Estate Tax Planning for Cross-Border Families and Foreign Nationals

Multi-national families have numerous issues associated with Nonresident Alien Parents who are considering transferring their wealth to their U.S.-resident children. The Nonresident Alien Parents’ goal is to pass the assets to the children when the surviving parent dies, and ensure that successive wealth transfers to future generations are made without U.S. estate tax, or generation-skipping transfer tax while minimizing U.S. income tax on investment income.  

Residence of a Trust

A trust will be considered domestic if:

(i)                a U.S. court can exercise primary supervision over trust administration (the "Court Test”),  and

(ii)               U.S. persons control all substantial trust decisions (the "Control Test").

All other trusts are foreign.  (Treas. Reg. §§ 7701(a)(30)(E) & 7701(a)(31)). These trust residency definitions are effective for taxable trust years beginning after December 31, 1996.

The regulations contain a "safe harbor" test under which a trust is considered to meet the Court Test if:

(i)                 the trust deed does not direct that the trust be administered outside the United States;

(ii)               the trust is, in fact, administered exclusively in the United States; and

(iii)             the trust is not subject to an automatic "flee clause" pursuant to which the trust migrates from the United States in the event that a U.S. court attempts to assert jurisdiction over the trust's administration.

The Control Test will be considered to be satisfied if U.S. persons control all substantial decisions affecting the trust and no foreign person acting in any capacity can overcome the decisions of the controlling U.S. persons. 

A Foreign Grantor Trust

The Nonresident Alien Parents could create a revocable trust, with the provisions to them for their lifetime with the remainder to their US children.  This trust is fully revocable, until the surviving parent dies.  

 

As a “Grantor Trust” the Nonresident Alien Parents are treated as the owners of the trust assets. This is achieved by satisfying the requirements of IRC §672(f).  The simplest way is to make the trust fully revocable by the Nonresident Alien Parents (IRC §672(f)(2)(A)). 

The Nonresident Alien Parents’ have no exposure to U.S. income or estate tax, unless they hold U.S. assets in the trust. 

Alternatively, the same structure could also be used to avoid solely US Gift and Estate Taxes by having the trust own a foreign corporation, which in turn owns U.S. stocks and bonds, U.S. real estate or other U.S. situs assets; however the US situs assets would be subject to US income tax on income produced from these investments.

 

Upon Death of Nonresident Alien Parents - Foreign Trust Becomes a Non-Grantor Trust 

The trust is designed to continue as revocable until after both parents have died. After the death of the last parent to die, the beneficiaries are the U.S-resident children and grandchildren. At that point for US tax purposes it will be considered as a “Foreign Non-Grantor Trust,” because it is a foreign trust which is managed outside the United States (IRC §7710(a)(30)(E)).

For U.S. income tax purposes, a foreign Non-Grantor trust is only subject to US tax on its US source income and foreign source income is not subject to US tax. However, foreign source income will be subject to tax when the U.S. beneficiary receives a distribution of trust income.  For estate tax purposes, the trust assets will receive a step-up in basis to fair market value calculated at the time of the surviving parent’s death.

 The Throwback Rule

The tax-free accumulation of foreign source income inside a this Foreign Non-Grantor Trust, is subject to the “Throwback Tax” (IRC Sec. 667). Throwback Rules apply when a foreign trust makes an “accumulation distribution” to a United States beneficiary and that trust has “undistributed net income” from one or more of its preceding taxable years.

IRC Section 665(b) defines an “accumulation distribution” as any distribution of “any other amounts properly paid or credited or required to be distributed” to the beneficiary, to the extent that it exceeds both the trust’s distributable net income for that year (reduced by any amount required to be distributed currently) and the trust’s net accounting income for the year.

All Distributions of “Accumulated Income” are taxed at:

• Ordinary Income Rates and 
• Subject to an Interest Charge for Failing to Pay Tax in Prior Years.

There is no way to efficiently accumulate income for future generations of U.S. resident beneficiaries with a Foreign Grantor Trust. 

Throwback Rule - Planning

One solution to the throwback rule is to eliminate the Foreign Non-Grantor Trust, as soon as possible, by domesticating it. The throwback rules only apply to Foreign Trusts. This can be achieved by:

1.      Transfering all of the administrative powers to a U.S.‑resident trustee and bring the trust within the reach of U.S. courts, which satisfies the requirements of the "Court Test."

2.      Alternatively, the assets contained in the Foreign Non-Grantor trust can be distributed to a new domestic trust with similar distribution provisions.

