Family Wealth Planning Challenges with Multi-National Families

As families become more global, more people are faced with international touches that lead to an increase in tax and informational filing obligations.  Non-citizens who live, work, invest or own real property in the U.S. must understand how they are impacted by both the U.S. income, and estate and gift tax rules.  Similarly, U.S. persons with family members living abroad must understand certain transactions can create exposure for family members residing in the U.S.   For some, the increased complexities may be easy to plan around, while for others the planning may not be so easy.  Planning for multi-national families is becoming more complex every day.  This article highlights some of the U.S. tax considerations and filing requirements that may be required for various scenarios.

Estate Tax Planning for Multinational Families

When a person moves to the U.S. and becomes a resident, their entire income, regardless of where earned, becomes subject to U.S. income taxation.  While this is not necessarily the case for wealth transfer purposes, there is a different set of rules that is equally complex for estate and gift planning. Those with family members residing in different countries face additional challenges when planning for the proper administration of their assets as they are passed from one generation to the next.  Transactions between family members in different tax jurisdictions create a myriad of U.S. income and estate tax issues.  Currently, the US has estate and/or gift tax treaties with 16 different jurisdictions.  This leaves many families from countries where issues such as domicile, dual-domicile, or potential double taxation on asset transfers with little relief and sometimes minimal guidance.  We recommend coordination between U.S. and foreign legal and tax counsel to better understand the family’s short and long term objectives, and the implementation of a legal structure that will function as desired in every applicable legal jurisdiction while minimizing the worldwide effective tax impact.

Receiving Gifts from Foreign Individuals

U.S. persons receiving gifts from foreign individuals are required to timely report such gifts to the Internal Revenue Service (IRS) if the gifts exceed either $100,000 annually or are distributions from a foreign estate or trust.  Failure to report can result in significant penalties.

Planning for U.S. Beneficiaries of Foreign Estates or Trusts

Foreign estates and trusts may be subject to U.S. income tax and other reporting obligations when there are U.S. beneficiaries, U.S. assets, or a trustee living in the US.  Planning with foreign trusts can become extremely complicated as understanding all the ramifications of the trusts are key to ensuring proper U.S. reporting.  All too often we see the family shocked to hear that they have a separate U.S. filing obligation with respect to the foreign estate or trust.  Tax advisors can help advise on existing trust structures to find ways to mitigate or reduce the U.S. tax exposure while working with the international family and legal counsel to ensure that all individual and business goals are properly maintained.

Foreign Investment in U.S. Businesses or Real Estate

Many foreigners invest in U.S. real estate or businesses and without fully understanding their exposure to U.S. tax and reporting during the acquisition, operation, and ultimate disposition of the asset.  The consequences of failing to file can be extremely costly and ultimately result in hefty penalties. Additionally, improper planning may result in the asset being subject to U.S. estate taxes upon the non-U.S. person’s death.  Other consequences for lack of proper planning can include the inability to use preferential long-term capital gain rates, disallowance of certain asset related expenses, and withholding taxes levied when funds are repatriated from the U.S.  Even a property in the U.S. held for personal use must be carefully structured to reduce tax, legal and reporting issues.

 Estate Tax Planning for Non-Citizen Spouses

When both individuals are U.S. citizens, a tax-free transfer of property is unlimited between spouses.  However, the same benefit is not afforded to marriages between a U.S. citizen and a non-U.S. citizen or domiciliary.  The gift tax annual exclusion available to a non-citizen spouse was $157,000 in 2020 compared to the unlimited exclusion available between citizen spouses.  Proper planning can help defer the tax due for assets passing to a non-U.S. citizen spouse.  Additionally, it is very important to avoid the tax trap of assuming a tax-free exclusion at death of the non-U.S. spouse if the estate is currently under $11.58 million since the non-U.S. spouse exclusion available is limited to just $60,000.  

 Conclusion

As companies and individuals become globally mobile, the number of individuals affected by the multinational tax rules will increase.  Timely and coordinated planning is crucial.  We encourage you to take all necessary actions to ensure you are properly prepared for potential U.S. income, estate and gift tax implications of a move to/from the U.S.,  gifts to or from either foreign individuals, estates or trusts, the purchase of U.S. property, or a marriage to a non-U.S. person.