Do you own assets in multiple states? Do you have children or other beneficiaries living in other states or countries? Are you a United States citizen or resident living abroad? Are you a non-citizen considering a move to the United States?
For our clients facing such multi-jurisdictional issues, the process of creating a comprehensive estate plan includes coordination with the laws of various states and foreign jurisdictions, as well as coordination with those U.S. tax and reporting laws that specifically apply to individuals with international concerns.
California Taxes. There is a reason why California has the reputation of being the land of high taxes and an aggressive tax collection agency. Our state income tax is among the highest in the country and our state income tax authority (Franchise Tax Board or "FTB") is notorious for vigorously pursuing any state income taxes (or other fees) that may be owed, whether by individuals, businesses, or trusts. For the right situation, forming an entity such as an LLC to operate outside of California, or creating a trust in another jurisdiction where the trustee and at least some of the beneficiaries are not in California, can serve to reduce these annual tax burdens.
Taking Advantage of Other States' Laws. For example, Delaware has gained a reputation as a business-friendly state and ideal place for formation of legal entities. Delaware courts are among the speediest and most predictable in the nation when it comes to resolving business and trust disputes. Their legislature also adopts and modernizes laws faster than most other states, creating a business-friendly, trust-friendly environment. And, of course Delaware has a favorable tax regime. Unfortunately, none of these positive attributes are generally associated with California.
Other states, such as South Dakota and Nevada, have sought to emulate Delaware, particularly in the context of trusts. In addition to the favorable tax benefits found in these jurisdictions, these states offer asset protection
Maximizing Privacy. California has taken significant steps to liberalize notification requirements to beneficiaries of trusts, as well as the right of beneficiaries to gain access to trust information and accounts – sometimes while the trust is still revocable. If you are concerned about what a beneficiary might do upon learning of an inheritance or if you want to maximize your privacy, you may want to consider creating a trust in a jurisdiction outside California.
Reporting Requirements. If you are a U.S. citizen or resident who owns foreign assets, it is critical that you be aware of various reporting requirements that may apply to you. In an effort to curb international money laundering and tax evasion, the government has cast a very broad net that unfortunately tends to snag many people who were never the intended target.
You may have heard of the FBAR (Report of Foreign Bank and Financial Accounts), which is a reporting requirement related to foreign bank accounts. But, you should also be aware of IRS Form 8938, which greatly expands the scope of foreign assets required to be reported. Also, if you have received distributions from a foreign trust or a foreign individual or corporation, you may be required to file IRS Form 3520. And, if you are the owner of a foreign trust (which can include foreign retirement accounts such as UK ISAs), you will probably need to file an IRS Form 3520-A. Failure to file these forms can have dramatic consequences, including draconian civil penalties and even criminal prosecution. The IRS and Department of Justice are aggressively pursuing these cases. If you have not been filing any required returns there are ways to bring you into compliance, including the offshore voluntary disclosure program.
Planning with Foreign Assets and Beneficiaries. Aside from the reporting requirements faced by those owning assets abroad, our clients must also take into account the laws of international jurisdictions in which assets or family are located. If appropriate, we will work with advisors in other jurisdictions to ensure that the U.S. estate plan is in harmony with international laws that may apply.
Pre-Immigration Planning. If you are considering a move to the United States, you should be aware that upon becoming a resident or citizen your worldwide assets will become subject to the U.S. estate and gift tax system, and you will be required to report your worldwide income. Before you become a citizen or resident there are unique planning opportunities available to you that are not available to U.S. citizens and residents, such as pre-immigration gifting or creation of offshore trusts to prevent assets from being included in your taxable U.S. estate.
Purchasing U.S. Real Estate. Finally, if you are not a citizen or resident of the United States, but are considering purchasing real estate in the United States, either as an investment or for a family member living in the United States, you should consult experienced legal counsel who can guide you in the best way to purchase the real estate. Simply taking U.S. real estate in your individual name can have the unintended consequence of subjecting the property to U.S. estate and gift taxes, taxes that could have been avoided with proper planning. In addition, the subsequent sale of U.S. real estate could trigger unforeseen income tax consequences. And, if you are thinking of purchasing California real estate, do not forget about California property taxes and property tax reassessments, which can be minimized with proper planning and implementation.