You now have a domestic irrevocable trust, also known as a dynasty trust, that is funded with assets carrying step-up basis as of the date of death of the surviving parent.

A second solution to the throwback rules involves electing to have the Non-Grantor Trust treated as part of the Nonresident Alien Parents' estate.  If both the executor (if any) of an estate and the trustee of a qualified revocable trust elect the treatment provided in IRC §645, such trust shall be treated and taxed as part of such estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent’s death and two years after surviving spouse's death.  

Non-US source income and capital gains realized by the electing trust and distributed to the US Beneficiary can be received by the US Beneficiary entirely tax-free. Furthermore, the Us Beneficiary is considered to receive “corpus” of the estate of the decedent, rather than DNI.

 

 These are just a few general alternatives for Estate Tax Planning for Cross-Border Families and Foreign Nationals.  Your actual Estate Tax Planning for Cross-Border Families needs to be customized to address your particular family situation.  

Want To Know More About 

Cross Border Estate Planning

Using Dynasty Trusts or IRC §645?

 

 

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ( 888 882-9243)

 

 

 

DOJ / IRS Obtains Court Orders to Seek Offshore Account Data From 5 U.S. Banks!

U.S. District Judge Kimba M. Wood of the Southern District of New
York entered an order on Nov. 7, 2013, authorizing the IRS to issue summonses requiring:

1. Bank of New York Mellon (Mellon) and
2. Citibank NA (Citibank) to produce information about U.S. taxpayers who may be evading or have evaded federal taxes by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (collectively, ZKB) in Switzerland.

U.S. District Judge Richard M. Berman of the Southern District of New York entered an order Nov. 12, 2013authorizing the IRS to issue summonses requiring:

1. Mellon, Citibank,
2. JPMorgan Chase Bank NA (JPMorgan),
3. HSBC Bank USA NA (HSBC), and
4. Bank of America NA (Bank of America) to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (collectively, Butterfield) in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom.

 

In these actions, the Court granted the IRS permission to serve what are known as "John Doe" summonses on Mellon, Citibank, JPMorgan, HSBC, and Bank of America. 

The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown. The John Doe summonses approved today direct these five banks to produce records identifying U.S. taxpayers with accounts at ZKB, Butterfield and their affiliates, including other foreign banks that used ZKB and Butterfield's U.S. correspondent accounts at Mellon, Citibank, JPMorgan, HSBC, and Bank of America to service U.S. clients.

This includes the names of taxpayers who had an account with CIBC FirstCaribbean International Bank over an eight-year period ending Dec. 31 without disclosing it to the IRS. It is too soon to say how many U.S. citizens held undeclared accounts at FirstCaribbean or what penalties they may face, Justice Department spokeswoman Dena Iverson said Nov. 12, 2013. FirstCaribbean does not have any branches in the United States but it has what's known as a correspondent account with Wells Fargo that allowed U.S. citizens to do business with the bank.

The U.S. obtained the order from a judge Nov. 12, 2013.after an IRS revenue agent reviewed information from 129 people who voluntarily came forward to disclose offshore accounts and decided further scrutiny of FirstCaribbean was warranted.

"These cases once again demonstrate the department's resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes," said Assistant Attorney General Keneally. "These John Doe summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations. U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it's too late."

"Today's action show that the use of foreign banks for tax evasion remains a high investigative priority of this office and U.S. citizens should understand that loud and clear," said U.S. Attorney Bharara. "

By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes."

"International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law," said IRS Acting Commissioner Werfel. "These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on U.S. soil."

IRS Offshore Voluntary Disclosure programs and initiatives enable U.S. taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income.

To date, U.S. taxpayers have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield. In addition, a number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at ZKB and Butterfield have admitted failing to report income earned from their offshore accounts on their federal tax returns.

 The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law. In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50 percent of the amount in the account at the time of the violation.

 

 

Have Unreported Foreign Bank Accounts or Companies?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ( 888 882-9243) begin_of_the_skype_highlighting 

 

 

Source:

DOJ

AP The Big Story

New York Times

Tina Turner - By Adopting Foreign Citizenship are you Still Subject to the US Exit Tax?

According to an “activity” report from the U.S. Embassy in Bern, Switzerland, long-time Swiss resident Tina Turner” was in the embassy Oct. 24 to sign her “Statement of Voluntary Relinquishment of U.S. Citizenship under Section 349 (a)(1) of the INA” — the Immigration and Naturalization Act.

She has merely 'relinquished' her US citizenship rather than formally 'renouncing' it, by adopting citizenship of her long-time home Switzerland.  

She apparently hopes to avoid the USA's exit tax on all her worldwide property, but she will be disappointed!

