The client, in her early 80s, lived in South America but her children resided in the U.S. and were U.S. citizens.
She wanted to leave the children her estate, worth tens of millions of dollars, in the most tax-efficient way possible. But she worried the pitfalls involved with dual-country estate plans could subject her or her heirs to a large tax bill.
Clients living outside the U.S. face tricky estate-planning issues, including the fact that any U.S. situs assets (assets owned in the U.S. such as real estate or shares of U.S.-based companies) are subject to U.S. estate-tax laws. What's more, non-U.S. citizens are subject to a $60,000 lifetime gift-tax exemption, compared with the $5.25 million exemption available to U.S. citizens.
However, under U.S. tax law, non-U.S. situs investments aren't subject to any transfer tax, estate or gifts taxes when the beneficiaries receive them, nor is there a limit to transfer, says Mr. Monnich. So to protect his client's assets from taxes, he first suggested that his client sell any U.S-based assets as well as passive foreign investment companies, like foreign-based mutual funds, which are subject to onerous tax laws for U.S. inheritors.
When that was done, the adviser had the woman transfer all her assets to a revocable foreign grantor trust, which named her children as beneficiaries. That type of trust would allow the assets to pass estate-tax free to the woman's heirs, yet gave her control over the assets during her lifetime. And because the trust didn't hold any U.S. assets, she would pay only taxes in her home country.
Upon the woman's death, her beneficiaries would receive the assets and the trust would automatically become an irrevocable non-grantor foreign trust. The assets in the trust also would qualify for a step-up in cost basis upon the client's death--allowing the children to avoid taxes on capital gains accrued during the woman's lifetime.
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