Pre-immigration tax and estate planning: pitfalls and considerations related to domicile.

• Author: Newton, William H., III

Pre-immigration tax and estate planning for a foreign person is to a large degree predicated on the concept of domicile. Specifically, at inception, the relevant status of the foreign person must be that of a nondomiciliary alien (NDA) of the United States. Correspondingly, in anticipation of completion of the planning process and an ultimate change in personal status from an NDA to a domiciliary alien, pre-immigration tax and estate planning should necessarily be inclusive of what may be considered postimmigration tax and estate planning.

A key rationale for the importance of and, thus, the focus on domicile rests with U.S. estate, gift, and generation-skipping transfer taxation (collectively referred to as "transfer taxation"). For example, the creation and funding of an irrevocable estate tax compliant trust with a completed gift is typically an integral component of pre-immigration tax and estate planning. Yet, if the donor were domiciled in the U.S. at the time of gifting, worldwide gift taxation with potentially severe, adverse gift-tax consequences would result. (1) By contrast, due to NDA status and with the gifting of foreign situs property, the gift tax is inapplicable. (2)

Consistent with these considerations, at the outset of the planning process, the objective is to pin down and confirm that the extant domicile is indeed outside and not in the U.S. On a cross-border basis, while a degree of commonality may exist in defining the domiciliary concept as applied by the jurisdiction of current domicile and the U.S., (3) important distinctions may nevertheless exist. (4) For this purpose, typically the starting point is the domicile of origin (5) with same necessarily continuing until a domicile of choice is subsequently acquired. (6) Notably, domicile for transfer taxation is not equivalent to residence for U.S. income taxation. (7) Accordingly, residence for income taxation may exist despite the absence of domicile with the converse also being true. (8)

By way of illustration, X at birth acquired a domicile of origin in the United Kingdom. On reaching adulthood and being peripatetic, X first moved to Bermuda and then to the U.S., accumulating over time a worldwide gross estate of in excess of $200 million. For the years 2011-2015, X was a resident of the U.S. for income taxation by virtue of physical presence in the U.S. (9) Throughout 2016, X was consistently present in either Hong Kong or Singapore spending no time in the U.S. X's foreign legal counsel has opined that effective as of the beginning of 2016, X's domicile of origin in the United Kingdom was reactivated. X's objective is to move permanently to Florida beginning in 2017 while in the interim, i.e., during 2016, effecting a completed gift of assets having a collective value of $180 million to a pre-immigration estate tax-compliant trust.

The central concern in this context is the matter of domicile, the existence of which would result in X's being subject to significant gift-tax liability. Interestingly, the legal...