eliminate U. S. income tax on non-U. S. assets. For example, the investor could make irrevocable gifts to long-term trusts for U. S. or non-U. S. beneficiaries. These trusts can be either U. S. trusts or foreign trusts for U. S. tax purposes – typically U. S. trusts if there are U. S. beneficiaries and foreign trusts if there are non-U. S. beneficiaries. However, if it is a foreign trust for U. S. tax purposes, the trust will be taxable to the investor / trust settlor if he becomes a U. S. resident within five years of the trust’ s creation, thereby eliminating much of the benefit of using a foreign trust.
In reality, it is often impractical to engage in planning more than five years in advance. Under these circumstances, the client should still establish the trust – to remove the assets from the U. S. transfer tax system – and invest the trust assets in such a way so as to not produce U. S. taxable income; through tax-efficient investments or a U. S. insurance policy that allows tax-free access to the policy’ s cash value. This will significantly reduce – if not eliminate – U. S. income tax going forward.
U. S. TRANSFER TAX
Under current law, absent a tax treaty, real property and tangible personal property located in the United States and owned by a non-U. S. person are subject to a 40 percent gift tax for lifetime transfers above $ 14,000($ 15,000 as of January 1, 2018) if to a non-spouse, and $ 149,000($ 152, 000 as of January 1, 2018) for lifetime transfers to a non-U. S. citizen spouse. These same assets and more are subject to a 40 percent estate tax above only $ 60,000 if owned at death. Conversely, U. S. citizens and“ residents” have a“ unified credit” or unified gift and estate tax exemption amount of $ 5 million, indexed for inflation to $ 5.49 million in 2017($ 5.6 million in 2018). In other words, U. S. citizens and residents can transfer up to $ 5.49 million free of gift or estate tax.
Lifetime gifts that exceed the gift tax annual exclusion( currently $ 14,000 per recipient) require the filing of a U. S. Form 709 Gift Tax Return and use up some of this unified credit. Significantly, the unified credit for U. S. residents
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