Tina is an “expatriate”, and it is safe to guess that she has enough assets so that she “meets the requirements of 26 USC § 877(a)(2)(A)”. Therefore, she meets the two prongs of the test to be a “covered expatriate," who is subject to an Exit Tax!

Need Advice On "Should I Stay or Should I Go"?

  

Contact the Tax Lawyers At
Marini & Associates, P.A. 

For a FREE Tax Consultation at:

www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ( 888 882-9243) 

Sources:
 

Washington Post

Phil Hodgen's Blog

Forbes




 

British a Territories are no longer "Tax Havens"!

UK Prime Minister David Cameron made the following announcement in the House of Commons: ‘I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens.

They have taken action to make sure that they have fair and open tax systems’.  The Prime Minister's comments follow the progress made on tax transparency at the G8 and G20 summits, and come just weeks after the publication of an extensive report highlighting Jersey’s overall value to the UK economy.

The Isle of Man government has welcomed comments releasing the Crown dependencies and overseas territories from their reputation as tax havens.

Have a Secret Account in
One of the UK Tax Havens?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms
or Toll Free at 888-8TaxAid ( 888 882-9243 ) 

Sources:

BBC News

Jersey Finance

IRS Implements Shorter Processing Time for Taxpayer Authorizations

According to Beyond 4/15, the IRS announced that it would now process all tax authorizations within 5 business days (IRM Procedural Update #WI-21-1113-1609 dated Nov. 7, 2013), compared with its estimate of 10 days after the retirement of the IRS e-Services Disclosure Authorization tool on Sept. 3. This announcement affects the timeframe for practitioners to represent their clients and get client information from the IRS.

This announcement comes at a time when many tax professionals are concerned about the backlog of authorizations and documents submitted to the IRS during the three-week government shutdown, when the IRS was not processing authorizations.

Whether or not the IRS meets its 5 day processing goal, there are tips you can use to streamline the filing and management of authorizations in your tax practice. 

1. File directly with the CAF unit.
2. Consider filing a Form 8821 on all of your clients this tax season.
3. Use e-Services to confirm whether your Form 2848 is on file without having to call.
4. Fax instead of mail.

File directly with the CAF unit. If you are responding to the IRS for a client’s notice or tax issue, file your authorization directly with the CAF unit rather than sending it with the notice response or to an IRS compliance function (Audit, Collection, Appeals). Sending it directly to the CAF unit will likely avoid processing delays due to the backlog in IRS correspondence processing.

The Treasury Inspector General for Tax Administration reports that 40% of all IRS correspondence is more than 45 days old before it is processed.

Filing authorizations directly with the CAF unit will also ensure that you are copied on your client’s interim IRS correspondence before the IRS processes your client’s response to the notice or tax issue.

Consider filing a Form 8821 on all of your clients this tax season. If you file a Form 8821, you will not be authorized to represent your client before the IRS, as you would be with a power of attorney, but you will be copied on your client’s IRS correspondence and have the ability to research your client’s account at the IRS if the need arises. For most clients, this is all you need to stay in the loop. It also allows you to proactively address a client’s situation without taking on more risk than is necessary.

Use e-Services to confirm whether your Form 2848 is on file without having to call. If you have access to the e-Services Transcript Delivery System and can pull your client’s transcripts for the years/forms noted on your Form 2848, you’ll know that your client’s authorization is on file. If you can’t access your client’s transcripts after five days, refile your Form 2848 with the CAF unit.

Fax instead of mail. To speed up processing time for an authorization, fax your Form 2848 or 8821 to the appropriate CAF unit. This can reduce processing time by about three days compared to mailing the form.

You should also keep in mind that when your client representation engagements end:

1. Keep a file with all original authorizations that you filed with the IRS. Authorizations automatically expire seven years after filing.
2. When client representation engagements end, you should withdraw your Form 2848. You can still keep a Form 8821 on file to get notified on your client’s IRS correspondence, but you should only keep Form 2848 on file with the IRS if you are engaged to represent your client.

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms
or Toll Free at 888-8TaxAid (888 882-9243)

Another Fraudulent Tax Firm, "Instant Tax Service," Ordered t to Shut Down.

The U.S. District Court for the Southern District of Ohio issued has entered a permanent injunction ordering ITS Financial LLC, the parent company of the Instant Tax Service franchise, to cease operating, the Justice Department announced today.

The injunction order, which was signed yesterday by Judge Timothy S. Black of the U.S. District Court for the Southern District of Ohio, also bars Fesum Ogbazion, the sole owner and CEO of ITS Financial, from operating or being involved with any business relating to tax-return preparation.  The court issued the order following a two-week trial in Cincinnati in June 2013. 

