Estate Planning for the International Family: Opportunities for Delaware

1. Washington, DC ◊ New York, NY ◊ New Haven, CT ◊ Chicago, IL Estate Planning for the International Family: Opportunities for Delaware Stanley A. Barg Estate Planning Council of DelawareKozusko Harris Duncan November 13, 2013

2. Importance of Estate and Tax Planning • Persons subject to US taxation can realize substantial savings through estate and asset planning. • US recognizes broad range of trusts and trusts play an important role in many structures. • Particularly effective for non-US persons to take professional advice before coming to or investing in the US. • Also important for US persons who acquire assets overseas or who have family members who reside overseas and may not be US persons. • Asset Protection Planning

3. Citizens and Residents • Must pay U.S. income taxes on their worldwide income • Citizens – There are said to be 6 million American citizens who live outside the US • Residents for Income Tax Purposes • Green Card Holders • Substantial Presence Test

4. Substantial Presence Test • An individual is considered a resident alien under the substantial presence test if he or she was in the U.S. 183 days or more during any calendar year. • Resident alien status can also be established under a three-year test which counts 183 days to include: • each day in the current year; plus • during the first preceding year, 1/3 days in the U.S.; plus • during the second preceding year, 1/6 days in the U.S. • General rule: to avoid resident alien status, average annual days lived in the US should not exceed approximately 120 days.

5. Exemptions • Certain individuals such as students who enter the U.S. on an F-1 visa, or other student visa are exempt from the substantial presence test for a period of time, usually five years. • Closer connection test • Use of treaties

6. Non-Resident Aliens • A non-resident alien is usually subject to US income tax only on US source income. • Critical for students and other temporary visa holders to plan as status changes. • Termination of Green Card status.

7. Liability for US Estate and Gift Tax • US citizens and those deemed “resident” in the US for Estate and Gift Tax Purposes are subject to a complex tax regime on worldwide assets. • US “Non-residents” are subject to Estate and Gift Tax on US situsassets such as US real estate, tangible personal property (e.g. art) located in the US and securities of US companies (estate tax only). • Residency for this purpose is based on domicile • Domicile: where one lives with the intent to remain • Green Card Holders are generally presumed to be residents but can in certain circumstances rebut the presumption. • Similarly, one with a temporary visa may nevertheless be regarded as domiciled in the US.

8. Choice of Law – What Does it Mean to Have a US Trust ? • Importance of State Law • Creation • Taxation • Rights of Parties • US Trust for Tax Purposes • Control Test • Court Test

9. US Trusts for US Tax Purposes • Objective Rule – A trust is considered domestic for US tax purposes only if: • a US court can exercise primary supervision over its administration (the court test), and • the US fiduciaries have the authority to control all substantial decisions relating to the trust (the control test). • A trust that does not satisfy both tests is a foreign trust for US tax purposes

10. The Court Test • A US court must be able to exercise primary supervision over the administration of the trust. • Safe Harbor: • The trust instrument does not direct that the trust be administered outside of the US • The trust is actually administered exclusively in the US • The trust is not subject to an automatic migration provision

11. The Control Test • One or more US persons must have the authority to control all substantial decisions of the trust. • Substantial decisions include: • Whether and when to distribute income or corpus • The amount of any distributions • The selection of a beneficiary • Whether a receipt is allocable to income or principal • Whether to terminate the trust • Whether to compromise, arbitrate or abandon claims • Whether to sue on behalf of the trust or to defend suits against the trust • Whether to remove, add or replace a trustee • Investment decisions

12. Grantor Trusts with Foreign Grantors • Grantor Trust Rules • Who is the “Grantor”? • Foreign Grantors • A trust (foreign or domestic) is treated as a grantor trust only if the person deemed to own the trust is a US citizen or resident or a domestic corporation. • Designed to preclude the use of the grantor trust rules to eliminate all US income taxation on foreign-source income of a foreign grantor trust distributed to US beneficiaries • Grandfather Rules

13. Exceptions • Revocable Trusts • Irrevocable Trusts Benefiting Only the Grantor and/or the Grantor’s Spouse • Compensatory Trusts

14. Non-GrantorForeign Trusts • Reporting requirements • Tax on Current Income • Throwback Tax and Interest Charge • Minimization • Isolate Tainted Income with Cleansing Distribution • Permanent Income • Use of Default Method • Life Insurance Products • Domestication

15. The Use of Business Entities in Estate Planning • LLCs – The use of US Disregarded Entities • Purchasing property • Foreign taxpayers with foreign assets • Family Limited Partnerships • Partnerships and LLCs • Facilitation of Transfers of Interests • Used with trusts

16. Check the Box Entities • Election out of default classification • Made on Form 8832, Entity Classification Election • Generally effective on date filed • 75-day retroactive election • 12-month prospective election • Timing Issues • 60-month moratorium on change after election

17. Foreign Bank Account Reports (FBAR) • Treasury Department Form TD F 90-22.1. • On February 24, 2011 new rules were issued applicable to FBARs due by June 30, 2011 with respect to accounts maintained in 2010 and subsequent years. • The rule addresses: • who must file FBARs; • the types of account which must be reported; and • exemptions from filing that may apply.

18. Foreign Bank Account Reports (FBAR) • Trusts are included under the definition of 'US person' in the same manner as corporations and limited liability companies; i.e., a trust that has been created, organized or formed under the laws of the United States must file. • A beneficiary of a discretionary trust does not have a financial interest in a foreign account simply because of his or her status as a discretionary beneficiary. A beneficiary has a “financial interest” in the assets of the trust only if he or she has a 'present beneficial interest’ although it is unclear how 'present beneficial interest' may be defined.

19. Foreign Bank Account Reports (FBAR) • A US person has a financial interest in a financial account in a foreign country for which the owner is a trust: • if the US person is the trust grantor and has an owner interest in the trust under the grantor trust rules, or • if the US person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. • Anti-avoidance rule • Delaware LLCs

20. US Trusts in International Planning • The domestication of trusts to the US • Use of foreign grantor trusts in international planning • Death of the grantor • The use of US trusts that are not US trusts for US tax purposes • Could be grantor or non-grantor • May be domesticated in the future • Subject to US tax only on US income • The use of US trusts to acquire US assets • Qualified Domestic Trusts – The need for an institutional US trustee • Foreign non-citizen spouse • Foreign taxpayer with US assets - Limited to $60,000 exemption • US persons living overseas who want a living trust without subjecting the trust to local tax

21. Washington, DC ◊ New York, NY ◊ New Haven, CT ◊ Chicago, IL Estate Planning for the International Family: Opportunities for Delaware Stanley A. Barg Estate Planning Council of DelawareKozusko Harris Duncan November 13, 2013