Dont Overlook International Estate and Gift Tax Treaties Kevin J. - - PowerPoint PPT Presentation

Don’t Overlook International Estate and Gift Tax Treaties

Kevin J. Moore, Esq. October 23, 2017

Agenda

• Overview of Estate and Gift Taxation of

Foreign Persons

• Application of Estate and Gift Tax Treaties
• Practical Examples

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16 Countries That Have Estate and Gift Tax Treaties

• Australia
• Austria*
• Denmark*
• Finland
• France*
• Germany*
• Greece
• Ireland
• Italy
• Japan*
• Netherlands
• Norway
• South Africa
• Sweden*
• Switzerland
• United Kingdom*

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* Combined Estate and Gift Tax Treaty

Part I

Overview of Estate and Gift Taxation

• f Foreign Persons

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• 1. Are You a Non‐Resident Alien?

• 2. Estate and Gift Tax Applies Only to

US Situs Assets

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Real Property Located in U.S.

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Shares of Stock Certificate U.S. Stock

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Tangible Personal Property

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Intangible Property

• Exempt from gift tax, but not estate tax
• Partnership Interests

– Probably exempt from gift tax, but IRS might dispute this‐‐See Revenue Ruling 91‐32. Also, will not issue ruling or determination letter on this issue – For estate tax purposes, partnership interest is US situs property if not a separate legal entity, dissolves on death of partner, and underlying assets are US property

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Exempt US Property

• US Bank Accounts (not to be confused with Cash)
• Life Insurance Proceeds on an NRA
• Debt Obligations of US Persons

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Situs of Property

Gift Tax Estate tax Real US Property √ √ Shares U.S. Stocks √ Tangible Personal Property √ √ Intangible Personal Property √

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• 3. Credits, Deductions and Exclusions
• $60,000 estate tax exemption ($13,000 credit) ‐ Does not

apply to lifetime gifts

• Annual gift tax exclusion (but no gift splitting).
• No marital deduction to NRA spouse unless QDT (can get

marital deduction if spouse is US citizen)

• Annual gifts of $149,000 to NRA spouse (indexed for inflation).
• Entitled to pro rata deduction for funeral and administrative

expenses, claims, debts, etc. – Numerator = total value of US property and denominator = total value of all worldwide property – Can deduct 100% of non‐recourse debt secured by US property

Part II

Application of Estate and Gift Tax Treaties

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• 1. Domicile
• Domicile rules are not simply based on citizenship or

nationality, but rather on a variety of subjective factors

• Advantage of domicile rules include:

– NRAs who are residents of a treaty country can establish themselves in the US for a period of time without fear that they will be subject to the US estate and gift tax system. – If NRAs are domiciled in a treaty country per the rules

• f the particular treaty, then the US estate and gift tax

system does not apply and the estate and gift taxation

• f NRAs is altered by the particular treaty provisions.

• 2. US/German Estate and Gift Tax Treaty

Overrides

• US property subject to estate and gift tax:

– Real property, property used in US business, partnership interest which owns US real property or property used in US business

• US property not subject to estate and gift tax:

– Cash, tangible personal property (unless US business), debt obligations, shares of US corporations, intangible personal property (unless partnership interest per above)

• Pro rata estate tax exemption

– Numerator = total value of US property and denominator = total value of all worldwide property – Does not apply to lifetime gifts

• Marital deduction

– Lifetime or testamentary transfer to an NRA spouse or surviving spouse to the extent value of transfer does not exceed 50% of value of all US property – Testamentary transfer to NRA/German surviving spouse not to exceed the unified credit amount (after the 50% exclusion per the above)

• 100% deductions of debts that are secured by or relate to US property regardless of whether

recourse or non‐recourse

• 3. US/UK Estate and Gift Tax Treaty

Overrides

• US property subject to estate and gift tax:

– Real property, and property used in US business (note: no specific inclusion of partnership interest language like in US/German treaty)

• US property not subject to estate and gift tax:

