Pre-immigration tax and estate planning: pitfalls and considerations related to domicile.
A key rationale for the importance of and, thus, the focus on domicile rests with U.S. estate, gift, and generation-skipping transfer taxation (collectively referred to as "transfer taxation"). For example, the creation and funding of an irrevocable estate tax compliant trust with a completed gift is typically an integral component of pre-immigration tax and estate planning. Yet, if the donor were domiciled in the U.S. at the time of gifting, worldwide gift taxation with potentially severe, adverse gift-tax consequences would result. (1) By contrast, due to NDA status and with the gifting of foreign situs property, the gift tax is inapplicable. (2)
Consistent with these considerations, at the outset of the planning process, the objective is to pin down and confirm that the extant domicile is indeed outside and not in the U.S. On a cross-border basis, while a degree of commonality may exist in defining the domiciliary concept as applied by the jurisdiction of current domicile and the U.S., (3) important distinctions may nevertheless exist. (4) For this purpose, typically the starting point is the domicile of origin (5) with same necessarily continuing until a domicile of choice is subsequently acquired. (6) Notably, domicile for transfer taxation is not equivalent to residence for U.S. income taxation. (7) Accordingly, residence for income taxation may exist despite the absence of domicile with the converse also being true. (8)
By way of illustration, X at birth acquired a domicile of origin in the United Kingdom. On reaching adulthood and being peripatetic, X first moved to Bermuda and then to the U.S., accumulating over time a worldwide gross estate of in excess of $200 million. For the years 2011-2015, X was a resident of the U.S. for income taxation by virtue of physical presence in the U.S. (9) Throughout 2016, X was consistently present in either Hong Kong or Singapore spending no time in the U.S. X's foreign legal counsel has opined that effective as of the beginning of 2016, X's domicile of origin in the United Kingdom was reactivated. X's objective is to move permanently to Florida beginning in 2017 while in the interim, i.e., during 2016, effecting a completed gift of assets having a collective value of $180 million to a pre-immigration estate tax-compliant trust.
The central concern in this context is the matter of domicile, the existence of which would result in X's being subject to significant gift-tax liability. Interestingly, the legal principles applied by the United Kingdom and in the U.S. in defining domicile differ in material respects. In the United Kingdom, a domicile of choice, if abandoned, reactivates the domicile of origin. (10) By contrast, within the U.S., an existing domicile of choice continues until a new domicile of choice is acquired. (11) Thus, the opinion of foreign legal counsel would in no sense be controlling in gauging the existence of domicile within the U.S. Instead, the applicable standards as applied in the U.S. must be considered. Absent unequivocal affirmation of NDA status consistent with U.S. legal standards, pre-immigration tax and estate planning should not proceed irrespective of the opinion of foreign legal counsel. (12)
By contrast, if the existence of NDA status is indeed clear and unequivocal, appropriate planning can then commence. For example, Y, a nondomiciliary alien of the U.S., was diagnosed in the foreign jurisdiction of domicile with lung cancer and first entered the U.S. on January 1, 2014, for treatment. Y was physically present in the U.S. for 183 days or more during both 2014 and 2015, thereby becoming a resident of the U.S. for income taxation for each such year. (13) Even so, apart from contacts relating solely to medical treatment, Y otherwise had no nexus with the U.S. for either year. Instead, on completion of medical treatment, Y"s intent, as evidenced by the relevant facts and circumstances, was to return to Y's home jurisdiction. Accordingly, though a resident of the U.S. for income taxation, Y was not domiciled in the U.S. for transfer taxation. (14) Accordingly, consistent with such intent, pre-immigration tax and estate planning may, as desired, commence on such basis, e.g., with the view of subsequently becoming domiciled in the U.S.
As an integral component of initiating pre-immigration tax and estate planning, appropriate strategies must be thoroughly developed and assiduously addressed. For this purpose, the objective is to place the NDA into a position to make informed decisions as to how best to proceed. Thereafter, those strategies as selected should be duly implemented and brought to full completion prior to the acquisition of domiciliary status. This necessarily includes not only the drafting and execution of relevant instruments and documentation, but the completion of all other material steps as well.
