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Strategic Approaches to Minimize Tax Liabilities for Non-Citizens and Non-Resident Aliens in the U.S.

By Matthew Ledvina, JD, LLM Taxation<br>Navigating the maze of tax liabilities and financial planning for non-U.S. citizens or non-resident aliens (NRAs) is a complicated task. However, the strategic use of insurance and annuities can offer a streamlined pathway for mitigating tax implications and providing more financial security.

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Strategic Approaches to Minimize Tax Liabilities for Non-Citizens and Non-Resident Aliens in the U.S.

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  1. MATTHEW LEDVINA F1 STRATEGIC APPROACHES TO MINIMIZE TAX LIABILITIES FOR NON- CITIZENS AND NON- RESIDENT ALIENS IN THE U.S. Financial planning for clients who are neither U.S. citizens nor resident aliens comes with a host of challenges, most notably the complex tax laws that govern them. A well- designed strategy, involving life insurance and annuities, can offer these clients effective ways to lessen their tax burden. UNDERSTANDING THE INTRICACIES OF FOREIGN NON-GRANTOR TRUSTS For non-U.S. persons who have established foreign trusts with U.S. beneficiaries, utilizing life insurance can offer substantial advantages. These trusts, known as Foreign Non- Grantor Trusts (FNGTs), often accumulate Undistributed Net Income (UNI), creating a complicated tax situation. Although life insurance doesn’t erase existing UNI, it can prevent further accumulation, essentially “putting a cap” on the problem. WHAT DEFINES A FOREIGN NON- GRANTOR TRUST? Simply put, a FNGT is not considered a U.S. entity. The IRS specifies two criteria for a trust to be deemed a U.S. person: 1. A U.S. court has primary oversight over the trust’s administration. One or more U.S. persons have authority over the trust’s significant decisions. FNGTs don’t meet these conditions and thus face stringent tax rules aimed at curbing deferred income tax payments by U.S. beneficiaries. 2. COMPLICATIONS ARISING FROM DNI AND UNI IN FNGTS When a FNGT distributes its Distributable Net Income (DNI), the beneficiaries are taxed, and the trust gets an income tax deduction. If DNI isn’t fully distributed, it turns into UNI and is carried forward, accruing additional interest charges when eventually distributed. Private Placement Life Insurance as a FNGT Solution Investing in a life insurance policy, particularly a non-modified endowment contract (non- MEC), can arrest the growth of taxable income in a FNGT. Such policies offer numerous tax advantages, including the non-taxable status of income and investment returns within the policy. Strategies for Pre-Immigration Planning Life insurance planning becomes even more effective when applied before any UNI accumulates in a FNGT, particularly for NRAs considering U.S. residency. This preemptive strategy eliminates future UNI complications. Planning for Temporary U.S. Residents through Annuities Variable annuities offer a powerful planning tool for clients considering a short-term stay in the U.S. Purchasing an annuity from a foreign insurer allows the client to defer U.S. taxes on their worldwide assets during their stay. Sources: https://www.jsonline.com/obituaries/mjs076556

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