Coming to America Part 2: Integrated Tax Strategies For Entrepreneurs Relocating to The US

In this two-part series, Melvin Warshaw and David Lesperance discuss the critical importance of an integrated and coordinated tax and immigration strategy for businesspeople and their families when considering and executing a move to the United States on a part- or full-time basis. In this second part of the series, the authors look at the interaction between tax and immigration law and possible strategies for entrepreneurs considering relocation to the United States.

Green Card vs. Non-Immigrant

As we discussed in Part 1 of this series, various immigration options are available when considering a move to the US. Quite often, we will receive a request to “get us all a Green Card”. However, after further discussion, we discover that only certain family members want to live, work, or study in the US full-time. Others (often the wealth creator) just want access to the US for business and personal reasons but do not want to immediately or ever expose their existing wealth to US taxation.

The U.S. Tax System is Complex: Here Are the Basics

U.S. citizens, green card holders (i.e., permanent legal residents), and substantial-presence residents of the U.S. are subject to income taxes on worldwide income and, typically, transfer taxes on their worldwide assets. The 2017 tax act in the U.S. will generally cause the income of foreign entities to be taxed to certain U.S. shareholders currently, even if the earnings are not distributed. U.S. citizens and green card holders remain subject to U.S. income tax wherever they reside in the world and may incur an exit tax if they seek to give up their U.S. status.

Non-residents of the U.S., on the other hand, are generally only subject to U.S. tax on income that is effectively connected with a U.S. trade or business (including gains on the sale of real property) and dividend payments received from U.S. corporations (through withholding tax).

Non-U.S. citizens and non-U.S. residents (known as “NCNDs””) are generally subject to U.S. estate tax only on certain U.S. assets, typically real estate and tangible property located in the U.S. Importantly, there is no U.S. gift tax on the transfer of intangibles such as shares of a U.S. corporation but such shares are subject to U.S. estate tax if held by a non-domiciliary in his or her personal name.

Residence

An individual who is not a U.S citizen is treated as a U.S. tax resident (known as a Resident Alien) during a particular tax year, and, therefore, is subject to U.S. federal income tax on a worldwide basis, unless an applicable tax treaty provides otherwise, if such individual is a lawful permanent resident (green card holder), satisfies the substantial presence test, or makes an election to be treated as a U.S. tax resident.

In addition, an individual who meets the substantial presence test will not be considered a U.S. tax resident for that year if such individual is present in the U.S. for fewer than 183 days during such year and establishes that for such year he or she has a tax home (i.e., a place of employment, otherwise a habitual residence) in a foreign country and has a closer connection to such foreign country. 

Also, if an individual is considered a U.S. resident (e.g., holds a green card) and is also considered a resident of a foreign country that has a tax treaty with the U.S., the treaty tie- breaker rules may apply to determine whether the individual is a resident of either the U.S. or the foreign country. 

It is also important to understand how residency status impacts an individual’s U.S. estate and gift tax position. Unlike the income tax residency rules which are relatively objective, exposure to U.S. gift and estate taxes for Resident Aliens is determined based on domicile, and is typically influenced by an individual’s subjective intent and other actions. 

An individual could be exposed to U.S. gift and estate tax on worldwide assets if such individual moves to the U.S. and his or her actions imply an intention to remain in the U.S. indefinitely.  In addition, applying for U.S. citizenship or a green card could expose the individual’s worldwide assets to U.S. estate and gift taxes.

Conversely, it is possible that a green card holder who permanently leaves the U.S. and establishes domicile in another country might be considered a NCND of the U.S, however, there is no notice requirement that a NCND must provide to the U.S. government notifying the U.S. of a change of domicile away from the U.S.

U.S. citizens and U.S. domiciliaries are entitled to lifetime gift and estate tax exemption amounts of $12.92M in 2023. However, these relatively high exemption amounts are temporary and absent intervening Congressional action before 2026, the exemption amounts will sunset and revert to pre-2018 levels of approximately $7M beginning in 2026. 

