As taxpayers are becoming more global, the complexity of their financial matters increases, and as practitioners, we’re being approached with new issues involving cross-border matters more than ever before.
The discussion that follows highlights common issues to look for and shares some planning ideas for those with cross-border interests, primarily within the realm of trust, gift and estate. These issues are usually interwoven with tax reporting and compliance.
Here is a short (non-exhaustive) list of some of the issues that are commonly seen—and some that maybe aren’t as common:
The “accidental” American (U.S. citizen by birth has lived substantially all their life in another country)
U.S. owners and beneficiaries of non-U.S. trusts
Passive Foreign Investment Companies (PFIC)
Non-resident alien decedents holding U.S. sited assets
Gifts of bank accounts to U.S. children of non-U.S. Parents
Ownership of non-U.S. enterprises and hidden reporting requirements
The following are real-life scenarios we’ve seen in the last two years with our clients.
Situation No. 1
Harry is a U.S. person, living in California, and the beneficiary of a Hong Kong sited trust settled by his late grandfather, Phillip, a non-U.S. person. Phillip passed away in 2022, the same year Harry became aware of the trust.
During 2022, Harry also received an outright gift of £150,000 from his grandmother, Elizabeth.
Harry must obtain from the trustee a beneficiary statement and then file, at minimum, a Form 3520 with his return. Other forms may be due as well, such as 8938, possibly 1040 NR, etc. depending on the trust.
He must also report the receipt of the cash gift from his grandmother on Form 3520.
Other questions should be asked, as well: What is the nature of the investments? Could there be a PFIC element? Could Harry be the indirect owner by attribution of controlled foreign corporations? Even further, if the trust does not make regular distributions, there is a risk that throwback regime rules apply.
The issue of cash gifts is one that we see on a regular basis. In many cultures, it is customary to place bank accounts and other assets in the name of children. If these children happen to be “accidental” Americans, these gifts often go unreported—and penalties for failure to report can be significant.
Situation No. 2
Henry and Harriet are a married couple. Henry is a U.S. person, living overseas, but spends a few months a year in the couple’s jointly-owned Florida home. Harriet, not a U.S. person, is a tax resident of New Zealand, owns businesses in several other countries and has significant financial holdings outside the United States. Harriet is a non-resident in the U.S.; however, the couple has decided to move to the U.S. in 2024, and Harriet plans to get a Permanent Resident Card, ultimately focused on citizenship. They have no will or trust. The couple is current with all U.S. tax filings and fully compliant.
After a quick analysis, you realize that Harriet already has a taxable estate by U.S. standards, and Henry is approaching that level. While this is a very complex case involving domestic and international matters, where would you start?
Without any planning, her non-U.S. assets are likely to become part of her U.S. estate. As a first step prior to immigration, she might consider a “drop-off” style trust (a non-U.S. sited trust established before she becomes a U.S. person).
Whether in a trust or owned outright, the income from such assets would also become taxable to her after immigration. Harriet may also consider liquidating many of the securities and other assets before she becomes a U.S. person given the absence of capital gains tax in her current residency.
Both Henry and Harriet should consider the use of foreign and domestic trusts to provide generational protection. While doing her pre-immigration planning, Harriet may also want to consider adding an additional layer of tax and estate benefit by incorporating the use of a private placement life wrapper.
Situation No. 3
Charlotte (affectionately referred to as Charlie by her parents) was born in the United States and moved with her non-U.S. parents to Belgium when she was less than a year old. Charlie, now 24, has recently inherited the family’s chocolate factory worth 18 million Euros. Charlie earns a moderate income as a medical resident. She has several European bank and investment accounts (which include significant holdings in European exchange-traded funds) and is unaware that she has any U.S. filing requirements. Charlie is unmarried but mentioned that her fiancé loves chocolate and has expensive tastes.
Notwithstanding the obvious income tax reporting requirements and compliance issues, what do you tell Charlie?
First, there will be the reporting of the inheritance, and while not taxable in the United States, the gift itself will require disclosure. Other conversations should be held regarding whether the chocolate factory constitutes a controlled foreign corporation and the accompanying reporting requirements. You may also want to mention your concern over potential PFIC holdings in ETFs.
From there, I might shift the conversation to some forward-looking estate planning (and asset protection) with the idea that a gift to a properly structured irrevocable trust would provide benefits on multiple levels.
Situation No. 4
Lawrence is a non-U.S. person and a citizen of Hong Kong. In 1992, he purchased a house in Massachusetts for $250,000, expecting that his then-teen children would attend Harvard. Sadly, Lawrence passed away in 2022. His only U.S. sited asset was this house, worth
$5 million at date of death.
You can see several issues have come up here for both income tax and estate.
The first is that the property itself if sold, would be subject to the Foreign Investment in Real Property Tax Act. It’s not the end of the world, but something to consider. More daunting is that in 2022 a non-resident alien of the United States was entitled to a $60,000 estate exemption (on U.S. sited assets), leaving $4,940,000 of estate tax exposure. How would you have advised the family? Given enough runway, perhaps we would have considered the use of a blocker corporation, or even the sale of the asset.
The purpose of this article is to raise awareness of issues that we may see on a regular basis as we work with cross-border taxpayers. Although the names are made up and the facts simplified, each of the situations described are real, frequent and often come as a surprise to the client. It is up to us as practitioners to listen carefully.
Steven Geller is a CPA, TEP and senior partner at Morris+D’Angelo headquartered in Silicon Valley. You can reach him at email@example.com.