Debra Treyz said she may save one family millions in taxes on assets the Hong Kong-based parents are leaving to their U.S. children.
Treyz, managing director of global wealth advisory for JPMorgan Chase & Co. (JPM)’s private bank in New York, is helping her clients maximize a transfer of $40 million by setting up an offshore trust that will convert to a U.S. vehicle once they die. That may ensure the money won’t be subject to U.S. estate taxes when their children in the U.S. die.
Multinational families increasingly are turning to high-end estate and tax planners to reduce tax bills when they shift money to children living in the U.S., whether or not their kids are U.S. citizens. They’re doing so as countries step up information sharing in an effort to flush out tax dodgers, including a new round of a voluntary disclosure program by the U.S. Internal Revenue Service that brought in more than $4.4 billion from American taxpayers hiding assets offshore.
“Over the past 10 years there’s been an explosion” in the number of clients seeking advice on cross-border tax issues, Treyz said. “The minute you get these multijurisdictional families, you’re really playing three-dimensional chess.”
The dollars at stake are large. Treyz said the trust she’s working on could be worth as much as $137 million by the time it reaches her clients’ grandchildren, assuming the children don’t need to take out any money.
Global wealth is increasing. There were 3.3 million high- net-worth individuals in the Asia-Pacific region in 2010, an increase of about 10 percent from 2009, and 10.9 million worldwide, according to the 2011 World Wealth Report by Capgemini SA (CAP) and Merrill Lynch Global Wealth Management, which defined such individuals as those with at least $1 million in investable assets.
Citigroup Inc. (C)’s private bank this year formed a group of wealth planners to focus on the issues of multinational clients, said Art Giacosa, head of cross border advisory services for Citi Trust North America.
“The number of clients has grown exponentially,” Giacosa said.
Property located in the U.S. and held by foreigners, including real estate, art, jewelry and stock in U.S. companies, is generally taxable at death under U.S. estate tax law, said James Marion, national fiduciary advisor executive for U.S. Trust, the private wealth management unit of Charlotte, North Carolina-based Bank of America Corp.
People who aren’t U.S. citizens or residents generally have an estate-tax exemption of just $60,000, he said. U.S. citizens currently have about a $5 million exemption or $10 million for a married couple through 2012.
Certain foreign trusts reported about $2.9 billion in distributions to U.S. persons in 2006, the most recent year for which data is available, compared with $311 million in 2002, according to the IRS.
A related issue is gift taxes. Foreigners generally may give unlimited sums to U.S. taxpayers without triggering U.S. gift taxes as long as they don’t give physical property that’s in the U.S., such as real estate or art, yet such gifts may ultimately trigger estate-tax levies for the recipients. U.S. taxpayers declared about $2.9 billion in gifts from foreigners and foreign corporations in 2006, compared with about $2.3 billion in 2002, according to the IRS.
It’s unclear whether the IRS considers cash in U.S. bank accounts to be U.S. property, so when giving cash to U.S. children foreign parents may want to make transfers from their non-U.S. bank account to the child’s non-U.S. bank account, said Leigh-Alexandra Basha, partner with Holland & Knight LLP in Tysons Corner, Virginia.
Whether the IRS would consider transfers of cash to be a gift for tax purposes would depend on the facts of a particular instance, said Sara Eguren, an IRS spokeswoman.
A common pitfall occurs when parents make expensive gifts to U.S. children when they come to visit, said Ed Mooney, wealth strategist for New York-based Bank of New York Mellon Corp.
“They go into Tiffany (TIF)’s or Cartier and surprise their child with a gift that’s of significant value,” Mooney said.
There’s no lifetime gift-tax exclusion for foreigners making gifts of U.S.-based property, which means those giving property may owe taxes on amounts greater than $13,000, at a rate of as much as 35 percent. The lifetime gift-tax exclusion for U.S. citizens is currently about $5 million per individual through 2012.
One strategy for minimizing taxes on gifts of real estate may be to place the property into an offshore company, with family members owning the interests in the offshore company, Marion said. Gifted interest in the company from parents to children may be considered an intangible and so generally isn’t considered taxable, he said.