For non-U.S. domiciliaries, the U.S. estate tax is imposed on certain U.S. situs assets in excess of $60,000 (subject to possible relief under a U.S. estate tax treaty with some countries that impose an inheritance tax, as well as with Canada).

U.S. citizens may pass their entire estate free of U.S. estate tax to a U.S. citizen spouse on death.  However, if a U.S. citizen or U.S. domiciliary is married to a non-U.S. citizen then he or she may transfer $175,000 annually (in 2023) to such spouse during life. At death, after applying their remaining lifetime gift/estate tax exemption amount, such excess must be transferred to a Qualified Domestic Trust (QDOT) which merely defers U.S. estate tax on this excess amount until the death of the non-U.S. domiciled spouse.

State and Local Tax

In addition to the U.S. federal tax issues outlined in this paper, individuals considering coming to the U.S. should be aware of the very significant differences among the states in imposing a state income tax and a state estate tax. The rules for determining when an individual is a resident in a specific state also vary greatly so anyone considering a move to the U.S. should seek further guidance in this area. 

California and New York impose the highest state income taxes on its residents but only New York has a state estate tax.  Texas and Florida do not impose a state income tax and neither state imposes a state estate tax.

Next is to develop a tax savvy immigration strategy which meets all the family goals with regards to proposed activity; amount of time to be spent in the US; and timing to commence US activities.

Securing non-immigrant status but avoiding becoming a us taxpayer

There are a few techniques to potentially minimize the extensive scope of the U.S. income tax system for businesspeople who often travel to the United States but aim to avoid the global application of the U.S. income tax system. Generally, if a non-U.S. citizen stays in the U.S. for over 121 days annually, that individual may meet the “substantial presence” criteria and thus be classified as a resident alien, becoming liable for U.S. tax on their global income. Several exceptions to this “substantial presence” rule exist.

Closer Connection Test

One significant exception to the “substantial presence” test, which is crucial for non-U.S. individuals who find themselves spending extended periods in the United States, is the “closer connection exception.” This exception comes into play when an individual is in the United States for under 183 days in the current year, but the weighted average formula typically used for the “substantial presence” test meets or surpasses 183 days (due to the individual’s time spent in the United States over the past two years).

For this exception to be valid, the individual must demonstrate for the current year that they have a (i) “tax home” in a country outside the U.S., and (ii) stronger ties or “closer connections” to that foreign country than to the United States. Treasury Regulations §301.7701(b)-2(c)(1) clarifies that an individual’s tax home refers to their regular or main place of business.

If there’s no regular or primary business location due to the nature of the individual’s business, or if they aren’t involved in any trade or business, then their tax home is where they regularly reside in a genuine and significant manner. Treasury Regulations §301.7701(b)-2(d)(1)(i) – 301.7701(b)-2(d)(1)(x) enumerate ten non-exclusive factors to be considered when determining if a closer connection is present.

As mentioned earlier, the closer connection exception doesn’t apply if the individual stays in the United States for 183 days or more during the current year. Practically, this exception might be relevant to someone without a business or workplace in the U.S. who spends between 122 and 182 days in the U.S. annually.

Furthermore, this exception is void if the individual holds lawful permanent residency in the United States (e.g., has a green card) or if they’ve initiated or “taken other affirmative steps” in the current year to alter their status to a lawful permanent resident or have a pending application for status adjustment.

To claim this exception, one must complete and submit IRS Form 8840, Closer Connection Exception Statement for Aliens, by the stipulated deadline.

Treaty Tie-Breaker Election 

If an individual qualifies for the “substantial presence” test (and thus is a U.S. income tax resident according to the Code), but also maintains tax residency in another country that has an income tax treaty with the U.S. (termed a “treaty party country” here), they might be eligible to sidestep taxation as a U.S. income tax resident due to the treaty’s provisions. This provision, often dubbed the “tie-breaker” rule, allows  an individual considered a tax resident of both the U.S. and a treaty country be taxed as a resident of just one of the two countries.

