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Defer Losses and Deductible Expenses
Some NRAs may have assets that have significantly declined
in value from the time they were acquired. Selling or exchanging
these assets prior to residence start date will adjust the tax basis
downward, to current fair market value. If the acquisition basis
can be substantiated, then it is best to preserve the built-in losses
of these assets and trigger them only following the residence
start date. These losses can then be used by the now U.S. tax
residents to offset ordinary income and capital gains.
Funding U.S. assets into a foreign trust removes them from
the U.S. estate tax base, and funding non-U.S. assets into a
foreign trust not only removes them from the U.S. estate tax
base, but may also eliminate U.S. income taxation.
If an NRA has an extensive investment portfolio with
significant values, it would be beneficial to selectively pick stocks
that will be sold and repurchased prior to U.S. tax residence
(to increase tax basis), and stocks that will not be sold prior to
residence start date (to preserve high basis).
There are four notable points on the U.S. income tax
treatment of a pre-immigration foreign trust. First, if the
foreign trust ever makes a distribution to a U.S. beneficiary,
the distribution will be subject to a throwback regime and an
interest charge. Second, capital gains earned by the trust and not
currently distributed are taxed under the ordinary income tax
rules. Third, trusts funded within five years of the U.S. residence
start date are taxed as grantor trusts. Fourth, U.S. beneficiaries
must report distributions received from a foreign trust.
Similar logic is applied to deferring the payment of those
expenses that would be deductible for U.S. income tax purposes,
including both business and personal expenses.
Foreign Trusts
A trust classified as a “foreign trust” is treated for U.S. tax
purposes as an NRA. As discussed above, the United States
taxes NRAs only on U.S.-source income and imposes an
estate tax only on U.S.-sited assets. For these reasons, funding
a foreign trust prior to the residence start date is a significant
pre-immigration tax planning tool.
As discussed above, NRAs are not s ubject to U.S. gift taxes
on gifts of non-U.S. assets and on gifts of all intangible assets
(even if in the United States). This allows NRAs to remove an
unlimited amount of wealth from their possible U.S. estate prior
to the residence start date.
The income tax advantages of foreign trusts may be limited
when they have U.S.-source income, U.S. beneficiaries or are
established within five years of U.S. residence. In certain situations the practitioner may intentionally seek to have the foreign
trust classified as a grantor trust. This avoids the application of
the throwback regime, reporting requirements for beneficiaries
and taxes the grantor on trust income, allowing the grantor to
further reduce his assets otherwise subject to the U.S. estate tax.
Conclusion
Advance pre-immigration tax planning can significantly
reduce U.S. income and estate taxes of EB-5 investors. This is
commonly accomplished by transferring ownership of assets
into newly created legal entities or distributing assets from existing entities to obtain a basis step-up, reincorporating entities
to obtain basis step up and strip out accumulated earnings and
profits, deferring deductible expenses, accelerating income, and
funding foreign trusts.
The planning must also account for the tax laws of the
immigrant’s home country. It would make little sense to reduce
U.S. taxes if home country taxes are increased by the same or
nearly the same amount. As a matter of practice the author
always coordinates U.S. pre-immigration tax planning with
foreign tax counsel.
★
Jacob Stein is a partner at Aliant LLP, a law firm
focused on international law and headquartered in Los Angeles. Stein is a certified tax
law specialist, and a recognized expert in
international tax planning and cross-border
business transactions. His works have appeared
in many publications including, The Journal of
International Taxation, Bulletin for International
Taxation, Business Entities and EB5 Investors
Magazine.
Jacob
Stein
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EB5 INVESTORS MAGAZINE