It may cost from about $5,000 to “tens of thousands of dollars” to set up one or more foreign corporations, depending on fees of service providers and the complexity involved, said Jeffrey Kolodny, a member and an attorney in the private client services group at Cozen O’Connor in New York.
International buyers from about 70 different countries purchased $82 billion in residential real estate in the U.S. in the year through March 2011, compared with purchases of $66 billion by buyers from 53 countries the year before, according to the National Association of Realtors. The figures include non-resident foreigners and recent immigrants.
Such purchases may have unforeseen estate-tax consequences for those who don’t live in the U.S., said Gideon Rothschild, a partner with Moses & Singer LLP in New York.
Writing Big Checks
“They’ll see a broker, buy an apartment here, and the broker doesn’t know the first thing about tax issues,” Rothschild said. While the owner is alive planners generally may be able to transfer the interests to a more tax-efficient structure such as an offshore company. If the buyer has died, “there aren’t too many options at that point other than to write out a big check.”
Some countries, including France, the United Kingdom and Japan, have tax treaties with the U.S. that may provide credits to avoid double taxation on U.S. assets at death, Kolodny said. Hong Kong and Singapore don’t have tax treaties with the U.S., said G. Warren Whitaker, a partner with Day Pitney LLP in New York. Residents of those countries may consider holding U.S. stocks through a foreign corporation, he said.
Failing to plan ahead may come with high costs for those leaving the U.S. tax system as well, Basha said. The U.S. may impose a so-called exit tax on those giving up residency or citizenship, if they have a net worth of $2 million or more or paid an average of $151,000 or greater annually in net income taxes over previous five years, for those expatriating in 2012.
One former World Bank employee who worked with Basha was moving from the U.S. back to Europe upon retiring. The woman had already given up her U.S. green card before consulting with Basha, which triggered U.S. exit taxes of about $500,000 on the value of her total future pension payments from the World Bank. She declined to name the client citing privacy concerns.
Some foreigners who formerly might have ignored U.S. tax rules have been forced to reconsider, Whitaker said.
“In the old days people moved to the U.S. and some of them just wouldn’t comply,” he said. “They’d count on hiding money and not reporting it, and those people are having a lot of difficulties now as the world shrinks and information-exchange increases.”
By June 2013 foreign financial institutions must enter into agreements with the IRS to disclose information about accounts held by U.S. taxpayers, under the Foreign Account Tax Compliance Act.
U.S. recipients of gifts from foreigners or distributions from foreign trusts should make sure they comply with relevant IRS reporting requirements, said Suzanne Shier, tax strategist for Chicago-based Northern Trust Corp. (NTRS) U.S. taxpayers generally are required to disclose to the IRS any offshore bank or brokerage accounts if the total in those accounts is more than $10,000. They also must generally disclose any gifts from foreign persons or foreign estates of more than $100,000.
The IRS in January said it had collected more than $4.4 billion in the two voluntary disclosure programs it had offered U.S. taxpayers hiding assets offshore to become current on their taxes, and said it would reopen the program for an indefinite period, according to a statement. Participants generally pay a penalty of 27.5 percent of the highest balance they held offshore in the previous eight tax years.
The most important step is for wealthy foreign families to consider tax consequences before they step on U.S. shores, Whitaker said.
“The biggest mistake is they come here with their money and six months later they ask me, ‘What can I do?’” he said.
One client was who was moving from Switzerland to the U.S. was able to lower his tax exposure by stopping in Ireland before he entered the U.S., in order to establish a higher cost basis on certain investments and to place some assets into trusts, Treyz said.
Families relocating to the U.S. for a limited period of time, such as for a five-year work assignment, could benefit by placing assets into private-placement life insurance, which is a way of holding mutual funds and alternative assets such as hedge funds within a tax-deferred life-insurance wrapper, Rothschild said. The assets may grow tax-deferred while the family resides in the U.S. and the policy may be terminated after they leave and are no longer subject to the U.S. income taxes, he said.
To contact the reporter on this story: Elizabeth Ody in New York email@example.com