Instant Tax Service, which is based in Dayton, Ohio, claimed to be the fourth-largest tax-preparation firm in the nation.  According to the court, ITS Financial had about 150 franchisees that filed over 100,000 tax returns each year in 2011 and 2012.  Two other entities owned by Ogbazion, Tax Tree LLC and TCA Financial LLC, were also defendants in the case and were also ordered to cease operating.

The court found that Ogbazion and his defendant companies had:

 

1. Filed tax returns for customers without their permission and encouraged franchisees to do the same;
2.  Clandestinely trained and encouraged franchisees to prepare and file tax returns prematurely with paycheck stubs that omitted and understated income and inevitably resulted in the submission of false federal tax returns;
3. Defrauded customers, who were largely low-income, by marketing false and fraudulent loan products to lure them into the tax-preparation offices;
4. Defrauded customers by requiring franchisees to charge phony and exorbitant fees;
5. Forged customers’ signatures on loan checks and used those forged checks to operate Ogbazion’s businesses;
6. Willfully failed to pay over $1 million of their own employment taxes and lied about assets in connection with the collection of those taxes, while hiding money in a secret bank account and defrauding the United States and third party creditors;
7. Lied on government forms and encouraged franchisees to do the same;
8. Obstructed government agents and materially assisted franchisees in circumventing Internal Revenue Service (IRS) law-enforcement efforts involving the suspension of electronic filing identification numbers; and
9. Told franchisees to lie to government agents in connection with IRS compliance visits.

 

The court credited an IRS study concluding that the tax harm caused by Instant Tax Service franchisees in five cities in a single tax-filing season was between $10 million and $25 million.   

 

“Defendants’ harm to the public is extensive and egregious, indeed appalling,” the court stated.  “This is especially so given the nature of Instant Tax Service’s core customer – the working poor – who are particularly vulnerable to [the] Defendants’ fraudulent practices.”

 

The court further stated:  “Defendants’ repeated attempts at trial and in argument to downplay the gravity of their lawlessness was stunning.  The court concludes that even today [the] Defendants have not fully recognized their culpability.  Ultimately, the nature, scope and gravity of [the] Defendants’ offenses, and the unrepentant attitude toward their commission, demonstrate the necessity for a complete injunction putting the Defendants permanently out of business.”

 

The court also concluded that Ogbazion and ITS Financial violated the terms of a preliminary injunction order that the court had entered in October 2012 with their consent.  The court found that, despite their agreement to obey various lending and consumer-protection laws during the 2013 tax filing season, they violated several of those laws by discriminating against active-duty military personnel on loan applications and by failing to obtain a state lending license in a timely manner.  The court determined that they violated the preliminary injunction by causing their franchisees to provide tens of thousands of customers with Truth-in-Lending Act disclosure forms falsely stating that the loans carried no finance charges and an annual percentage rate (APR) of zero.

 

“The court's decision sends a clear message to those who might be tempted to abuse the public trust provided to the tax preparer community,” said Acting IRS Commissioner Danny Werfel.  “Those who deceive their customers and defraud the U.S. Treasury will face swift legal action that puts an end to their corrosive conduct."   

 

 

Real Tax Problems?

Call Real Tax Attorneys!

Contact the Tax Lawyers at 

Marini & Associates, P.A. 

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or 

Toll Free at 888-8TaxAid ( 888 882-9243)3)3 begin_of_the_skype_highlighting

 

Seems Like The IRS Is Having Trouble Delivering Transcipts?

We reprinted Tax Attorney James R Malone, Jr's string of postings from Tax Controversy Professionals LinkedIn Group, which indicates that the IRS doesn't seem to be taking live transcript requests?

Ellen Brody - Partner at Roberts & Holland LLP

My partner had that same problem yesterday - leave me a message with all the detail and we will mail it to you in 7-10 business days.

Stephen Olsen - Tax Attorney at Gawthrop Greenwood

I was able to get transcripts over the last few days, but when I called in yesterday, the person I spoke with said the system was down, and they could not assist at that time. This was in line with computer problems I had dealing with exam and collections this week, with most Service folks claiming the slowness and glitches starting late last week. Yesterday, I was told to wait three hours and call back. I still haven't tried yet. Hopefully, this is temporary.

Dana Snider - Law Office Dana Snider

You're right, they give you the recording, you type it all in and then they say "a transcript will be sent in the next 10 days" or something to that effect then they hang up on you.