California Probate - Law Offices of Janet Brewer Blog

Did You Just Renounce Your Citizenship? Next Estate Planning Steps

If you renounced your citizenship in the United States or another country, you may need to make changes to your estate plan. Depending on your net worth and other factors, your renunciation may lead to taxes now or taxes later.

How Does Renunciation Affect Taxes Now?

People who renounce their United States citizenship may owe taxes now if they are covered expatriates. Covered expatriates have:

• A net worth of more than $2 million on the date of expatriation;
• Average annual U.S. income tax liability of more than $165,000 for the five years before the year of expatriation; or
• Incorrectly filed U.S. tax returns for the five years before the year expatriation.

If you fall in any of these categories, the IRS may assess very expensive taxes against all of your property. Fortunately, some estate planning before renunciation can help. You potentially can reduce your taxable estate by strategies such as making lifetime gifts or starting a trust. Also, you can work with your accountant to potentially reduce income tax liability.

How Does Renunciation Affect Taxes Later?

When you become an expat from the United States, you lose tax benefits such as the $11.18 million estate tax exemption, the unlimited marital deduction, and estate tax portability. Instead, you will have only a $60,000 estate tax exemption. This can lead to expensive estate taxes after your death unless you plan ahead.

In short, if you still own any property in the United States that exceeds a $60,000 value, your estate may owe taxes on it after your death. Further, gifts to relatives who are U.S. citizens or to a citizen spouse could lead to taxes later too. Careful estate planning takes into account future taxes and potentially helps you reduce tax liability through structures such as qualified domestic trusts or holding companies.

The same tax consequences are true if you renounced citizenship in another country but are not yet a U.S. citizen or permanent resident. It’s a good idea to do some estate planning in the U.S. to protect yourself and your spouse from the expensive taxes that non-citizens often owe.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Investing in Foreign Corporations: Will You Pay Lower Taxes?

You may have heard from friends that investing in foreign corporations is a smart move because it will reduce your taxes. Unfortunately, in most cases, this is not true.

When you invest in a foreign corporation by purchasing shares or contributing money, and the foreign corporation’s business is investing in shares, bonds, or some real estate, this is a passive investment on which you hope for a return. You also can make investments in corporations that engage in active business in another country. You should be aware that you have to pay U.S. income tax on any income you earn from these investments such as interest or dividends and on any capital gains. The foreign government also can assess you taxes on this income and capital gains.

In effect, you might have to pay double the taxes on your foreign investments. The IRS does provide Americans with a “foreign tax credit” that can offset some of the U.S. tax liability based on the amount of taxes you pay to the foreign government. This credit, however, may not cover all of the double taxation you end up paying.

Some foreign countries do not assess any taxes on investments, so the foreign tax credit is useless. Instead, they automatically “step up the basis” of the investments. Stepping up the basis refers to adjusting the value of an asset that has increased in value over time. In other words, the foreign country simply considers the asset to be worth more the next year instead of assessing taxes. The United States has no such laws, so you will still have to pay U.S. income taxes if your foreign investments increase in value.

If you leave foreign, passive investments to your American heirs in your estate plan, the foreign steps up in basis will not affect them. The foreign country’s steps up every year do not count in the U.S., so in your heirs’ hands the property will have a basis of their fair market value on your date of death. If the heirs later sell the investments, they will pay taxes on the difference between the value when you passed away and the amount for which they sold it.

Some people investing in foreign corporations want to trigger a step up in basis so that when they give the investments to others, they receive the higher basis. To maintain this higher basis in the United States, the investors will need to do some complicated tax planning that usually involves forming a foreign corporation. If you are interested in this option, talk to a lawyer experienced with international estate planning.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

What Is an Estate and Gift Tax Treaty, and Will It Affect Your Estate Plan?

The United States has entered into estate and gift tax treaties with several other countries. The purpose of a treaty is to reach an agreement between governments of two countries on issues affecting both countries. The estate and gift tax treaties affect tax treatment of gifts and estates for people who have ties to more than one country.

Countries with which the United States has signed gift and/or estate tax treaties include the following:

• France
• Italy
• Germany
• Japan
• United Kingdom

The U.S. also has treaties with several other countries around the world. These treaties are not all the same. The United States has reached different agreements with each country, and some treaties affect only estate taxes, not gift taxes.

These treaties resolve various tax and legal issues for people living in both countries, making transactions in both countries, or holding property in both countries. The issues include locating an individual’s domicile, resolving possible dual-domicile issues, and reducing or eliminating double taxation. Some treaties provide deductions or tax relief.