– Cash, tangible personal property (unless US business), debt

• bligations, shares of US corporations, intangible personal property

(should be able to exclude partnership interest from gift tax as an intangible – may be able to exclude partnership interest from estate tax)

• No provisions to provide for pro rata estate tax exemption, HOWEVER:

– Personal representative of UK decedent can elect to treat the decedent as if domiciled in the US immediately prior to death

• No provisions to alter the marital deduction
• No provisions to alter pro rata deductions of debts even if secured by or

related to US property (still have non‐recourse alternative)

Part III Practical Examples

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Planning Considerations

• Investor Characteristics
• Income Tax Consequences
• Investment Characteristics

– Use: Personal, Investment – Income generating? – Exit Strategy – Donative Intent – Confidentiality – File Tax Returns

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Scenario 1: Direct Investment By NRA

• Chinese NRA

– Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use non‐recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception

• German NRA

– Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception

• UK NRA

– Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception

Scenario 2 Direct Invest By Foreign Individual Using Recourse Debt

• Property acquired for $4 million with $2.5 million of

Recourse debt

• Value doubles to $8 million
• Recourse debt increases to $6 million when foreign

individual passes

Scenario 2 Direct Investment By Foreign Individual Using Recourse Debt

• Chinese NRA

– Estate/Gift taxes apply at 40% (can not deduct full $6 million recourse debt)

• German NRA

– Estate/Gift taxes apply at 40% of net equity in property or $800k

• UK NRA

– Estate/Gift taxes apply at 40% (can not deduct full $6 million recourse debt)

Scenario 3 Investment by FI Through Domestic Partnership

U.S. Partnership or LLC treated as a partnership

Scenario 3 Investment by FI Through Domestic Partnership

• Chinese NRA

– Estate/Gift taxes apply at 40% except gift of partnership interest might be exempt from gift tax as intangible property

• German NRA

– Estate/Gift taxes apply at 40% (no exception to partnership interest per treaty)

• UK NRA

– Estate/Gift taxes apply at 40% except gift of partnership interest might be exempt from gift tax as intangible property

Scenario 4 Investment by FI Through Foreign Partnership

Foreign Partnership or

• ther entity treated as a

Partnership

Scenario 4 Investment by FI Through Foreign Partnership

• Chinese NRA

– Gift of partnership interest might be exempt from gift tax as intangible property and for estate tax purposes partnership interest may not be considered US situs property

• German NRA

– Estate/Gift taxes apply at 40% (look through to underlying assets)

• UK NRA

– Gift of partnership interest might be exempt from gift tax as intangible property and for estate tax purposes partnership interest may not be considered US situs property

Scenario 5 Investment by FI Through Foreign Corporation

Foreign Corporation

Scenario 5 Investment by FI Through Foreign Corporation

• Chinese NRA

– No estate/gift tax consequences

• German NRA

– No estate/gift taxes consequences

• UK NRA

– No estate/gift tax consequences

Scenario 6 Investment by FI Through Domestic Corporation

Domestic Corporation

Scenario 6 Investment by FI Through Domestic Corporation

• Chinese NRA

– No gift tax – Estate tax applies at 40%

• German NRA

– No estate/gift tax consequences (Don’t need foreign corp)

• Can not elect Subchapter S status
• No capital gains treatment
• UK NRA

– No estate/gift tax consequences (Don’t need foreign corp)

• Can not elect Subchapter S status
• No capital gains treatment

Scenario 7 Investment by FI Through Foreign and Domestic Corporation

Foreign Corporation Domestic Corporation

Scenario 7 Investment by FI through Foreign and Domestic Corporation

• Chinese NRA

– No estate/gift tax consequences

• German NRA

– No estate/gift tax consequences

• Don’t need the foreign corp to achieve estate and gift

tax savings

• UK NRA

– No estate/gift tax consequences

• Don’t need the foreign corp to achieve estate and gift

tax savings

For Further Information

Kevin J. Moore kmoore@kjmlaw.com

301 East Colorado Blvd. Suite 600 Pasadena, CA 91101 (626) 586‐9300

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