In a time when great uncertainty clouds the world’s financial markets, ultra-high-net-worth individuals abroad are increasingly looking to the United States as a secure location in which to grow their wealth. As foreign investment in the United States, and more specifically, South Florida, has continued to increase, ultra-high-net-worth individuals abroad have sought the expertise of U.S. counsel to assist with the increasingly complex and global nature of ultra-high-net-worth estate planning.
More generally, an ultra-high-net-worth individual should pay particular attention to structuring his or her estate planning needs if he or she has property in more than one country, or has family members who are residents of or domiciled in more than one country. Typically, in South Florida, this involves a foreign client who has assets situated in the United States or has family members residing in the United States, or both. Location of the individual’s property, as well as the residencies and citizenships of the individual’s spouse and/or descendants can create complexities that necessitate legal expertise and tax planning and structuring.
From a U.S. tax perspective, the federal estate tax is imposed on estates with U.S.-situs assets where the decedent is neither a resident nor a citizen of the United States, commonly referred to as a nonresident alien. A resident decedent is a decedent who, at the time of his or her death, had his or her domicile in the United States. Federal estate tax liability is determined by domicile, meaning the place where a person lives with no intention of leaving, based on a variety of factors. Establishing residency or non-residency for U.S. tax purposes is complex and requires the guidance of an international tax planning professional.
For estate tax purposes, U.S.-situs assets, or assets located in the United States, generally include real property located in the United States, tangible personal property located in the United States (like artwork, cars, boats and jewelry), currency, and stock of U.S. corporations. The gross estate of a nonresident alien is limited to that portion of his or her assets, which at his or her death, is located in the United States.
Ultra-high-net-worth individuals abroad must also be careful navigating the federal gift tax. With respect to nonresident aliens, the federal gift tax is imposed only upon gifts of U.S.-situs property, which includes gifts of real property and tangible personal property, located in the United States. A nonresident alien does not have a gift tax exemption available; however, there is no federal gift tax when a nonresident alien transfers intangible personal property, like shares of stock in a U.S. company. Thus, a nonresident alien could potentially gift U.S. stock tax-free, but could not bequeath the same stock at death free of federal estate tax.
With respect to income, income tax liability is determined by residency status; however, it is important to note that the test for residency for federal income tax purposes is different from the test for domicile for estate and gift tax purposes discussed above. Factors considered for residency as it relates to income tax liability include the green card test (lawful permanent residence test) and the substantial presence test (day counting test). Given the overall increase in ultra-high-net-worth individuals abroad seeking to benefit from the comparative security afforded by investing in South Florida, enforcement of the residency tests for income tax purposes is strict and often unforgiving.
In terms of international tax planning, it is important to maintain formalities and strictly comply with the requirements of the Internal Revenue Code to protect foreign assets from the gross estate (and thus minimize estate tax liability) for U.S. tax purposes. Sophisticated tax planning techniques can be utilized to protect the U.S.-situs assets of a nonresident from the federal estate tax. A popular technique, utilized by many, is to establish a foreign holding company to hold the U.S.-situs assets, and thus avoid or minimize the federal estate tax.
The United States and South Florida present a stable, yet lucrative, opportunity for foreign investment. However, in order to fully take advantage of the U.S. markets, ultra-high-net-worth individuals must properly plan and structure their investments.
This article was previously published in the August 25-31, 2017 Edition of the South Florida Business Journal.