Money without borders: estate tax planning for cross-border families.

• Author: Hodgen, Philip D. W.
• Position: Estateplanning

multi-national families, unaccustomed to paying estate tax in their home country, create special challenges for tax advisers. In many cases, these families are not happy with the prospect of the U.S. government claiming a portion of their family's wealth, so they decide to keep the majority of their wealth outside of U.S. borders. In cases like this, opportunities and pitfalls exist when considering the transfer of wealth from parents to U.S.-resident children.

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Typical Situation

The parents are not U.S. citizens and live outside the United States. Their two adult children, both living in the United States, may be U.S. citizens or hold green cards. The parents have significant wealth, which is all outside of the United States.

If the parents simply gave or transferred the family wealth on death to their US-resident children, there would be estate tax payable when the children die. So, while the parents are not at risk for U.S. estate tax, their children and future descendents would be.

The goal is to pass the assets efficiently to the children when the surviving parent dies, and ensure that successive wealth transfers to future generations are made without U.S. estate tax, or generation-skipping transfer tax. All the while, we want to minimize U.S. income tax on investment income.

Typical Solution: Start With a Foreign Grantor Trust

Start by having the nonresident parents create a revocable trust, to which they would be the sole beneficiaries during their lifetimes. The trust is fully revocable until the surviving parent dies.

Think of this like a generic revocable trust used in routine domestic estate planning--without all the U.S. estate tax stuff like bypass trusts and qualified terminable interest property trust provisions.

The trust is a "grantor trust" so the parents are treated as the owners of the trust assets. We achieve that status by satisfying the requirements of IRC Sec. 672(f); the simplest way is to make the trust fully revocable.

By design, this is a foreign trust since no U.S. residents control the substantial decisions for trust administration, and a U.S. court cannot exercise primary supervision over the trust [IRC Sec. 7701(a)(30)(E)].

As nonresidents, the parents' only potential exposure to U.S. income tax will exist if they hold U.S. assets in the trust. With investment in only non-U.S. assets (or inoculation against U.S. income tax on U.S. assets in the trust) the parents will be outside the...