A delay in the process may well require the postponement of the domiciliary starting date. To illustrate, a gift to an estate tax-compliant trust must not only be completed in fact, but also be duly memorialized prior to the acquisition of domicile. For this purpose, the trust must be in existence, and necessarily implemented and executed by the NDA. One approach to the collective funding of the trust and the memorialization of the gift is the formation and funding of a single member domestic limited liability company (LLC) as wholly owned by the NDA with intangible personal property. Correspondingly, the NDA may then gift the ownership interest in the LLC to the trust. As the LLC is a disregarded entity (15) and its underlying assets consist of intangible personal property, no gift tax will be imposed on the NDA as a result of the completed gift. (16)
Memorialization of the gifting of the LLC ownership interest consists of a series of interrelated steps. These include the issuance by the LLC of the initial membership certificate documenting the 100 percent ownership interest of the NDA as a prelude to its funding with intangibles. On completion of funding by the NDA, the membership certificate as issued to the NDA should then be cancelled with a new 100 percent membership certificate then being contemporaneously issued in the name of and transferred to the designated trustee of the pre-immigration trust. The date of the issuance and transfer of the new certificate by the NDA to the trustee is the key date in the memorialization process and should, in general, be considered as the date of completion of the gift. Moreover, minutes should previously have been prepared and executed authorizing the funding and memorialization of the gifting process. Further, the register of members of the LLC must likewise have been duly completed and dated accurately and consistently with the issuance of the initial certificate to the NDA and of the gifting of the new certificate to the trustee. Central to this collective process is the objective of contemporaneously memorializing that the gifting by the NDA of the LLC ownership interest and, thus, its underlying intangibles to the trust in fact occurred prior to the acquisition of domicile.
An integral component of preimmigration tax and estate planning is to place the NDA in position for a shift in personal status from an NDA to a domiciliary alien. Notably, with the acquisition of domicile, the applicable exclusion amount increases dramatically. Specifically, for an NDA, the Internal Revenue Code estate tax exemption equivalent is only $60,000 (17) with no gift tax credit being available. (18) By contrast, the applicable exclusion amount for a domiciliary of the U.S. as unified for estate and gift tax and indexed to inflation now significantly exceeds $5 million. (19)
As a result and in anticipation of a change in personal status, the pre-immigration tax and estate plan must necessarily be inclusive of post-immigration tax and estate planning considerations, e.g., the collective value of those assets that are to be retained and not gifted must necessarily be addressed relative to the enhanced unified credit. Additionally, the conceptual planning may be directly affected by the status of the nondomiciliary as an alien rather than a citizen. Specifically, in the case of spouses collectively immigrating, alien classification gives rise to a series of planning considerations not presented in the more typical case of U.S. citizen spouses. (20)
In any event, with collective completion of pre-immigration and interrelated post-immigration tax and estate planning, the necessary steps for the complete refocusing of the relevant facts and circumstances from the foreign jurisdiction to domicile within the U.S. may be commenced and duly completed. The intended effect is to give rise unequivocally to the relinquishment of domicile in the foreign jurisdiction and its acquisition within the U.S.
(1) All references made to the Internal Revenue Code shall mean the Internal Revenue Code of 1986, as amended. I.R.C. [section]2501(a)(1); Treas. Reg. [section]25.2501-1(b).
(2) I.R.C. [section]2511(a); Treas. Reg. [section]25.2511-3.
(3) Treas. Reg. [section]20.0-1(b)(1) defines domicile in terms of where one intends to remain indefinitely. See also Elkins v. Moreno, 435 U.S. 647 (1978) (applying terms permanently and indefinitely interchangeably in discussing intent to acquire domicile).
(4) Compare In re Estate of Jones, 182 N.W. 227 (Iowa 1921), with Udny v. Udny, (1869) LR 1 Sc and Div. 441 (HL).
(5) See, e.g., Restatement (Second) of Conflict of Laws [section]14(1) (1971) (defining domicile of origin as domicile of child's parents or those persons on whom child is legally dependent at birth).