Estate and gift tax treaties provide a number of advantages for international taxpayers. For one, they eliminate some of the issues described above. Domicile problems and double taxation otherwise could result in taxpayers having to pay twice the amount of tax on gifts to relatives or in estates paying taxes on the same property in two countries.

Second, treaties may allow non-residents of the United States who are domiciled in a treaty country to live or conduct transactions in the U.S. for some period of time without worrying about U.S. estate and gift taxes. Of course, whether non-residents will pay taxes varies widely depending on their circumstances. Just because your country of origin has a treaty with the U.S. is not a guarantee that you will not owe U.S. taxes. The provisions of the treaty will govern which and how much taxes you will pay.

If you believe that your country of origin has an estate or gift tax treaty with the United States that may change your tax liability and affect your estate planning, contact a qualified attorney today. Your attorney can help you understand the treaty and make changes to your planning to account for its benefits.

Planning your estate? Look to the Law Offices of Janet Brewer to help with these kinds of issues. You can schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Are California Trusts Taxed Differently than Trusts Formed in Other Countries?

If you are planning to form a trust to hold foreign property or managed by a foreign trustee, you may wonder if California trusts are taxed differently than trusts formed in other countries. Unfortunately, there is no simple answer to this question. If your trust has any cross-border involvement, you need to speak to tax and estate planning professionals about how to proceed.

There are many factors that affect the tax treatment of trusts, including but not limited to:

• Residency of trustees
• Whether a foreign resident trustee can control decisions about the trust
• Location of assets held by the trust
• Language in the trust document regarding where the trust will be administered
• Where the trust is actually administered
• Whether the trust is a grantor trust or non-grantor trust (a legal determination)

The first step in determining how the trust will be taxed is evaluating whether it is a “domestic” or “foreign” trust. Each receives different federal tax treatment. Determining the proper category is very complicated. Trusts can even switch from domestic to “accidental” foreign trusts by something as simple as changing the trustee to a non-U.S. citizen.

In addition, you will need to figure out how the trust is taxed in California. California has different rules than some other states for trust taxation. State law looks to (1) whether the trust crosses borders (by holding foreign property or having a foreign trustee), and (2) whether the trustees and non-contingent beneficiaries are California residents. If a trustee is a California resident, the trust must pay California taxes. If the non-contingent beneficiaries are California residents, then the trust must pay California taxes. This is true even if the trust holds no property located in California.

As you can see, determining where a trust will pay taxes and which taxes it will pay requires answering a number of questions and interpreting complicated tax laws. The location in which a trust is formed may not matter at all. Many different factors do matter and could greatly affect the amount of taxes that you pay. In fact, your trust could accidentally change from a domestic to foreign trust or the reverse without you knowing. Talk to an experienced and knowledgeable estate planning attorney when you set up the trust and before you make changes to the trust to learn about tax treatment.

Planning to form a trust that holds foreign assets or has a non-U.S. citizen trustee? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet has more than 20 years of legal experience and is certified as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization.

To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Can You Name a Non-Citizen as Beneficiary of a Retirement Account?

When you have internationally located family members or non-U.S. citizen relatives, you may want to make one a beneficiary of your U.S.-based retirement account. You probably already have an idea of the different tax issues faced by non-U.S. citizens, so making your beneficiary designation will raise questions about whether it is a good idea.

First, it is possible to name a non-U.S. citizen as a retirement account beneficiary. The retirement account could be an IRA, a 401(k), or a similar account. When you make the designation, the account administrator may need more information about whether the beneficiary is a “U.S. person” or a “foreign person” for United States tax purposes. U.S. persons include citizens, residents, estates of citizens, domestic trusts, and domestic business organizations. Foreign persons include nonresident aliens, foreign estates, foreign trusts, and foreign business organizations.

If the administrator determines that your beneficiary is a foreign person, it will withhold 30% of retirement plan distributions to that person to pay taxes. To show that a beneficiary is a resident rather than a foreign person, you may need to provide additional documentation to the administrator. Further, you may be able to avoid the 30% rate if the beneficiary is a citizen of a country that has a tax treaty with the United States.

That 30% withholding rate can substantially reduce what your beneficiary actually receives from your retirement plan. You and your beneficiary have a few options to work around it. Your beneficiary could decide to disclaim the distributions and allow them to pass to the contingent plan beneficiary (the backup person if the main beneficiary passes away or disclaims distributions). But this might frustrate your original intent in making the designation. Instead, if you want to give the plan distributions to your spouse, you could create a qualified domestic trust and make it the beneficiary.

