This article is part of our series of articles on the risks and rewards of buying U.S. real estate as a non resident alien.
Accountants know a lot about keeping track of your money, but estate planning isn’t their primary job. By working with an attorney experienced in international estate planning law, you can get all your questions answered and gain peace of mind that your loved ones will not face a snarl of tax issues down the road.
If you own property outside of the United States, it’s even more important to have a network of experts to call upon when you have an issue. Not all countries recognize trusts and other tools that work here. To reduce or eliminate tax liability, you may need to choose an appropriate ownership structure. Keep in mind that the net tax savings will vary depending on the ownership structure as well as individual circumstances.
Ownership structures include:
- Individual
- Pass through entity (limited liability company or partnership)
- U.S. corporation
- Foreign corporation
- Foreign trust
- Real estate holding company
Not all of these structures will avoid U.S. estate and gift tax liability and some provide better income tax benefits than others. It is important that you seek competent legal advice before you purchase U.S. real property (or as soon afterward as possible).
Resources
Examples provided in our guides and here on this blog help illustrate this point:
All the best,
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A stack of forms can’t “know” the nuances of your situation. Work with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances. Protect your loved ones and assets by examining your options now »
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This fictional example is drawn from our guide Buying U.S. Real Estate When Your Child Studies in America.
Hiro Sasaki, 19, will be a freshman at Stanford this fall (Class of 2015). Hiro’s parents, Emiko and Dai Sasaki of Tokyo, are looking to purchase a place for Hiro to live. They want to do everything they can to help him succeed, and that means providing a study environment free of the distractions common in a dormitory.
$675,000 cash for Palo Alto townhouse
The Sasakis identify a townhouse in Palo Alto listed for $675,000. It’s close enough for Hiro to bike to campus. Dai pays the listing price in cash, putting the title in his name.
Dai reads online about the importance of having a revocable living trust in the U.S. Dai has seen those online legal programs where it is possible to purchase do-it-yourself-forms. To Dai it seems like a good option. He uses a do-it-yourself form to establish the trust.
Establishing trust does not lower Sasakis' tax liability
Unfortunately, while a revocable living trust is useful for avoiding probate, it does not lower his tax liability. Dai still has only a $60,000 exemption. So if something happened to Dai, his family will have a massive estate tax bill – in the neighborhood of $142,800.
The online legal program where Dai purchased his form wouldn’t “know” about the unique circumstances he is in. And despite diligently completing the form he downloaded, he is about where he started off with respect to his tax liability.
A minor car accident in Tokyo gets Dai thinking again. He realizes he has not protected his loved ones from a big tax bill, should anything happen. He finds a Bay Area attorney experienced in international estate planning, and gets a sound plan in place.
Takeaway
This example is made up, but it's true that a stack of forms can’t “know” the nuances of your situation. If your situation is anything like the one described here, consider working with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances.
All the best,
This article is part of our series on Buying U.S. Real Estate When Your Child Studies in America
Trend: more NRAs purchasing in college areas
The June 29, 2011 article “U.S. is Top Choice for Real Estate Investors,” in Generation America, has some interesting facts and figures from a survey was conducted by the National Association of Realtors as part of its 2011 Profile of International Home Buying Activity.
Among the survey’s findings (paraphrasing): real estate in the U.S. is the top destination for foreign buyers; the number of foreign exchange students at U.S. colleges and universities has increased the demand for real estate by foreign buyers; and some foreign families are purchasing U.S. properties in college areas so their child has a place to live.
The president of the National Association of Realtors observes that, "the U.S. has always been a desirable place to own property and make profitable investments. In recent years, we have seen more and more foreign buyers coming here to take advantage of low prices and plentiful inventory."
Why putting off estate planning is especially risky for NRAs
No one likes to think about dying someday. Some people even consider it bad luck to discuss death. But family members who have come to the United States from elsewhere may find U.S. tax law quite different than what they were used to.
It’s important to set aside our emotions and consider a key fact: Federal estate and gift tax laws impose onerous restrictions on non-citizens (even if you have a “green card”).
Consider:
- Outright gifts during your lifetime to a non-U.S. citizen spouse – including making him or her joint owner of certain assets – can trigger gift tax problems immediately.
- A non-resident non-citizen with no green card who bought a $1.5 million house with cash, intending to leave it to one of his children through a will or trust could trigger an estate tax of $495,000. With advice from the right expert, she could avoid that tax bill.
- Likewise, gifts at death to a non-citizen spouse may not qualify for the “unlimited marital deduction.” Your unsuspecting widow or widower may be forced to pay hundreds of thousands of dollars in estate taxes shortly after your death.