(6) Acquisition of a domicile of choice is predicated on physical presence in a new jurisdiction plus the intent to remain there indefinitely as determined based on objective facts and circumstances, e.g., location of family, jurisdiction where business is conducted, nature of living accommodations, immigration status, etc. Compare Estate of Fokker v. Commissioner, 10 T.C. 1225 (1948) (finding domicile in U.S. as based underlying facts and circumstances) with Estate of Nienhuys v. Commissioner, 17 T.C. 1149 (1952) (concluding based on objective factual analysis that decedent not domiciled in U.S.).
(7) I.R.C. [section]7701(b), which defines residence for income taxation, is expressly inapplicable for purposes of subtitle B of the Internal Revenue Code, i.e., estate, gift, and generation-skipping transfer taxation. See I.R.C. [section]7701(b)(1).
(8) A pre-existing medical condition of which the alien was aware prior to arrival in the U.S. does not constitute an exception to residence for income taxation but may nevertheless preclude existence of domicile. Compare Treas. Reg. [section]301.7701(b)-3(c) (3) (residence for income taxation existed due to prior awareness) with Estate of Paquette v. Commissioner, 46 T.C.M. 1400 (1983) (absence of domicile in the U.S. for estate tax where decedent was hospitalized in Florida for removal of cancerous lung tumors). Additionally, though a G-4 visa holder may become a domiciliary, residence for income taxation cannot exist due to express statutory exception. Compare Elkins, 435 U.S. at 647, with I.R.C. [section]7701 (b)(5)(B) (ii) and Treas. Reg. [section]301.7701(b)-3(b)(1)(i).
(9) I.R.C. [section]7701(b)(3)(A) and (B).
(10) See, e.g., Udny v. Udny (1869) LR 1 Sc and Div. 441 (HL).
(11) In re Estate of Jones, 182 N.W. 227 (Iowa 1921).
(12) Additional factual development would for this purpose be required. The focus would essentially be directed to whether a domicile of choice was previously acquired in the U.S. and, if so, whether same continued for the duration of 2016.
(13) Due to the prior diagnosis and the element of awareness, the medical condition exception for income taxation is unavailable. Treas. Reg. [section]301.7701(b)-3(c)(3).
(14) See, e.g., Estate of Paquette v. Commissioner, 46 T.C.M. 1400 (1983).
(15) See Treas. Reg. [section]301.7701-3(b)(1)(ii) (classifying domestic LLC as disregarded entity absent check-the-box election).
(16) I.R.C. [section]2501(a)(2);Treas. Reg. [section]25.25011(a)(3)(i). Notably, a gift of domestic corporate stock is not subject to gift tax even though the estate tax would apply if owned by an NDA at death. P.L.R. 8342106; I.R.C. [section]2104(a).
(17) I.R.C. [section]2102(b)(1). The $13,000 credit corresponds to an exemption equivalent of $60,000. I.R.C. [section]2001(c)(1).
(18) See I.R.C. [section]2505(a) (extending unified credit only to U.S. citizens or domiciliaries).
(19) I.R.C. [section][section]2010(c)(1)-(3), 2505(a).
(20) See, e.g., I.R.C. [section][section] 2056(d) and (d)(2)(a) (estate tax marital deduction disallowed unless surviving spouse is citizen with limited exception for qualified domestic trust). By regulation, the portability election is precluded for the estate of an alien decedent. I.R.C. [section]2010(c)(6); Treas. Reg. [section]20.2010-2(a)(5).
William H. Newton III is author of the two-volume treatise International Income Tax and Estate Planning, published by Thomson-Reuters, a practicing attorney in Miami, an adjunct professor of law in the masters of tax and estate planning programs at the University of Miami of Law for over 25 years, author of numerous articles regarding international tax and international estate planning, and a graduate of the Massachusetts Institute of Technology and Southern Methodist University.
This column is submitted on behalf of the Tax Law Section, James Herbert Barrett, chair, and Michael D. Miller and Benjamin Jablow, editors.
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|Author:||Newton, William H., III|
|Publication:||Florida Bar Journal|
|Date:||Mar 1, 2016|
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