This decision is based on criteria found in each tax treaty which lays out a hierarchy of factors to consider  in which country the individual is primarily a tax resident. To obtain this tie-breaker benefit and be taxed in the treaty party country instead of the U.S., the individual must meet particular conditions detailed in the relevant treaty. Usually, this means having stronger connections to the treaty party country than to the U.S.

Should someone claim this tie-breaker relief, they would compute their U.S. income tax as if they were a nonresident alien, possibly letting them pay U.S. federal income tax on only on their U.S. source employment, dividend or business income while their non-U.S. source investment and business income would not be subject to U.S. tax..

However, contrasting the closer connection exception, a person claiming treaty tie-breaker relief must fill out IRS Form 1040NR, U.S. Nonresident Alien Income Tax Return. They’re also bound by many reporting stipulations applicable to U.S. income tax residents (for instance, reporting certain foreign entity ownerships, financial interests, or control over foreign accounts, and gifts from nonresident aliens, among others).

Additionally, they need to attach IRS Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to their Form 1040NR, where they assert the tie-breaker position by citing the language in the applicable treaty that pertains to them.

As highlighted later, claiming a Form 8833 treaty tie-breaker status in the eighth year or beyond as a green card holder is seen as an expatriation act for U.S. tax purposes and might activate U.S. exit tax and future U.S. inheritance tax obligations for U.S. heirs in specific scenarios.

Delay Decision to Obtain Green C

Generally, it’s often advised for individuals relocating to the U.S. to postpone acquiring a green card (permanent legal resident) status as long as feasible. The primary rationale behind this typical advice is to prevent potential exposure to the U.S. exit tax and having their U.S. descendants liable to U.S. inheritance tax if they decide to depart from the U.S. down the line. Those in the U.S. on multi-year L-1 intracompany work visas who meet the “physical presence” test can never be exposed to the U.S. exit or inheritance taxes.

If a green card holder remains a permanent legal resident for eight straight years, they’d likely be labeled a “long-term” green card holder if they then relinquish U.S. permanent legal residency any time in or after the eighth year. Such  “long-term” green card holders. can be tagged as “covered expatriates” if they fulfill any one of three alternate tests. One is a net worth test amounting to $2 million or more the day before surrendering the U.S. green card.

Another is not being able to prove complete U.S. tax compliance five years before the expatriation year. The third test examines whether the individual paid more than an average of $190,000 in federal income tax liability (in 2023, adjusted for inflation) over a rolling five year period

Thus, U.S. exit tax might be levied if a “long-term” green card holder’s net worth is $2 million or higher when relinquishing their green card, and their global capital asset appreciation exceeds $821,000 (as of 2023). Letting a green card expire doesn’t affect U.S. permanent legal residency. A holder typically has to give up their permanent legal status, often by completing a Form I-407, Record of Abandonment of Lawful Permanent Resident Status, with the U.S. Citizenship and Immigration Service.

Yet, there’s another way a green card holder might unintentionally invoke the U.S. exit tax, even if they retain their green card that year. IRC Section 877(A)(g)(5) referencing IRC Section 877(e)(2) states that a “long-term resident” is any non-U.S. citizen who’s a lawful U.S. permanent resident in at least 8 out of 15 taxable years concluding with the year in which a certain event occurs. An individual won’t be seen as a lawful permanent resident for any taxable years if they’re viewed as a resident of a foreign nation for those years under a U.S.-foreign country tax treaty and doesn’t renounce the treaty benefits available to foreign country residents.

Therefore, there are two primary ways to avoid counting years within the fifteen-year duration towards the eight-year criterion. The most frequent is when an individual doesn’t have a green card for the whole year (by voluntarily submitting a Form I-407 with the U.S. CIS that year). It’s vital to understand the unique regulations surrounding treaty claims (i.e., filing of Form 8833 with Form 1040NR) that might inadvertently activate the U.S. exit tax for green card possessors.

