Preresidency trust, gift and estate planning.

High net worth individuals who emigrate to the United States should seriously consider rearranging their financial affairs to minimize the U.S. income, gift and estate tax consequences of non-U.S. situs property. Recently, the IRS issued Letter Ruling 9347014, which addressed such an individual who was a resident and citizen of Canada and was in the process of emigrating to the United States.

The taxpayer owned 50% of the shares in a Canadian investment company which in turn owned U.S. and Canadian subsidiaries. The taxpayer also wished to transfer shares of these companies to an irrevocable trust for the benefit of his children. The individual taxpayer, his spouse and a third party were the primary trustees of the trust. The trust was to be maintained in separate shares, i.e., one share for each child, and was to be further subdivided in the event of additional children being born or adopted. The primary trustees had the discretionary power to distribute the trust's income or corpus for the beneficiary's health, education, maintenance and support until each child reached age 31. The primary trustee was to distribute one-half of each child's respective share of the trust to the child when the child reached age 30 and the remaining portion at age 35.

The trustees had the power to administer the trust and manage the trust assets, including the power to invest and reinvest trust property and discretion over the allocation of income and corpus distributions. The trustees were prohibited from borrowing trust capital without adequate interest or security. Secondary trustees had the power to vote or direct the voting of any corporate shares or other securities held by the trust. The trust was irrevocable and neither the individual taxpayer settlor nor the primary trustee had the power to alter, amend, revoke or terminate the trust. The taxpayer's spouse's reversionary interest in the trust was less than 5%.

Subsequent to the establishment of the trust and the rearrangement of the taxpayer's financial affairs, the taxpayer, his spouse and their children were going to change their residence from Canada to California. Under state law, in California an individual reaches the age of majority at age 18. Furthermore, parents have an equal responsibility to support and educate their children in a manner suitable to the child's circumstances, taking into account the parents' respective earning capacities.

Based on a review of the trust agreements, the Service concluded that none of the documents contained any circumstances under which the taxpayer, as grantor of the trust, would be treated as the owner of any portion of the trust and thus the trust income was not taxable to him or his spouse under the U.S. grantor trust provisions. Furthermore, the IRS also concluded that, based on the trust agreement, no circumstances existed that caused there to be any administrative controls present that would tax the income on a current basis to the trust's taxpayer/settlor for U.S. income tax purposes.

Furthermore, based on the trust arrangement prior to the establishment of the trust, the taxpayer had never resided in the United States and was never a U.S. citizen. Accordingly, because the taxpayer was held to be a nonresident of the United States at the time of the gift (i.e., the funding of the trust with the corporate shares), the taxpayer was not subject to U.S. gift tax.

For U.S. estate tax purposes, the individual taxpayer's settlor, as primary trustee, could distribute income or corpus of the trust to a beneficiary. However, such distributions were restricted by an ascertainable standard relating to the health, education, support or maintenance of the beneficiaries. Given these restrictions, the taxpayer did not have a general power of appointment and thus the trust could be excluded from his estate for U.S. estate tax purposes.

Thus, this letter ruling serves as excellent guidance for nonresident aliens with a high net worth who plan to move to the United States. The ruling provides guidance on how to shelter non-U.S. situs assets from income, gift and estate taxes by placing such assets in an irrevocable trust prior to the move. In this particular ruling, the taxpayer not only took advantage of this technique but also went as far as possible in structuring the trust so as to maintain control over the assets while keeping them out of his estate. From William J. Zink, CPA, Chicago, Ill.