A few days ago, a tax CPA called me from Florida. He had read my blog on the big risk of “check the box” pre-immigration income tax planning (on this link). A few hours later, an immigration attorney from Houston called pre-immigration U.S. death tax planning. Her client was from Mexico and had purchased homes in the U.S.
Pre-immigration income tax plan
Upon becoming a U.S. income tax resident, you learn that the IRS sees you as always being a tax resident. Okay, it makes no sense, and it is not fair. If we had a tax law that was fair, then you would not need a tax planner. But we don’t, so you need a tax planner (an exception applies to a UK citizen (more on this link).
Tax planners attempt to fix unfair rules of the tax cost of your property. For example, Pierre purchased his home in Paris in 1990. His cost in dollars is $100,000. He became a U.S. resident in 2015. In 2016, he sells his Paris home and buys a home in California. His Paris home sells for $1,000,000. His gain of $900,000 is taxable for both the U.S. and California.
This also applies to Pierre’s French business. In 2016, Pierre sells his French business. He started the business in the 1980s and had no historical records. The company sells for $1,000,000. Because he does not have historical records, the entire gain is taxable. Since the French corporation is a “controlled foreign corporation,” the gain is taxed at a higher tax rate.
The Florida CPA called because he did not want to commit malpractice by using the “check the box” election. The risks were high that the election would not work.
The another choice is to re-organize the French company into either a U.S. company or another type of French company. Both of these are time consuming process. The U.S. company is known as a “dual resident corporation (more on this link). The alien business person can seldom accept the complexity of U.S. tax law. They often get frustrated and take shortcuts that create a tax problem for a few years. The tax problem because of a malpractice problem for the tax planner.
Pierre has the same estate tax problem as the Mexican family. Pierre came to the U.S. on an investor E2 visa to start a tech firm in Santa Monica. He plans to return to France after he makes his fortune in California. With the E2 visa, he is a non-resident for estate and gift taxes. His death tax exemption is only $60,000 (not $5.2 million as it is for an American).
His estate planning had to be completed before he purchased his home. His tax planners were so concerned about income taxes that they forgot the U.S. death tax. A qualified personal residence trust (QPRT) needed to be established before he purchased the home.
While Pierre was an income tax resident in 2015, he never became a resident for gift taxes or estate taxes. For gift and estate taxes, he had to be domiciled in the U.S. to be a resident. Thus, he could have funded the trust with a gift of money at any time (tax planners advise the money not to be in U.S. dollars or initially in a U.S. bank account).
Before he purchases a home in California, he meets with an estate planning attorney. The attorney drafts the QPRT. This type of trust passes the home to Pierre heirs after a period of years (usually twenty or more years depending on Pierre’s age). The IRS provides a free sample agreement for the QPRT. If you want the agreement, please contact me.
If you are a non-resident moving to the U.S., ask your tax planner to get an IRS guarantee. This is known as a private letter ruling (more on this page).