If a holder decides to make a treaty claim to be taxed as another country’s resident under tie-breaker rules after June 2008, and it’s prior to achieving the “long-term resident” status, that year’s treaty claim (done during the first seven green card years) prevents that year from counting towards the eight-year “long-term resident” criterion. Conversely, if they make such a claim after the eight-year threshold has been met,  merely filing of such Form 8833 itself in or after June 2008 is an act is an expatriation for tax purposes, even though the individual retains their permanent legal residence status for U.S. immigration purposes.

Only “long-term” holders meeting the eight-year criterion might face the U.S. exit tax if they’re deemed a “covered expatriate” through one of three alternate assessments (average federal net tax liability surpassing a certain amount ($190,000 for 2023, adjusted for inflation), personal net worth of $2M or more, or failing to validate full U.S. tax compliance on a punctually submitted Form 8854 Expatriation Statement for the 5 years before the expatriation date).

Pre-Residency Income Tax Planning for those who will be US Taxpayers

If an individual is moving from a jurisdiction with a lower tax rate than the U.S., consider accelerating the recognition of income, such as dividends paid by closely-held foreign companies or deferred compensation for services performed outside the U.S., before becoming a U.S. income tax resident.  The goal is to minimize being taxed at higher U.S. tax rates.  Conversely, if the individual is moving from a jurisdiction with a higher tax rate, consider deferring recognition of the income until after the individual has moved to the U.S. Also consider the impact of any state income taxes based on the state where the individual will reside.

While timing of income recognition may be limited to those few individuals who have such control, the timing of when to realise capital gains or losses can usually be more readily determined.  It is important to note that absent a tax treaty provision, capital gains realized once the individual has become a U.S. income tax resident carry the original cost basis.  The same applies to founders of startups that have low tax basis in their foreign company stock and subsequently sell at a huge gain while a U.S. income tax resident.  As discussed below, an inbound individual may benefit from a check-the-box election to increase his or her basis in a highly appreciated asset before moving to the U.S.

Review Foreign Holdings

The U.S. tax rules that address foreign investments are complex and designed to limit the ability of U.S. income tax residents to defer income taxes.  This is typically achieved principally by maintaining fully transparency through onerous U.S. international information reporting.

It is not uncommon for wealthy individuals residing outside the U.S. to hold their investments through an offshore holding company possibly organized in a low-tax jurisdiction.  If an individual holds such an ownership interest in a foreign (non-U.S.) company and becomes a U.S. income tax resident unless they pro-actively undertake pre-immigration tax planning they will have serious adverse U.S. tax consequences. The income will generally be taxed each year at the highest U.S. tax rates, even if no income is distributed or repatriated. In addition, the individual could become subject to a second level of U.S. income tax after paying foreign taxes.

Careful consideration should be given as to whether it makes sense to liquidate the foreign company before becoming a U.S income tax resident, however, it is often not practical to do so and there may be a significant tax cost in the country from which the individual is moving or where the business is located. 

Subject to certain eligibility criteria, it may be possible to cause a ”deemed liquidation” of the foreign company solely for U.S. tax purposes (and not for any other law purposes), before the individual moves to the U.S.  The inbound individual would elect to treat the foreign company as a pass-through entity (i.e., either a”disregarded” entity or a ”partnership” for U.S. tax purposes). This has the same U.S. tax effect as if the company sold it assets thereby potentially obtaining a step-up in the tax cost basis before becoming a U.S. income tax resident while still maintaining the entity’s legal form. 

There are at least two other favoable consideration when an inbound individual to the U.S. can cause a check-the-box election on a foreign company in which he or she is a shareholder. First, the complex anti-deferral U.S. tax systems and reporting requirements under the U.S. controlled foreign corporation and passive foreign investment company rules are avoided and there is reduced U.S. tax reporting.  Moreover, as a pass-through entity for U.S. tax purposes, the owner should be entitled to claim a foreign tax credit on his or her U.S. income tax return for the allocable share of foreign country corporate tax paid by the foreign company, creating more tax efficiency.

