Tag Archives: international inheritance tax planning

U.S. International Inheritance Tax Plan for the British, French, Dutch, Germans and Canadians

International inheritance tax plan for the United Kingdom citizen, the French citizen, Dutch citizen, German citizen and Canadian citizen is unique.   Citizens of these countries have numerous tax treaties allowing for unique tax treaty planning. 

The “trick” is to balance the inheritance tax law in the U.K., France, the Netherlands and Germany with both the U.S. estate tax laws and income tax laws. The U.S. laws are different from the laws in other countries. 

Canada does not have an estate tax or an inheritance tax.  Thus, the “trick” is to balance the U.S. income tax laws with the Canadian income tax laws using the income tax treaty.

While some European countries do not recognize trusts, these countries do either because of their local laws or European treaties.   The United States has many types of trusts.  There is almost always a trust type that will reduce the inheritance tax and or the U.S. estate tax.

One of the special rules that the U.S. has for estate planning, is the use of a “private annuity”.

Here is an example.    Ian owns property in the U.S. and the U.K.  He is a U.K. citizen and resident.   Part of his assets are in the U.S. stock market.     Ian decided to create a trust in the state of Nevada.  Nevada trust law allows Ian to direct the trust investment and direct distributions to any person other than himself.

Ian settles the trust with an initial gift of $2,000,000,  He wants to limit his gifts (for both U.K. and U.S. tax reasons).    He decided to places an additional $2,000,000 into the trust with the agreement that the trust will pay him a lifetime annuity.  

Ian is age 75. Based upon an IRS tax table, the trust will pay him $200.000 a year.  

By using the annuity, Ian avoids having a gift in both the United States and the United Kingdom.  The annuity payment can be deposited in a U.S. bank account or a bank account in another country.

International Inheritance Tax Planning Involves Income Tax Planning

There is more than just avoiding tax upon death.  You want your heirs not to pay income tax because you took a shortcut in your international  inheritance tax planning.

Learn more about UK  tax planning on this link,

Learn more about French tax planning on this link.

The United States has a special tax savings law for heirs.  The property inherited gets a new tax cost for income taxes.  The new tax cost is the value of the asset on the date of death of the decedent.   If you would like to strategies your international inheritance tax plan, then please contact me, Brian Dooley, CPA, MBT at [email protected]

 

 

Foreign Investors Learn Why a Foreign Corporation is U.S. Death Tax Trap

The problem for the non-resident alien is that their estate tax exemption is $60,000 and not $5.3 million (as it is for Americans).   And there is one more problem… the U.S. estate tax planner.  While the U.S. has a tax on the estate, other countries tax the recipient.  This tax is called an “inheritance tax.”

Thus the  American tax planner also must know “international inheritance tax planning” for the foreign country of the investor.

They advise the nonresident alien (the term for estate and gift taxes is “nondomiciled“) to own their U.S. investments and U.S. real estate through a foreign corporation (such as a Panamanian company or a British Virgin Island company).  

Since the 1950’s, this tax plan has failed.  The U.S. courts have ruled for the IRS (more on these cases on this link).  These court cases focused on the power to revoke (section 2038) and the right to the corporate dividends (section 2036).  These tax laws  required the assets owned by the foreign entity to be included in the deceased’s U.S. taxable estate

The best estate tax planning method for the foreign investor involves a trust.   Here is a link on the basics.  In Europe and the United Kingdom have an inheritance tax.  Estate taxes and inheritance differ.  This difference challenges international inheritance tax planners. 
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IRS Hits Foreign Investors in U.S. LLCs and Partnerships Hard.. very Hard

No audit is necessary!   The tax law allows the IRS to automatically assessed that tax on the gross income and disallow all expenses when a Form 1120F  is not filed or is filed late.   

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

U.S. international tax law disallows all business expenses when a Form 1040NR or Form 1120F is filed late or has not been filled.    

Here is an IRS explanation.  The legal advice is in blue below:

Third Party Communication: * * *
Date of Communication: Month DD, YYYY

ID: CCA_2015032710120101

From: * * *
Sent: Friday, March 27, 2015 10:12:01 AM
To: * * *
Cc: * * *
Bcc: * * *
Subject: FW: IRC 882(c)(2) and TEFRA (POSTS-143012-14)

The section 882 limitations on deductions is not a partnership items because it is not something the partnership must determine under Subtitle A. I.R.C. 6231(a)(3) and 703.

Instead, the limitation is a partner-level affected item similar to partner limitations on partnership deductions under the at risk (sec. 465), passive loss (sec. 469) and outside basis limitations (sec. 704(d) rules. See Treas. Reg. 301.6231(a)(5)-1(a) through -1(d).