- If an investor buys a $1.5 million property in U.S. and dies owning it without ever having put it in a trust, the probate cost alone could be as much as $28,000. If that investor also happens to be a non-resident alien, the estate taxes could be $495,000.
Taking steps to protect your loved ones and your assets
Even if your estate is modest, the tax effects of poor planning on NRAs can be devastating. Choosing the right lawyer takes an investment of time and money, and it is a wise investment. We can set up documentation, write any complex agreements, and take other steps to help protect you. But you need to take the first step: contacting us. Protect your loved ones and your assets by examining your options now. Call +1 650 325 8276 or get started at our website »
All the best,
Everyone with a high net worth should put together an estate plan. Here is an example showing how people with complex financial circumstances benefit from finding the right legal advisor. For more examples, see my latest guide and checklist.
Meet Sanjay and Ling, U.S. residents with young children born in the U.S.
Meet Sanjay and Ling, young, bright, hard working professionals. They don’t think of themselves as rich, but they have substantial savings. They want to make sure their two young children are cared for if anything bad happened. They are not U.S. citizens, but their children were born in the U.S.
An experienced estate planning attorney will know which laws apply. And by establishing a long-term relationship, the attorney can help Sanjay and Ling update their plan as their family grows, as their finances change, and as they move to new places. They will also counsel fiduciaries in connection with carrying out legal responsibilities - whether they are personal representatives, trustees, or guardians.
If their proposed guardians don’t live in the U.S., the kids are at risk of having the Court not permit them to be taken out of the U.S. – or at least there might be a protracted guardianship dispute/case. There are also issues with making sure the kids have passports that permit them to travel with someone other than their parents.
How does the attorney know what Sanjay and Lin want?
First he or she works with the couple to gather personal data and financial information. This is their estate plan, so the attorney needs to review personal data and financial information, and discuss a potential plan to meet their goals and objectives. The attorney needs to learn about their family and how the various members handle money. This is sensitive information, something not always easy to talk about. But an experienced estate planning attorney won't be shocked by any characters lurking in the family tree – everyone has them!
Both spouses meet a few times with the attorney to discuss goals, values, and -- maybe most importantly -- what they want to avoid. In the process, Sanjay and Ling discover that they have very specific wishes they want someone to carry out were something to happen. The attorney listens carefully and prepares the appropriate strategy and documents.
Few estate planning lawyers have the knowledge and expertise to avoid the pitfalls in these situations
Sanjay and Ling are made up people. But if your circumstances are anything like their, I do recommend that you retain an attorney familiar with helping non citizens and non residents.
Also, here are guides I've published that might help you:
All the best,
Everyone with a high net worth should put together an estate plan. Some may be straightforward, while others will be complex. Here is one example (there are others in my newest guide) of a person with relatively complex financial circumstances, who would benefit from hiring an experienced estate planning attorney.
Meet Barry, the Silicon Valley entrepreneur
Barry is an entrepreneur in his 50s. He is not a U.S. citizen, but he has a green card. He owns real estate here, plus stock in U.S. companies, and lots of expensive stuff in his home -- cars, antiques, etc. He also has assets in South America and Europe.
Barry wants a little bit of his estate to go to his children (who are already doing well on their own), most to go to his grandchildren, and nothing to go to his ex-wife.
A good estate planning attorney will know the applicable laws, both domestic and foreign, that apply to Barry’s situation. His estate plan can be structured so that his grandchildren don’t get control the money until they are old enough to handle it.
The planner will go through several years of tax returns to see how Barry is handling his finances now, what he paid for the properties and what they are worth today. In addition to minimizing estate taxes, the plan will minimize capital gains taxes and property taxes.
Few estate planning lawyers have the knowledge and expertise to avoid the pitfalls in these situations
There is a great deal that must be considered in international estate planning and there are no easy answers or simple solutions. That is why Barry avoided the cookie cutter approach to estate planning -- the one offered by using pre-printed forms. He did make an investment -- top shelf legal guidance is not cheap -- and got a handsome return.
Getting a plan tailored to your needs
Barry is a made up person. But if your circumstances are anything like his, I do recommend that you retain an attorney familiar with helping non citizens and non residents.
Guides I've published that might help you:
All the best,
When estates are valued in the millions of dollars, good planning takes more than filling in the blanks on a stack of one-size-fits-all forms. Get a copy of my new guide that tells the kind of training and experience a good estate-planning attorney needs to do it well. The guide even has a checklist that people can use to compare the services offered by a variety of law offices.