Pre-Domicile Transfer Tax Planning

If an individual intends to be in the U.S. indefinitely and might face U.S. estate and gift taxes, such individual might consider making an irrevocable gift to either a non-U.S. relative (not be moving to the U.S.) or a discretionary ”drop-off” trust.  To the extent intangible assets located anywhere or real estate or tangible property located outside the U.S., there should be no U.S. gift tax and no U.S. gift tax reporting obligation.

Those assets should be removed from the individual’s U.S. taxable estate. This strategy is especially appealing to wealthy individuals whose estate will be in excess of the current $12.92M (2023) lifetime gift/estate tax exclusion amount.  A gift to a so-called ”drop-off” trust (i.e., a fully discretionary U.S. domestic trust) before moving to the U.S. will generally not use up any portion of the individual’s $12.92M (2023) exclusion amount. 

In most situations, however, the income earned by the ”drop-off” trust will likely remain taxable to the individual trust creator, unless he or she established and funded the trust more than five years priot to moving to the U.S.  

To be most effective, an inbound individual should only fund the ”drop-off” trust with no more than roughly 80% of his overall net worth, and while residing in the U.S. the trust creator should limit distributions of trust income and principal to himself while encouraging distributions to other beneficiaries.  The trust creator does not want the IRS to perceive that the trust creator has an indirect ownership in the trust access as demonstrated by multiple distributions to support his lifestyle while living in the U.S.

An independent trustee is highly recommended and the trust creator should retain no powers over the ”drop-off” trust that would cause inclusion of the trust property in his taxable estate if he died while living in the U.S.  (The trust creator could retain the power to remove a trustee and appoint a new independent trustee to fill any vacancy, without any adverse U.S. estate tax implications.)

If an individual plans to be in the U.S. indefinitely and possibly might obtain U.S. citizenship but his or her spouse is not a U.S. citizen, such individual might consider that only the lifetime gift/estate tax exclusion amount can pass to the non-U.S. citizen spouse tax free on death of such U.S. domiciliary or citizen. Such individual may wish to consider the use of a Qualified Domestic Trust (QDOT) which allows a martial deduction on death of the U.S. citizen or domiciliary spouse on the assets in excess of the lifetime gift/estate tax exclusion amount but there are some drawbacks to such trust.  Such individual might consider the benefits of alternatively funding a life insurance trust for the benefit of such surviving non-U.S. citizen spouse which should avoid all of the QDOT constraints and requirements. 

Possible Cross-Border Business Issues For Businesspeople

Well before entrepreneurs begin to consider their departure from their home country, they should consider all of the important early-stage tax and non-tax considerations of their cross-border business. Among the considerations is what is the most appropriate legal entity to use when expanding to the United States.  For example, should the organizational form of the U.S. operation include a subsidiary, branch or limited liability company (LLC) /partnership?

Another consideration is whether other employees or personnel should relocate to the United States? An additional consideration to be made by the foreign business is whether to capitalize the U.S. venture with debt, equity or a combination of the two? 

The foreign direct investor into a U.S. business also has a variety of ways by which it can repatriate the profits of its U.S. operations.  These include the payment of interest or dividends to the foreign owner.  The utilization of royalties, if applicable is often a tax-efficient means to extract profit the U.S. enterprise. Often the business activity being contemplated for the U.S. involves the sale of inventory products by a foreign company to customers located in the U.S., or so-called inbound sales. 

The essence of this planning is to divide the total profit to be earned in respect to the importing and sale of inventory between the foreign manufacturer and its related U.S. affiliate.  The goal is to minimize the role that the U.S. affiliate plays in the transaction in order to support less income being allocated to it. Moreover, the transfer pricing considerations in the U.S. and, if applicable, in the foreign country must also be considered.

Changing the initial business structure becomes more difficult and more expensive after a start-up company becomes more advanced in its business cycle. For example, changing the ownership of intellectual property from a company in the tech entrepreneur’s current home country of residence to a U.S. subsidiary might be very costly and could draw the attention of the home country’s tax authority due to its transfer pricing rules. Moreover, if access to U.S. capital markets is contemplated, most U.S. investors would prefer to invest in a U.S. entity when making their initial investment in the business.