There may be some other options for you if you want to benefit a non-spouse but do not want the 30% tax rate. An estate planning attorney who is experienced with international families can help you make an informed decision about your beneficiary designation on a retirement account.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Understanding Untied States Estate Tax Treaties & Gift Tax Treaties

Purchasing foreign property often comes with being closer to family, rewarding cultural experiences, international adventure, and the realization of long-held dreams. It could also mean having a home away from home in a relaxing place or near loved ones who live overseas. However, although owning foreign property can enrich your life, it can also cause complications when it comes to taxes, estate planning, and inheritance. It is vital that you understand the implications of buying property abroad and work with an experienced attorney to avoid issues like double taxation and mandatory inheritance laws.

Unfortunately, there are very limited international estate tax laws – and estate tax and gift tax laws can vary drastically from country to country. This lack of consistency can lead to double taxation and large amounts of confusion, especially if it is unclear which country the owner lives in permanently. To fight some of these ambiguities and complexities, the United States has established treaties with 18 different countries. These treaties establish specific rules related to estate taxes, gift taxes, and the determining where a resident is domiciled. In many cases, the treaties provide a tax credit in the country of residence so that the estate’s owner does not have to pay estate taxes twice.

According to the Internal Revenue Service, the United States has estate tax and gift tax treaties with the following countries:

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

The details of each of these treaties may be different. It is critical to speak with an experienced international estate planning lawyer about your case if you have foreign property in one of these countries. 

Whether you have property in a foreign country or whether you are considering a purchase overseas, you may wish to fully understand the tax implications of such a decision. Our California estate tax law office works with a number of clients who are non-residents or who hold international property – and we can help you with a large number of legal issues related to international estate planning. To learn more about our services or to request an initial consultation, call The Law Office of Janet Brewer today: (650) 325-8276.

photo credit: dcgreer via photopin cc

Americans Living Abroad Feel Impact of FATCA

According to some international financial experts, recently implemented American tax rates and policies may cause more Americans living abroad to renounce their U.S. citizenship. A recent conference in Israel on the subject of tax changes saw several speakers agree that more and more people will begin to seriously consider renouncing their American citizenship to avoid expected tax hikes and closer scrutiny of their overseas bank accounts by the IRS.

Motivation to Renounce Citizenship?

This is especially true in cases involving high net worth individuals who rarely travel to the U.S. In such cases, the value of an American passport may not be enough to justify the hassle of rising tax rates and compliance with recently implemented financial regulations.

International Banks Required to Reveal Depositor Identities

One such recently enacted bit of legislation is the Foreign Account Tax Compliance Act, or FATCA, which takes effect this year (2014). The Act requires that foreign financial institutions divulge certain information with the IRS about accounts held by U.S. taxpayers or face steep penalties for their failure to comply. Passage of this bill means that if Americans are not currently claiming such accounts, they are going to have to start because their international banks are going to be forced to reveal their identities to the IRS.

Breaking Point is $50,000

The burdens of FATCA primarily fall on the major international banks. The Act will mean millions of dollars in compliance costs for several global financial institutions, as it requires that foreign financial institutions to report the holdings of American taxpayers whose foreign financial assets exceed $50,000 to report those holdings to the IRS.

The Treasury Department decided to ignore a request made by various business, banking and foreign financial groups to delay the January 2014 start date. Beginning this year (2014), big fines will be levied against those individuals and firms who refuse to comply with the FATCA law.

Exceptions to the Law Revealed

Though the law is tough, it’s not without loopholes. Certain retirement funds, life insurance policies and other relatively low-risk financial products that exist internationally and are not considered vehicles for dodging American taxes are exempted from the FATCA reporting requirement. This represents a small victory for the financial firms and wealthy Americans living abroad that had been aggressively lobbying for their exemption.

Need for an Estate Plan

Whether you have few assets or a multi-million dollar estate, you need to have an effective estate plan that works for your family. As a board certified estate planning, trusts, and probate lawyer, I have the skills and knowledge to handle complex estate planning matters (certified as a specialist by the California State Bar Board of Legal Specialization). To schedule a consultation to discuss your estate planning goals and needs, please contact us.

Source: U.S. issues final tax anti-evasion rules, enforcement ahead by Patrick Temple-West, published at ChicagoTribune.com.