1. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 What is it? Note: –Planning in this area is contingent on whether there is a treaty with the country in question which covers tax issues Techniques used will depend on: –Extent to which these individuals have property situated in the U.S. –Whether they are classified as either resident or nonresident aliens –Whether they were U.S. citizens who have renounced their citizenship through expatriation or other nations –Whether the spouse of the client is a citizen of the U.S.

2. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 When is special planning required? 1.Client or family member is an alien who is considered to be a resident in the U.S.  Income tax – physical presence  Estate tax- domicile: “intent” to remain here indefinitely 2.Client or family member is not a citizen or resident of the U.S., but is subject to federal estate tax because his taxable estate includes property situated in the U.S. 3.Surviving spouse is not a U.S. citizen, regardless of domicile 4.Client is U.S. citizen not residing in the U.S.

3. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 To minimize impact of U.S. taxes –To avoid federal income tax: Alien does not hold permanent U.S. visa Do not remain present in U.S. for: –More than 30 days in the current year, and –No more than 182 days during three year calendar period Alien has a tax home in a foreign country and annual declaration filed with IRS that shows “closer connection” with foreign country than with the U.S. –To avoid federal estate tax: Alien’s estate has to establish “intent” of alien, using such proof as: –Bigger or better residence in foreign country –Business and investment affairs conducted outside U.S.

4. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 To minimize impact of U.S. taxes (cont’d) –When U.S. residency unavoidable: Gifts of assets to non U.S. persons, before becoming a U.S. resident –Irrevocable foreign situs trust –LLC –Foreign situs trusts may help mitigate tax consequences whether or not an alien is deemed a resident under U.S. tax laws Must be irrevocable Must have independent trustee Special rules relating to distributions to U.S. beneficiaries

5. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 To minimize impact of U.S. taxes (cont’d) –Where alien can avoid U.S. residency: Foreign situs revocable trust Foreign Corporation –Client is resident or U.S. citizen but spouse is not a citizen Gift tax marital deduction limited to $136,000 (2011) Estate tax marital deduction available for assets passing to a qualified domestic trust (QDOT)

6. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 To minimize impact of U.S. taxes (cont’d) –Unified credit Allowed for non U.S. citizens that are considered U.S. residents for estate tax purposes –Foreign death tax credit Foreign death taxes are often Imposed on property owned by resident noncitizen where property is situated outside U.S. Credit allowed only for taxes actually paid to foreign country or U.S. possession (including estate, inheritance, legacy, or succession taxes)

7. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 How it is done Example: –If client who is citizen of a foreign country and not a resident of the U.S. makes a direct, substantial investment in real estate in Hawaii Client subject to federal income tax on income generated by property Upon death, value of real property subject to U.S. estate tax –If client has foreign corporation, irrevocable foreign situs trust, or combination own the real property in Hawaii Must be recognized as corporation under U.S. law Little or no income tax advantage Complete protection from federal estate and gift taxes

8. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Issues In Community Property States Most countries, other than those that follow English common law, have community property laws If alien is a resident of a community property state, that state may impose its community property rules on assets or earnings received while domiciled in the U.S.

9. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Controlled Foreign Corporation “Controlled foreign corporation” is a foreign corporation in which either: –More than 50% of the total combined voting power for all classes of stock is owned by U.S. shareholders, or –More than 50% of the total value of the stock is owned by U.S. shareholders Any income earned by the corporation will be attributed to and taxed to any shareholders who are U.S. residents

10. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Partnership Or LLC Avoids double taxation of income If partnership is making U.S. investments or carrying on a U.S. trade or business, it is subject to strict withholding requirements Nonresident aliens owning an interest in a partnership carrying on U.S. business will have their partnership interest subject to U.S. estate tax

11. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Irrevocable Foreign Trust Often combined with a foreign corporation or partnership Strict withholding requirements on distributions from trust Preferable to any form of direct ownership of U.S. real estate Advantage: the potential avoidance of federal estate and gift tax by nonresident aliens

12. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Qualified Domestic Trust (QDOT) 1.Must meet same requirements for marital deduction as a trust for benefit of citizen spouse: –QTIP trust, –General power of appointment income interest trust, or –Estate trust

13. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 Qualified Domestic Trust (QDOT) (cont’d) 2.At least one trustee must be: –An individual who is a U.S. citizen, or –Domestic corporation 3.No distribution can be made from trust, unless U.S. citizen or domestic corporation trustee has right under the trust to withhold from the distribution any tax due on the distribution

14. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 Qualified Domestic Trust (QDOT) (cont’d) 4.Executor of decedent’s estate must make a QDOT election, and if a QTIP trust is used, a QTIP election as well 5.No marital deduction allowed unless property is transferred to a: –QDOT, –Trust reformed to qualify as QDOT, –Transferred to QDOT by surviving spouse, –Surviving spouse becomes a citizen, or –There is a treaty

15. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 Qualified Domestic Trust (QDOT) (cont’d) 6.Estate tax is imposed on QDOT assets due to any of the following events: –Distribution made prior to surviving spouse’s death, except for: Distribution of income to surviving spouse, or Distribution to surviving spouse on account of hardship –When surviving spouse dies Entire value of property in QDOT subject to estate tax –QDOT fails to meet requirements Estate tax imposed on entire value of property on the date trust fails –QDOT payment of estate tax on a distribution is itself a distribution subject to further estate tax

16. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 Qualified Domestic Trust (QDOT) (cont’d) 7.Computation of estate tax on a QDOT a.State amount involved in the taxable event b.Add all previous taxable events c.Compute the federal estate tax on the estate of the first spouse to die as if the total of steps a and b were included in the decedent’s gross estate d.Compute the federal estate tax on the estate of the first spouse to die as if only the amount of the previous taxable events were included in the decedent’s gross estate e.Subtract the tax computed in step d from the tax computed in step c. This is the tax imposed as a result of a current taxable event

17. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Qualified Domestic Trust (QDOT) (cont’d) 8.If surviving noncitizen spouse becomes a U.S. citizen after the QDOT is established: –Spouse may still be able to treat balance of QDOT assets as conventional marital deduction as long as other requirements of Section 2056A(b) (12) are met. Copyright 2011, The National Underwriter Company17

18. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 Qualified Domestic Trust (QDOT) (cont’d) 9.If the estate otherwise qualifies, various tax elections are available upon the death of the surviving spouse, such as: –IRC Section 303 –Valuation elections under Section 2032 and 2032A –Deferred payment of federal tax under Section 6166, or –Charitable deduction under Section 2055

19. Non U.S. Persons in the Estate Plan Chapter 20 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 Effects On Joint Tenancy Where one spouse is not a citizen, under IRC Section 2040(a), the entire value of the joint tenancy property is included in the estate of the spouse who contributed to the joint tenancy –Note: The 50% ownership allocation to each spouse under joint tenancy rules does not apply in this situation