Obviously, I hope people choose me for their estate planning. But I want them to choose me for the right reasons, and I want them to understand those reasons. It actually makes my job easier and more rewarding -- because it leads to better client relationships.
With that in mind, I've put out a Guide to Choosing Your Bay Area Estate Planning Attorney. You can find it here on my website at www.calprobate.com/choosing.
It's hard enough for most people to think about estate planning in the first place. They may not know the best way to make sure their goals are met, and they certainly don't know all the legal work involved in making sure their wishes are carried out when they are no longer around to supervise. That's the whole point of hiring an estate planning attorney!
But I want to be the navigation system, not the driver. I want them to be comfortable with their decisions, rather than having me tell them what they should want. Each client is unique. It takes the collaboration of my expertise and their goals.
When I sit down with prospective clients, I want them to understand that when estates are valued in the millions of dollars, good planning takes more than filling in the blanks on a stack of one-size-fits-all forms.
So get the guide. It explains what kind of work goes into a solid estate plan, and the kind of training and experience a good estate-planning attorney needs to do it well. The guide even has a checklist to use when comparing attorneys.
Here's something else you'll find in the guide: My fees. A lot of attorneys get very shy when it comes to discussing money. I don't see the point. I can't offer to do the job for everyone for the same flat fee, but the guide gives a range of what to expect for the typical kinds of estate planning services I perform.
Take a look at my guide and see how much better you understand what to look for when hiring an estate planning attorney. And please come back and comment to let me know what you think!
All the best,
To many, Bay Area real estate seems like a bargain right now. Prices are still some of the lowest in years, and foreign nationals, among others, are paying cash -- sometimes millions of dollars in cash -- for property in San Francisco area communities.
As I explain in a new guide, U.S. Gift Tax and Estate Tax Planning for Non-Residents and Non-Citizens, such investments are at risk if the buyer is a non-citizen or non-resident without a sound strategy to minimize gift taxes and/or estate taxes. The guide outlines key elements in an international estate plan, including:
- What is considered “home” for the purpose of estate planning?
- How the tax law treats citizens, non-citizens, and non-residents differently
- Treatment of minor children, including issues surrounding the choice and citizenship of a guardian
- One useful estate planning tool, the Qualified Domestic Trust
U.S. gift tax and estate tax laws are tough on non-citizens
The timing of international estate planning is key because federal estate and gift tax laws are tough on non-citizens -- even when non-citizens with ‘green cards’. In addition, many clients have assets both in the United States outside of the U.S. and not all countries recognize trusts and other tools that work within the United States.
The rules for a noncitizen and nonresident are even more complex if he or she dies owning 'U.S. situs' assets. The most common U.S. situs assets are real estate located in the U.S., stock options in a U.S. company, stock ownership in a U.S. company, and a U.S. company's corporate bonds.
Preventing asset erosion from fees and taxes
If you are a non-citizen or non-resident buying up U.S. assets, real estate agents, accountants and attorneys may each play an important role in asset protection. For example, accountants know a lot about keeping track and building up clients' money. On the other hand, estate planning isn’t their primary job. A real estate agent can help find killer deals on Bay Area houses, condos, and land -- but they won’t be an expert on tax law. And a title company can’t tell you the best way to pass your real estate assets to loved ones, either.
An attorney experienced in international estate planning law can help you can gain peace of mind that your loved ones will not face a snarl of tax issues down the road. At least, with this new guide as a start, families will know what kind of legal help they need, and the right questions to ask.
Download the guide >>
All the best,
Effective estate planning when you or your spouse are a non citizen or non resident
If you are a not a U.S. citizen or if your spouse is not a U.S. citizen, planning your estate becomes much more complicated because the estate tax and gift tax laws for non-citizens are very different than they are for citizens. If you are a not a citizen for estate and gift tax purposes, care must be taken in planning your estate in order to minimize gift and estate taxes.
Definitions of residency
The first huge difference in the treatment of non-citizens comes in area of estate tax law. The IRS has two definitions for residency: one for income tax purposes and another for estate and gift tax purposes. For income tax purposes, residency is defined as having a “presence” in the U.S. For gift and estate tax purposes, residency is defined as “an intent to remain in a place indefinitely and no intention to move away from it.”
Non-citizen exemption limits
Currently, citizens enjoy a $3.5 million exemption from estate taxes. Many non-citizens are limited to an estate tax exemption of $60,000. The determinative question is where the non-citizen considers “home” or domicile to be. If a non-citizen does not consider the U.S. his home, he can only claim a $60,000 estate tax exemption.