Consequently, the deductions should be disallowed through an affected item notice of deficiency issued under section 6230(a)(2)(A)(i).

Under Roberts v. Commissioner, 94 T.C. 853, 860 (1990), we do not have to open and close a TEFRA partnership proceeding before issuing such affected item notice of deficiency. But for the purposes of the affected item notice, we will be bound by the amounts reflected on the partnership return, before application of the partner-level limitations on those amounts.

Example of the tax trap for the foreign investor in LLC or partnership

A foreign investor uses a foreign corporation to be a ten percent  member in a U.S. LLC.  Domestic LLC’s are classified as a partnership.    The partnership has income of  $10,000,000 and expenses of $8,000,000.   The foreign corporation share of the $2,000,000 of net income is $200,000.   However, foreign corporation is late in filing its form 1120F.

Section 882 denies a tax deduction of all of the expenses when a return (form 1120F) is filed late or is not filed.  Thus, the IRS can assess tax on $1,000,000 (ten percent of the income of $10,000,000).  Under section 882, the foreign investor is denied a tax deduction for all of the expenses incurred by the partnership.

This is the case despite that LLC timely filing its partnership return.  Usually, the IRS would have to audit the partnership.  However, the legal advice explains that the IRS can merely assess the foreign corporation.

U.S. Estate Taxation of the Foreign Investor using a Foreign Corporation

The shareholder of the foreign corporation will owe U.S. estate taxes. The U.S. has an estate tax and not an inheritance tax.  U.S. estate tax law ignores the corporation.  Here is why on this link.

Best International Tax Structure for Doing Business in the United States

The Best International Tax Structure of the non-Citizen doing Business and Investing in the United States involves the use of a Trust.

Best International Tax Structure of the non-Citizen doing Business and Investing in the United States.

When in Rome do as the Romans’ do”  is the mantra for the foreign investor.   The U.S. has different concepts in taxation (for both income tax and inheritance tax, which we call the “estate tax”) than the U.K. and Europe.

To avoid high taxes in the U.S., the European needs to avoid using European and U.K. tax concepts.

Wealthy Americans use trusts to avoid taxes legitimately.   The diagram on this blog shows the typical structure of the Wealthy American.

A domestic holding company causes income to be taxed two times. They also have a higher tax rate on capital gains.  In the U.S., the preferred entity for investors and business owners is the limited liability company.   The U.S. has fifty nations (called states) each with their legal system.  The two states with the best business legal systems are Delaware and Nevada.

They have a higher tax rate on capital gains.  In the U.S., the preferred entity for investors and business owners is the limited liability company.   The U.S. has fifty nations (called states) each with their legal system.  The two states with the best business legal systems are Delaware and Nevada.  These states do not have an income tax.

The state with the best trust law is Nevada. In the diagram above, the trust should be in Nevada.  This state allows you to own a Nevada corporation to be your trustee.  This is known as a “private trust company.”

American income tax planning wants to maximize capital gains tax.  In the diagram, each entity is a single member LLC.  The IRS has favorable tax laws.  With these statutes, the LLC does not file a tax return.  This keeps down your tax accounting cost.

U.S. tax law has four choices in your trust taxation.  One option allows foreign income to be never be taxed.    Your foreign income can be earned by a Nevada trust and never pay U.S. or state income tax (Nevada has no state income tax).

For example, you own a U.K. company.  You want to avoid U.S. estate taxes.  You also do not want to pay U.S.  income taxes on the U.K. income.   A Nevada trust is ideal for this.  You can be the trustee (with your Nevada private trust company).  You gift the shares of the U.K. company to the Nevada trust.  You name your non-U.S. spouse as the current income beneficiary.  U.S.income tax law sees her as the owner of the U.K. shares.   The result:  No U.S. estate tax or U.K. inheritance tax; no income tax on the U.S. company’s profits and strong asset protection.

Another choice allows you to pay tax on U.S. income.   This is good if you are in a nation with a treaty with the U.S.   Treaties can reduce the U.S. tax rate to 5% to 15%.

Two other tax laws allow the trust to be the taxes.  If your trust is going to own U.S. real estate, then this is a good method.  It avoids the “Foreign Investor Property Tax Act” also known as FIRPTA.

Inheritance tax planning trusts are used by the wealthy to avoid the estate tax.  The IRS will give you a tax guarantee.  This is known as a “private letter ruling” (more on this link).

If you need more information, then please give me, Brian Dooley, CPA, MBT a call for a free one-hour consultation at 949-939-3414.