A foreign citizen who is NOT a resident of the US wants to gift money to a group of US citizens. Is there any way to structure a trust so that money is owned by the US citizens, but the income from the trust is for the benefit of the foreign citizen while she is still alive?
The issue here is inheritance tax. If the foreign citizen holds US stocks in a US brokerage account at time of death, there is a huge estate tax under US tax law. If the foreign citizen gifts the money while she is alive to US citizens, that transaction is tax free. But the foreign citizen needs the benefit of the income generated from that money, while she is still alive.
Does it have to be a US trust? This should be easy if the trust is in an offshore jurisdiction where you can set up trusts with any ownership you want.
Note that offshore does not imply tax evasion. There are plenty of perfectly legal offshore trusts that declare the income and pay the taxes they owe.
Well, yes, you could structure it that way. Actually it would have to be set up so that they would all be owners, with the citizens the owners of the remainder interest, and the non-citizens being the owners of the income interest for life.
Sorry, but Congress has seen this kind of thing before and prohibited it. First of all, if the "gift" is more than $14,000 per donor per donee, it gets added back into the taxable estate on death. So you're not saving much in that case.
Also, when someone has an interest for life in any property, even though someone else owns the remainder interest, the lifetime owner is normally taxed on the full value of the property.
The only way that I can think of to do what you would like is for the foreign citizen to be married, and to set up a qualified domestic trust for the surviving spouse. That would allow the estate to be taxed as a US resident, with the $5 million exemption.
There is no way US citizens are going to own an offshore trust. The IRS is at war with those people, even when it is correctly structured and disclosed.
If the foreign citizen opens up a foreign trust, there is no issue of tax evasion because the foreign citizen is not a US resident and has no obligation to pay US tax on foreign income.
You are right that most foreign citizens set up offshore trusts. But you always run the risk that the IRS will choose to attack any US citizen who inherits money from that trust. In addition, many investment banks have very large minimum investments required for a foreign trust. This foreign citizen probably has less than the required minimums.
The inheritance for the US citizens is just greatly simplified if they can inherit while the foreign citizen is still alive. That's why I am simply asking if there is any way to accomplish that while having the income benefit the foreign citizen.
To my understanding, a gift from a foreign citizen to a US citizen is a tax free event if the gift originates from non US domiciled assets. It doesn't become taxable later on when the foreign citizen dies. The exemption you refer to would be on gifts of assets that are domiciled in the US.
The related issue is estate tax on the US domiciled assets of the non US citizen, non US resident at time of death. One estate planning document I read says "Many non-U.S. citizens are surprised to find out that even though they have never stepped foot in the United States, the mere fact he or she owned stock in a U.S. corporation at death will trigger U.S. estate taxes if such ownership exceeds the exemption amount, currently U.S.$60,000."
Okay, but the question is again whether the treatment for a beneficiary who is not a US resident is different than the treatment for a US citizen or US resident alien. It sounds like any US based trust gets the foreign citizen an estate tax, and there is probably no way to avoid that. Only an outright unconditional gift made by the foreign citizen from assets not domiciled in the US would escape gift or inheritance tax. And if the US citizen receives the gift and is then asked to give the income from that money back to the foreign citizen, there is a double whammy:
1) Tax to the US citizen on any investment income from the gifted assets
2) Gift tax to the US citizen on any gift of the after-tax investment income to the foreign citizen
Marriage doesn't apply to this case. The US citizens are nephews and nieces of the foreign citizen.
Surprisingly, very few estate tax experts seem to know anything about this area. It's a very specialized skillset and it's not easy to find experts.
Why do the US citizens have to be current owners? If the money is left overseas and the citizens inherit it after the current owner dies, there will be no US taxes at all.
There is no problem with inheriting money from an offshore trust. The problem comes when the person inheriting it neglects to disclose and pay tax on any income earned on the money.
Again, why must it be a trust? Why wouldn't a will do?
But from a US tax standpoint it doesn't do any good at all.
Whether in trust or not, it's referred to as a gift of a remainder with a retained life estate.
But why bother with doing it that way?
If a non-citizen, no-resident owns any property (real or otherwise) in the US, it may be subject to US estate tax. And you're right, the exemption amount is low.
This has nothing to do with the treatment of the beneficiary. There is no tax on the beneficiary, except to the extent the money received earns income (e.g. interest).
Sorry, but that's not the case. If a foreign citizen gives property in the US to a US citizen, it is subject to gift tax. And it will be brought back and taxed in the foreign person's estate for US estate tax purposes (with credit given for gift taxes paid, of course).
Only gifts by foreigners of foreign property are complete exempt.
Double whammy from the standpoint that there is also income tax on the income? That's pretty normal. And if the property generating the income is in the US, then one of them will have to pay tax on it in any case.
