U.S TAX UPDATE:Planning For the New Expatriation Rules –

There’s More to it Than You May ThinkJuly 31, 2008

Presented By

Christopher Braun, MBA, JD, LLM, Director International Trust, Estate and Expatriate Planning

Matthew Boyd, International Tax Specialist

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Business Goals For Participants

• Review all your clients to identify any person holding a green card or who is filing as a physically present US tax resident (based on some form of visa) who may be about to acquire a green card (“prospect”);

• Contact prospect to identify their length of possession of green card (or the acquisition date of the green card in the near term) and advise them generally regarding the effects of the new expatriation law;

• Consult with prospect to determine specific tax consequences of holding the green card (i.e., permanent US income taxation) vs. giving up the green card (i.e., exit tax);

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Goals Continued:

• Perhaps they are not subject to exit tax and can give up green card before it is too late (i.e., one must hold green card for 8 years to be subject to new exit tax.)

• Rationale: Obtaining a green card now is many times a nearly fatal tax planning mistake and must be quantified and understood before one obtains it.

• Clients must be warned!

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Index

• Short Summary of Prior Law• Discussion of Changes Brought About

by HR 6081• Questions & Answers

Caveat: This PowerPoint is an overview discussion of complex tax issues with many exceptions and highly refined rules. This PowerPoint is not meant to be exhaustive and should not be relied on for tax advice. It is for educational purposes only and is designed by its very nature to be general and non-specific in scope.

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Prior Law

• Expatriation for U.S. tax purposes: generally defined as two main categories: giving up U.S. citizenship or terminating long-term permanent residency (i.e. generally holding a green card for 8 of the last 15 years.) Herein, both groups are referred to as “expatriates.”

• Generally, expatriates, who expatriated with the intent to avoid tax, were subject to 10 year window of special U.S. tax rules under IRC Section 877.

• Intent to avoid tax defined as:– Net Worth > $2,000,000(USD) on date of expatriation

OR– Average Federal U.S. Tax Liability for prior 5 years >

$139,000(USD) (in 2008, and increased annually for inflation thereafter.)

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Prior Law Cont.

• No continuing U.S. tax consequences (under special expatriate rules) for those former U.S. persons who did not meet the “expatriation to avoid tax” threshold financial tests.

• Expatriates were required to file Form 8854 to either notify the IRS of the date of expatriation to start their 10 year window if they were subject to IRC Section 877, or, alternatively, to notify the IRS of the date of cessation of citizenship or long-term residency status if they were not subject to IRC Section 877.

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Prior Law Cont.

• In general, individuals who met the threshold tests became subject to various U.S. income tax rules for a period of 10 years following expatriation (IRC § 877) . These rules included:– An expanded definition of U.S. taxable income (i.e.,

change of source rules);– Classification as “U.S. Tax Residents” in years

following expatriation where 30+ days were spent on U.S. soil;

– Look-through rules under U.S. estate tax for U.S. situs assets held by controlled foreign corporations owned by expatriates;

– Special U.S. gift tax rules on transfers of intangibles.

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New Law (Effective only for new “expatriates” after effective date of law of 6/17/2008. Old rules

for old expatriates are kept intact.)

• House Resolution 6081 essentially has three new parts:

Expatriates (essentially as previously defined) are now subject to:

- Outbound deemed disposition exit tax;- Donees of gifts made by expatriates are

subject to new inheritance taxes; and- Trust withholding for distributions from

Non-Grantor U.S. trusts to expatriates.

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Deemed Disposition Exit Tax• Canadian style departure/exit tax is assessed on expatriates

by measuring inherent gains on all property of the expatriate at the time of departure (with basis equaling the FMV, for inbound persons, as of the date the individual first became a resident.) 

• There is a floor of excluded gain of $600,000(USD) (amount to be adjusted annually), and, there are various exceptions for certain property (i.e., certain deferred compensation plans which are taxed at a flat rate of 30% when actually paid; and specified tax deferred accounts, such as IRAs, which are deemed distributed to the expatriate in full the day before the expatriation.) 

• Finally, the individual can elect to defer the tax until the property is actually sold if a tax payment bond is provided and the taxpayer waives any foreign treaty protection. Election is on an asset by asset basis and the IRS collects interest at the underpayment rate.

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Expatriate Gifts/Inheritance Tax

• New expatriate gift and bequest tax (assessed on the donee at the highest of the then gift or estate tax rates) of property given or bequeathed to U.S. person by a "covered expatriate" subject to the new rules (modified with certain exclusions for charity or spousal bequests.)

• Tax determined above is less any foreign gift or estate tax paid by the donor/decedent on the transaction.  This tax hits "covered gifts" (i.e., gifts or bequests from a covered expatriate, who is anyone subject to the new departure tax rules).  U.S. domestic trusts are considered persons for this rule and will be subject to the tax as well, and, there are look-through rules applicable to transfers to foreign trusts.

• New tax does not apply to gifts or estate transfers subject to regular U.S. transfer tax rules.

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Trust Withholding From Non-Grantor Trusts

• Distributions to expatriates from non-grantor trusts are subject to 30% withholding on taxable portion.

• If FMV of distributed property exceeds basis to trustee, deemed sale to expatriate by trustee.

• Reduced treaty rate withholding does not apply.

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Exceptions:

• Notwithstanding the foregoing, certain persons that would otherwise be “covered expatriates” are excluded. This includes individuals who are born US citizens and citizens of another country (and remain, at the expatriation date, dual citizens and are taxed as residents of the other country), and who for 10 of the last 15 years preceding expatriation have not been in the US in excess of the amount provided for under the substantial presence test.

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Planning Considerations

• Avoid U.S. citizenship or green card status.

• Pursue alternatives such as L1 or H1 or NAFTA or Australian Visa Programs.

• Treaty tie-break to avoid inclusion in 8 of 15 year green card status rule.

• Inbound basis planning.

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Conclusion

If you have additional questions, or if you require assistance with specific matters; please feel free to contact us:

Christopher Braun Matthew BoydOne Towne Square; Suite 600 115 S. 84th Street; Suite 400Southfield, MI 48076 Milwaukee, WI 53214(608) 334-4835 (direct) (414) 777-5850 (direct)(248) 368-8950 (fax) (414) 777-5555 (fax)cbraun@virchowkrause.com mboyd@virchowkrause.com

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