Where does the non-citizen's home for estate tax purposes?
To determine where a non-citizen considers home to be for estate and gift tax purposes, the IRS uses a “facts and circumstances” test which includes a review of the non-citizen's visa status, the locations and values of other residences (real property), where his or her family members and close friends live, the location of the non-citizen's personal property, especially valuable items like fine art, currency, and cash, stocks, and bank accounts, the location of the non-citizen's business interests, where the non-citizen is registered to vote and licensed to drive, where the non-citizen has his or her primary residence, and where the non-citizen's burial plot is located or where he or she intends to be buried.
If a person is neither a citizen of the U.S. or considered to be domiciled in the U.S. ( a non-resident alien or NRA) for gift and estate tax purposes, then their only assets which would be subject to gift and estate taxes are those situated in the United States. The estate and gift taxes on assets of NRA's is calculated at the same rate as for citizens and residents.
Pros and cons of a QDOT
Another major consideration in international estate planning is in the treatment of non-resident spouses. If the surviving spouse is a non-resident, he or she is no longer entitled to claim the standard marital deduction. Under present law, property must be left to a surviving spouse via a qualified domestic trust (QDOT). Ideally, the decedent spouse's will or trust will include a provision for the creation of the QDOT. However, if it doesn't and leaves everything to the non-resident surviving spouse outright, he or she can establish the QDOT after the decedent spouse's death and add assets he or she inherited from the decedent spouse to the QDOT after its creation.
The law requires qualified domestic trusts to contain certain features. One key feature is that it must have a U.S. trustee with the ability to withhold any estate taxes which would be due after each distribution from the trust. If the assets in the QDOT total more than $2 million dollars, a bank must act as the U.S. trustee or a performance bond must be posted.
A non-resident surviving spouse can avoid the QDOT requirements by becoming a U.S. citizen. However, any distributions from the QDOT will be taxed unless the non-resident surviving spouse becomes a citizen before the estate tax return is filed. After the non-resident surviving spouse becomes a resident, the remainder of the assets in the QDOT can be transferred to him or her outright or transferred to a qualified terminable interest trust (QTIP) tax free.
Another way to avoid the QDOT requirement is for the U.S. citizen spouse to make annual gifts to the non-resident spouse. In 2009, a spouse can make an annual gift of $133,000 to a surviving spouse and it won't be subject to gift taxes.
A non-resident spouse can make unlimited gifts to his or her U.S. citizen spouse. Such gifts are not subject to gift taxes.
Choosing a guardian for minor children
Another matter that requires careful consideration is choosing a guardian for your minor children. For a non-resident or international client, this decision can be even more difficult because the primary candidates may all live abroad. Under California law, a client can give his or her nomination of a foreign guardian effect by including it in his or her will. However, California law also provides that such a nomination is not binding on the court. This means that California courts have the authority to disregard the election of a foreign guardian and appoint a California resident instead. In instances where the child's only relatives live abroad, it's quite likely that a child could be placed in foster care if a California court is unwilling to appoint a foreign guardian.
For these reasons, it's important that your will include a provision giving the foreign guardian the authority to petition the court in his country for guardianship of the child. Additionally, the will should set forth in detail why appointment of a foreign guardian is in the best interests of the child.
Nominating a temporary guardian is especially important
As a non-resident, it's also imperative that you nominate a temporary guardian. This will ensure that your minor children don't end up in foster care while your foreign guardian's petition for guardianship is pending in the local court. The temporary guardian will also be able to care for the children while the foreign guardian petitions for guardianship in his or her country. It's also important to include provisions which give the foreign guardian visitation rights while his or her petition for guardianship is pending. If your will does not include such a provision, the temporary guardian will have complete discretion to allow the foreign guardian visitation or not.
Other issues that come into play for non-residents who nominate foreign guardians involve changing the child's personal residence and transferring assets left to the minor child out of the country. California, like most states, has very strict guidelines which must be complied with when these issues arise. The reason for these strict guidelines is the very legitimate concern the courts have about losing jurisdiction over the child or the property.
Few estate planning lawyers have the knowledge and expertise to avoid the pitfalls in these situations
There is a great deal that must be considered in international estate planning and there are no easy answers or simple solutions. I strongly advise you to avoid the cookie cutter approach to estate planning offered using by pre-printed forms. You should consult with an attorney experienced in international estate planning law to have your estate planning needs assessed by a professional and to get answers to all of your questions.
All the best,