There is no gift tax if it's a business transaction. In fact this could be structured as an annuity - I give you my house, you give me $X per year for the rest of my life. There is no gift there. And I believe there should be no estate tax either.
It's really not that specialized - it's just that there's not a huge call for this. The rules for foreigners are, in most instances, identical to the rules for US citizens. The main difference is that the lifetime exemption is lower for foreigners, and they don't get a marital deduction without using a qualified domestic trust.
I think the conversation is getting off target. If there is a gift, then he scenario being considered was always that the foreign citizen would gift money that is not inside the US. So that gift would be tax free, whether it was done before death or as part of an inheritance.
The question was is there any way to keep money inside the US before the foreign citizen dies, without incurring an estate tax? Apparently the answer is no, without some loophole, and that might get challenged.
Why would a foreign citizen want to bring money into the US instead of offshore? Offshore trusts are expensive to administer, and they often have expensive transaction fees for simple actions like currency exchanges. US law is more stable. It's sometimes easier to find people to trust inside of families than to trust unknown trust administrators in some foreign jurisdiction. All in all, a US based brokerage account just offers simplicity, lower cost, and some additional peace of mind. And the price for that is apparently to lose 45% of the asset to estate tax.
With all of the money coming into the Chinese and Indian economies, I think there is an increasingly large immigrant market that has all of these issues. Wealth in families is increasingly found outside of the US with members of the family who are not US citizens and not US residents, and the tax laws are simply different for this class.
You were talking about a foreigner making a gift to someone in the US, but keeping strings on the gift while he is alive. That is the issue I addressed, among others.
Right. All the loopholes I can think of have been eliminated.
They will likely get a credit for estate taxes paid to their home country, as well as a deduction for other taxes and expenses of the estate.
Apparently enough people think the US economy is the more stable or otherwise better investment, in spite of the tax bite. Other countires have taxes too, many higher than taxes in the US.
More likely most people simply don't understand the laws. If you asked 100 immigrants whose foreign citizen relatives open brokerage accounts in the US what the estate tax on that money would be, or the amount of the exemption, I bet not even 5% understand the impact of their decisions.
I would not assume that to be the case. Particularly when you consider that the funds in the tax haven can grow pretty much tax free. Even if the grantor is taking the income, there is the principal that can appreciate.
US tax law is stable? Thanks for the chuckle!
It's sometimes easier to find people to trust inside
I would think that would easily tip the scales in favor of a foreign trust.
This is an environment in which *safe* investments pay less than 3%. A grade A bond with maturity in less than 10 years is sometimes paying under
2%. The foreign citizen is eating capital at 5% per year so being able to save on taxes is not an issue for this person.
I did not say US *tax* law is stable. I said US law, by which I meant rule of law. Consider that the foreign citizen had some acres of property near the shoreline in their country, and 100 people stormed the property and squatted on it. Later on, they found out that the 100 people were actually working for the local chief of police!! So the guy who enforces the law actually ends up being the head of a mafia clan. In the foreign citizen's country, it's ordinary course for people to simply go squat on land, tie it up in ownership squabbles in court for a decade, and for every part of the judicial process to be corrupted by bribes.
To paraphrase Churchill: the US system of laws and courts is the worst of all possible systems, except for all the others! :) Yes, the US system is bad. And most of the less developed world is much worse.
For a foreign citizen to lose almost half of their money is pretty decisive. I start to appreciate why foreign citizens should almost never want to open up a brokerage account domiciled in the US.
What the US *should* do, is implement a modest 1/2 of 1% *asset* tax on all foreign accounts - paid yearly - and an extremely modest estate tax for foreign citizens' assets - maybe 5% - paid at time of death on just the US domiciled assets. Something like that would open up a floodgate of people wanting to open accounts in the US, and it would significantly increase the US tax revenue base.
If you are willing to risk getting caught breaking the law. When Switzerland decided to cooperate with US tax authorities, a lot of people were surprised and ended up getting caught not paying taxes that they should have.
Remember that the situation is the foreign citizen has a life interest in the income, on which I expect he pays the taxes, but the assets stay in the trust. The US beneficiaries get the assets after he dies. A trust in a jurisdiction with no capital gains tax wouldn't pay taxes since the income is all paid out.
So the question appears to be how to minimize the taxes when the US citizens get the assets after the grantor's death.
Yes, but the focus of this thread was about US law. And it's hard enough to even figure out what US law allows and doesn't allow for a foreign citizen who is not a US resident. Foreign laws are a subject for a different thread, and I'm pretty sure this group isn't going to have insights into the laws of Timbuktu. :)
The general summary seems to be that people who are not US citizens and not US residents should not open up brokerage accounts in the US, unless they are okay with losing half their money to an estate tax. Almost any alternative that doesn't put the assets into the US is better from a tax viewpoint.
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