Minimizing U.S. Income Taxation:
- Exploring strategies to benefit from the step-up in basis of assets to their fair market value so that only appreciation will be taxable once client becomes a U.S. tax resident
- Accelerating income and accelerating recognition on account receivables prior to becoming a U.S. tax resident
- Accelerating gain in appreciated assets (real estate assets, artwork, corporate stocks, options, etc.) prior to becoming a U.S. tax resident
- Deferring losses until after a client becomes a U.S. tax resident
- Disposing or restructuring foreign corporations with passive income to avoid “Subpart F” and other applicable regimes
- Planning with trusts as a non-resident can make irrevocable gifts to non-U.S. persons in trusts with proper structuring and avoid U.S. income taxes on future income earned by the trust and U.S. gift and estate taxes on transfer of such assets
Minimizing Exposure to the U.S. Gift & Estate Taxation:
- Planning with irrevocable discretionary U.S. trusts for the benefit of taxpayer or family members to ensure that assets will not be subject to U.S. estate tax on the taxpayer’s death (life insurance could be purchased to minimize income tax as well)
- Planning with foreign irrevocable trusts
- Planning with gifts to U.S. persons and between spouses prior to becoming U.S. tax resident
The following are strategies to minimize U.S. transfer taxes on an immigrant’s gratuitous transfers of property. Because determining domicile depends on a person’s subjective intent, a nonresident alien should be careful to take these steps before he or she begins to live in the United States, even with a definite present intention to leave.
1. Accelerate gifts
Gifts of non-U.S. property will not be taxed to a non-U.S. domiciliary. However, the gift tax will apply to all gratuitous transfers while a person’s domicile is the United States, regardless of where in the world the property is located. Consequently, a non-U.S. domiciliary should make gifts of non-U.S. property before establishing domicile in the United States.
Curiously, stock in a U.S. corporation is not considered U.S. property for purposes of the gift tax, but it is for purposes of the estate tax.27This means that if a non-U.S. domiciliary gratuitously transfers shares in a U.S. corporation before immigrating, he or she will not be subject to the gift tax on that transfer, and will remove the stock from his or her gross estate for purposes of the estate tax.
Example: A non-U.S. domiciliary owns 100 shares of stock in a U.S. corporation and non-U.S. rental real estate. If he becomes a U.S. domiciliary and keeps those assets until he dies, each will be included in his gross estate for estate tax purposes, subject to up to a 40% tax. However, if before becoming a U.S. domiciliary, he gratuitously transfers each asset to another person, then the assets, and the income generated by them during his life, will not be included in his gross estate.
2. Establish a foreign trust before immigrating
In addition to the income-tax benefits of a foreign trust discussed earlier, establishing a foreign trust before immigrating to the United States also has transfer-tax benefits. The gratuitous transfer of non-U.S. property to the trust will not be subject to the U.S. gift tax if completed before the transferor establishes domicile in the United States.
Additionally, the property owned by the trust will not be included in the transferor’s gross estate for estate-tax purposes. This means that the property transferred, and any income generated by it during the transferor’s life, will not be subject to the U.S. estate tax when he or she dies.
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Unlike in the context of the U.S. income tax, the foreign trust does not need to be established more than five years prior to immigrating to the United States. Consequently, even if it is not feasible to establish a trust more than five years prior to immigrating, there are still advantages to doing so.
Example: A non-U.S. domiciliary established a foreign trust in January 2012 using all non-U.S. property. In March 2016, she became a U.S. domiciliary. Although the trust’s income will be taxed to her, she will not be subject to the U.S. gift tax for the initial transfer of property, and the property owned by the trust will not be subject to the U.S. estate tax when she dies.
State and Local Taxes
In addition to the federal taxes discussed above, those planning to immigrate to the United States must be mindful of the additional state and local taxes to which they will become subject. These taxes vary by state and locality, and may include income taxes, sales taxes, property taxes, gift taxes, and inheritance or estate taxes.
Because each state and locality has its own blend of taxes, the prospective immigrant should compare the tax regimes in each state and locale to which he or she is considering moving to determine where his or her taxes will be lowest.
Pre-Immigration Tax Planning Resources: