Private Client

Action Item: This is the fifth installment of our Annual Estate Planning Newsletter, and focuses on foreign matters. We urge you to review this installment to ensure that your 2016 estate and tax planning is in order.

1. Estate Planning for Nonresident Aliens. The estate of a nonresident alien ("NRA") (a noncitizen who is not a U.S. resident) has only a $60,000 (not $5,450,000) estate tax exemption available. U.S. donees of gifts from NRAs or foreign estates in excess of $100,000 [or $15,671 in 2016 (inflation adjusted) from a foreign corporation or partnership] must report these gifts to the IRS on Form 3520. Several interesting planning opportunities may exist for an NRA. An NRA may avoid transfer taxes completely by structuring his or her holdings so that no U.S. "situs" assets are owned directly (for example, U.S. "situs" assets may be held by a wholly-owned foreign corporation, although U.S. real estate presents special income tax issues). If your spouse is not a U.S. citizen, you may wish to defer estate taxes by use of a "qualified domestic trust" (discussed in part four of the Annual Estate Planning Newsletter). Lifetime gifts by an NRA of U.S. "situs" intangible personal property (such as stock or partnership interests) are not subject to U.S. gift taxes, even though these items might be subject to U.S. estate taxes if owned by the NRA at death. An NRA also may wish to establish a trust to hold property for U.S. resident children or other family members to provide them with tax-free income and arrange for the trust property to pass to other family members free of transfer taxes.
   
   A U.S. taxpayer who expatriates ("covered expatriate") can be subject to severe tax penalties unless that taxpayer has a net worth of less than $2,000,000 and average annual income of not more than $161,000 (subject to annual inflation adjustments). The tax penalties can be deferred on an asset-by-asset basis if an election is made (interest and security are required). In addition, a 40% transfer tax is imposed on the receipt by U.S. taxpayers of any amounts in excess of $14,000 (adjusted for inflation) from a "covered expatriate." The IRS issued Proposed Regulations in September 2015 concerning the donee’s duty to report receipts from a "covered expatriate" on new IRS Form 708 (to be released after Final Regulations are issued).
2. Foreign Bank Account and Asset Reporting. The Treasury Department, working with the Justice Department, continues to actively pursue taxpayers who fail to report their foreign bank and securities accounts (including foreign fund accounts maintained outside the U.S.) on IRS Form 8938 as required by the Foreign Account Tax Compliance Act ("FATCA"). Filing this Form 8938 does not relieve U.S. taxpayers (including nonresident U.S. citizens and dual citizenship individuals) from the separate obligation to file a Report of Foreign and Financial Accounts ("FBAR") (FinCEN Form 114, replacing Form TD F 90-22.1) that must be received by the Treasury Department by June 30 each year (no extensions) to report an interest in, or a signature authority over, any financial account in a foreign country if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed electronically. These two forms must be filed even if the accounts earned no income. IRS Form 8938 must be filed with a U.S. resident’s income tax return if total foreign financial assets aggregate $50,000 at year-end or $75,000 at any time during the year (single or married filing separately) or $100,000 at year-end or $150,000 at any time during the year (joint return). Severe penalties are imposed for failure to comply with either of these filing requirements. On June 18, 2014, the IRS announced a modified offshore voluntary disclosure program, effective July 1, 2014, that includes significant changes providing new options for U.S. taxpayers who have not yet complied with the reporting requirements. The IRS also announced modifications to its "Streamlined Compliance Procedures," a program designed for taxpayers whose failures to report their foreign accounts were negligent or not willful. Both the voluntary disclosure and streamlined programs remain available to non-compliant taxpayers. Finally, FATCA became effective on July 1, 2014, and foreign financial institutions have been reporting the identities of their U.S. depositors to the IRS since March 2015.
3. Regulatory Notice. We are providing this letter and the enclosure as a commentary on current legal issues as a service to our clients and friends; neither should be considered legal advice, which depends on the unique facts of each situation. Receipt of this letter and the enclosure does not establish an attorney-client relationship.