Entrepreneurs might desire their original parent company in their home country to own the U.S. subsidiary. This arrangement could have potential benefits in terms of estate tax considerations in the U.S. But until the entrepreneur relocates to the U.S., the original parent company would serve as a foreign holding company. The entrepreneur’s estate tax considerations in their home country should be taken into account when determining the initial structure of the business. If the tech entrepreneur’s current home country of residence has an inheritance tax, as do many EU nations, local counsel must advise on the implications in such home country.

If the goal is to access the capital and distribution markets of the U.S. and to appeal to U.S. investors, a U.S.-based parent company might be appealing. However, there might be complications if the intellectual property was developed in the entrepreneur’s home country. The home country’s tax authority could challenge the economic ownership of the intellectual property under the transfer pricing rules, if any, applicable in the home country, especially if no significant business activities are taking place in the U.S.

The essence is that transferring intellectual property across borders is not straightforward, especially without triggering gain recognition in the seller’s home jurisdiction. U.S. investors typically prefer that intellectual property is owned within the U.S., leveraging certain favorable tax incentives. However, these U.S. investors might be wary of an ownership structure that subjects them to U.S. income tax on income generated from non-U.S. sourced intellectual property.

Entrepreneurs from other countries might structure their ownership to have a U.S. parent company with a subsidiary in their home country acting as a contractor for R&D. However, there are inherent challenges in locating intellectual property in the U.S., including potential costs and operational considerations.

If foreign entrepreneurs are testing the U.S. market, they might consider hiring an independent contractor for distribution or other services in the U.S. The key tax issue is to avoid having the U.S. contractor be viewed as a dependent agent, which might create a permanent establishment (PE) in the U.S., subjecting part of the business income to U.S. tax.

Forming a U.S. LLC to operate the business in the U.S. has implications for permanent establishment tax treatment. Transactions between the parent company and its U.S. subsidiary are subject to transfer pricing rules, potentially leading to different tax outcomes in each jurisdiction.

Ownership of a company from outside the U.S. by U.S. entities also presents challenges. There are specific U.S. tax considerations and regimes to consider, such as passive foreign investment company (PFIC) rules and controlled foreign corporation (CFC) rules. These can have significant generally adverse tax implications for U.S. investors.

One significant incentive for structuring a parent company in the U.S. is the QSB tax provision. This benefit is a major draw for U.S. investors. Because of the potential advantages of the QSB and the complexities of PFIC and CFC rules, U.S. investors typically prefer to invest in U.S. corporations over foreign ones.  For serial U.S. investors, a threshold criteria is often whether a U.S. investor would be entitled to the lucrative QSB gain exclusion amount (currently $10M) on eventual sale of the QSB shares following a 5-year holding period?

Finally, entrepreneurs should always be aware of any available benefits and incentives in their home country before making a decision about relocating or expanding their business to the U.S.

The Evolving Exit Tax in Some Countries

Many countries, especially those still developing and refining their tax laws, have exit tax rules.  For example, the U.S. has an onerous and robust exit tax regime applicable to certain U.S. citizens and long-term permanent residents who satisfy any one of three alternative tests. 

In general, the U.S. requires payment of a „mark-to-market” exit tax on worldwide appreciated assets or arranging for a U.S. person to periodically withhold U.S. exit tax on certain types of retirement assets as they are distributed to former U.S. persons. 

In other countries, the default position is that a departing resident is deemed to have elected to defer payment of the exit tax until the underlying asset is sold. For these other countries, such an approach often leads to numerous collection and enforcement challenges for the country’s tax authorities once the taxpayer is no longer a resident. Some of the tax treaties these countries enter into may lack robust provisions for cooperation and sharing of information with the tax authority in the new country of residency.

For example, if an individual leaves their home country for a residence in a nation without capital gains tax, challenges can arise. Tax authorities in the departing country might actively seek information from the new country’s tax administrations regarding affluent former residents and their assets, both held individually or through foreign entities.

The information shared could be much more detailed than what is typically exchanged between the two countries. In some nations, residents have the right to review requests made by their former country’s tax authority before their personal information is shared.

