum $10, 000 penalty for each failure to file or late filing plus loss of certain foreign tax credits 72

Offshore Voluntary Disclosure Program • 2014 OVDP, effective July 1, 2014 • • Must Offshore Voluntary Disclosure Program • 2014 OVDP, effective July 1, 2014 • • Must send copies of bank records • Revenue Agent assigned • No negotiation regarding willfulness or reasonable cause in OVDP • No de minimis exception • • 8 years of tax returns, along with payment of taxes, interest and accuracyrelated penalty General offshore penalty – up to 50% Streamlined Filing Compliance Procedures, effective July 1, 2014 • Must show that failure to file/failure to report was non-willful • 3 years of tax returns, along with payment of taxes and interest • 6 years of FBARs • U. S. Taxpayer Residing in U. S. : Offshore penalty of 5% • U. S. Taxpayer Residing outside U. S. : No offshore penalty 73

New Haven Summary of Tax and Reporting Requirements for U. S. Persons with Offshore New Haven Summary of Tax and Reporting Requirements for U. S. Persons with Offshore Interests Form Who Needs to File FBAR U. S. Persons with more than a total of Highest balance of each $10, 000 in foreign financial accounts financial account at any time (bank accounts, securities accounts, during calendar year life insurance, annuities, mutual funds) 1040 U. S. Persons (residents or citizens) Worldwide income from all sources with income above filing threshold New York Geneva 8621 Greenwich 8938 London 5471 U. S. Persons with interests in foreign mutual funds and passive foreign companies U. S. Persons with foreign financial assets (stocks, bank accounts, securities accounts, life insurance, annuities, mutual funds, etc. ), which total more than $50, 000 (threshold varies depending on filing status) U. S. Persons who own an interest in a foreign corporation What is Reported When Due Received by June 30 (no extensions) Starting with 2016 tax year, with tax return. April 15 (6 month extension available) Distributions and transactions With tax return Highest balance of each financial account or maximum value of each financial asset With tax return at any time during the calendar year Financial information about the foreign corporation With tax return 926 Milan U. S. Persons who transfer property to a Information about the transfer With tax return foreign corporation 8865 U. S. Persons who own an interest in a foreign partnership or who transfer property to a foreign partnership Information about the With tax return partnership and/or the transfer U. S. Persons who are beneficiaries of foreign trusts, who receive gifts from non-U. S. persons, or who receive inheritances from non-U. S. persons Information about the trusts, gifts, or inheritances 3520 -A Hong Kong The presenter would like to thank Masha M. Yevzelman of Fredrikson & Byron, P. A. for allowing him to include this chart in this presentation 76 Same date as income tax return or, for a U. S. decedent, same date as estate tax return

New Haven Summary of Potential Penalties for Noncompliance Audit Streamline §Non-willful: $10, 000 to New Haven Summary of Potential Penalties for Noncompliance Audit Streamline §Non-willful: $10, 000 to 50% of account balance New York FBAR (foreign accounts) Greenwich 5471 (foreign corporations) $10, 000 to $50, 000 per form 5472 (foreign corporation engaged in U. S. business with related parties) Geneva $10, 000 plus an additional $10, 000 for every month after taxpayer notified of delinquency 8865 (foreign partnerships) $10, 000 -$50, 000 per form and 10% of value of property transferred up to $100, 000 926 (transfer of property to foreign corporation) London Milan 3520 (transactions with foreign trusts and foreign gifts or inheritances) 3520 -A (foreign trust with U. S. owner) 8938 (foreign financial assets) Hong Kong Streamline Foreign: No penalties; must have been outside U. S. for more than 330 days in any of past three years Streamline Domestic: 10% of value of property transferred up to 5% penalty on maximum of $100, 000 per return (no maximum if highest value of all intentional) foreign financial assets § 35% of gross reportable amount that were not reported § 25% for unreported gifts on Form 8938 or FBARs or from which gross 5% of gross value of trust assets owned income was not reported; by U. S. person must have previously filed tax returns $10, 000 -$50, 000 per form § Failure to file: up to 25% 1040 Penalties 27. 5% penalty of value of foreign income-producing assets §Willful (civil): greater of 50% of account balance or $100, 000 per year §Willful (criminal): $250, 000/$500, 000 and 5/10 years § Failure to pay: up to 25% § Subst’l understatement: 20 -40% § Fraud: 75% The presenter would like to thank Masha M. Yevzelman of Fredrikson & Byron, P. A. for allowing him to include this chart in this presentation 77 OVDP 50% penalty of value of foreign income producing assets if has an account at a listed bank This is the only program that results in a closing agreement with the IRS. Failure to file: Up to 25% Failure to pay: Up to 25% Subst'l understatement: 20 -40%

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