Preresidency trust, gift and estate planning.

• Author: Zink, William J.

High net worth individuals who emigrate to the United States should seriously consider rearranging their financial affairs to minimize the U.S. income, gift and estate tax consequences of non-U.S. situs property. Recently, the IRS issued Letter Ruling 9347014, which addressed such an individual who was a resident and citizen of Canada and was in the process of emigrating to the United States.

The taxpayer owned 50% of the shares in a Canadian investment company which in turn owned U.S. and Canadian subsidiaries. The taxpayer also wished to transfer shares of these companies to an irrevocable trust for the benefit of his children. The individual taxpayer, his spouse and a third party were the primary trustees of the trust. The trust was to be maintained in separate shares, i.e., one share for each child, and was to be further subdivided in the event of additional children being born or adopted. The primary trustees had the discretionary power to distribute the trust's income or corpus for the beneficiary's health, education, maintenance and support until each child reached age 31. The primary trustee was to distribute one-half of each child's respective share of the trust to the child when the child reached age 30 and the remaining portion at age 35.

The trustees had the power to administer the trust and manage the trust assets, including the power to invest and reinvest trust property and discretion over the allocation of income and corpus distributions. The trustees were prohibited from borrowing trust capital without adequate interest or security. Secondary trustees had the power to vote or direct the voting of any corporate shares or other securities held by the trust. The trust was irrevocable and neither the individual taxpayer settlor nor the primary trustee had the power to alter, amend, revoke or terminate the trust. The taxpayer's spouse's reversionary interest in the trust was less than 5%.

Subsequent to the establishment of the trust and the rearrangement of the taxpayer's financial affairs, the taxpayer, his spouse and their children were going to change their residence from Canada to California. Under state law, in California an individual reaches the age of majority at age 18. Furthermore, parents have an equal responsibility to support and educate their children in a manner suitable to the child's circumstances, taking...