Many tax authorities are proactive in collecting tax information on high net worth individuals and auditing their high-value assets located globally, including those held through foreign trusts and corporations. However, obtaining such information can be a slow and inefficient process for the country’s tax authority, especially if their former residents now live in countries known for banking privacy.

Due to the inefficiencies and challenges of current exit tax systems, some countries have initiated tax reform efforts to revise their policies. A common feature in many exit tax regimes is the imposition of a tax on a person (individual or company) who ceases to be a resident. To determine the amount, the person is often deemed to have sold their assets at the fair market value on the date they cease to be a resident. However, while the tax is determined at departure, typically the payment is deferred until the actual sale of the underlying assets.

Such deferred systems might use a method that calculates the portion of the gain on the sale allocable to the original country, often based on how long the asset was held while the individual was a resident.

To ensure tax collection, some tax reform committees have recommended extensive changes. These might include allowing departing residents to choose between immediate tax payment or deferring it, with both options having more stringent reporting obligations.

When the value of assets subject to exit tax doesn’t exceed a certain threshold, both immediate and deferred tax routes might be available. But for more valuable assets, new and detailed exit tax regimes could be proposed, only allowing deferral on non-tradable assets. For instance, for foreign real estate above a certain value, deferral might require a pledge of assets. For other assets, annual reporting could be mandated, with certain types of income excluded from the exit tax. Corporate exit tax rules might also be reformed, with a focus on immediate tax on accrued profits up to the date of residency change.

In essence, as global mobility increases and assets are held in various jurisdictions, countries are grappling with refining and tightening their exit tax rules to ensure that their tax base remains protected.

Planning for Family Who Will Remain a NRA But Whose Children  Have Become U.S. Persons

Suppose the wealthy family matriarch or patriarch and NRA of the U.S. has no plans to move to the U.S. and become an income tax resident.  Also assume that the foreign family patriarch has substantial wealth tied up in many foreign corporations, including operating companies, and he intends to leave his fortune to his son and grandchildren, all of whom are U.S. citizens.

Instead of making outright gifts to the son and grandson, which would bring the assets into the U.S. income tax net and make them subject to inclusion in their U.S. taxable estates upon their deaths, the wealthy family patriarch should consider transferring the shares in the foreign corporations to a revocable family trust.  The trust would be classified as a foreign grantor trust for U.S. tax purposes during the life of the family patriarch as he would have complete control over the trust assets during his life. During the life of the foreign patriarch, he would be considered as the owner of the trust assets for U.S. tax purposes. So long as the trust had no U.S. source income from U.S. investments or a U.S. business during the patriarch’s life, there would be no U.S. tax due since the trust would be treated as a NRA.  Trust distributions to the son and grandchildren during the patriarch’s life would be treated as gifts not subject to U.S. transfer tax as long as made from a non-U.S. account. Those gifts would need to be reported on a Form 3520 by the son and the grandchildren.

After the patriarch’s death, the trust could continue for the life of the son and grandson, and would likely convert to become a U.S. domestic accumulation trust.  This should avoid any throwback tax issues in respect to distributions to the U.S. beneficiaries.  To the extent income is accumulated by the trustee, the trust would pay the U.S. income tax based on the U.S. ”distributable net income” (DNI) rules. To the extent income is distributed by the trustee to the trust beneficiaries each of the beneficiaries would have to include in income a portion of such DNI.

Final Words for Those “Coming to America”

After reading these two articles, it is apparent that for HNW businesspeople, “Coming to America” requires a expertly devised and executed integrated immigration and tax strategy that meets the needs and timing of each family member.

If done properly, this approach will result in a successful relocation which minimises the tax burden both in the US and the country. If done improperly, the cost of unnecessary easily avoidable tax will make the cost of developing a proper plan look like a mere rounding error.

In closing, the US is very attractive to many international families for many reasons. However, it is critical to understand the complexity of the US immigration and tax regimes and to navigate them expertly. As with many things in life, “Failure to Plan…is Planning to Fail”.

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