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Prenuptial agreements and relationship contracts
A prenuptial agreement is a legal agreement made by a couple before they enter into marriage to control the financial aspects of their marriage in the event of divorce or death. In order to be legally binding each person must obtain separate legal counsel and provide a full and complete disclosure of all assets, including any expectancy of inheritance.

What aspects of a marriage does a prenuptial agreement control?

Prenuptial agreements govern the financial provisions of a relationship and division of assets if the couple divorce and in the event of the death of a spouse. Many agreements contain provisions that quantify the maximum dollar amount to be paid to a divorcing spouse. This helps protect individual assets and interests in the family assets. The agreement generally has more generous provisions in the event of a death of a spouse, and frequently both the divorce and death benefit under a prenuptial agreement will vary depending on the length of the marriage. The agreement does not control child custody or child support obligations.

Who should have a prenuptial agreement?

A prenuptial agreement is often used by younger couples where there is family wealth that needs to be protected, including a closely held family business or real estate. Older couples often use prenuptial agreements when they have children from earlier marriages and accumulated wealth they want to protect for themselves and their respective children.

Working together to develop a prenuptial agreement is fraught with emotional considerations. It is often difficult to separate the concepts of love and money. Ideally, a prenuptial agreement will help a couple make positive financial decisions for the management of their financial life on a going-forward basis as a couple. This can be one of the most valuable aspects of thinking through finances before marriage.

What is a relationship contract?

Some prenuptial agreements go a step further and include provisions related to the couple’s relationship. For example, a couple may decide to require a certain number of date nights or amount of time alone with each other. A relationship contract can also include an infidelity clause or drug, smoking or alcohol use clauses, with rewards or penalties for certain behaviors.

What if you are married and don’t have a prenuptial agreement?

A postnuptial agreement, in states that allow one, is entered into after marriage and contains similar provisions to a prenuptial agreement.

Parents whose children choose not to enter into a prenuptial agreement can help protect family wealth through their estate plan documents by ensuring that their property remains in a specially drafted dynasty trust for the benefit of children and future grandchildren, or other family members, rather than passing outright to children.
Inheritances and the engaged and separated
Marriage and divorce trigger automatic protections in the event that one’s estate plan does not reflect his or her marital status at the time of death. However, individuals who are engaged to be married or separated (but not divorced) from their spouses do not enjoy the benefits of these protections. Inheritance laws determine who is entitled to receive what from the estate of a decedent. They were developed to reflect the impact of marriage and divorce on relationships.

The married versus the engaged

In every state except Georgia, a surviving spouse is entitled to a share of the decedent spouse’s estate even if the decedent did not leave a will indicating his or her desire to include the surviving spouse. Similarly, in a majority of jurisdictions, “rules of pretermission” grant a surviving spouse an intestate share of their decedent spouse’s estate if his or her will was executed prior to marriage and failed to provide for his or her spouse. The theory behind these rules is that because marriage is a lifetime commitment to care for one another, failure to revoke a premarital will or execute a will upon marriage is unlikely to reflect a testator’s intent. Therefore, the law views the provision of an intestate share to a surviving spouse as the extension of an existing obligation of support, whereas the provision of an intestate share to a surviving fiancé(e) would create a new obligation triggered at death that is not present during one’s lifetime.

In stark contrast to the laws that make provisions for inheritance by a surviving spouse, a surviving fiancé(e) has no statutory rights with respect to the estate of his or her decedent fiancé(e). A pre-engagement will remains effective despite the change in circumstances that an engagement represents. Likewise, a surviving fiancé(e) whose decedent fiancé(e) did not execute a will with provisions for him or her does not have a right to an intestate share of the decedent fiancé(e)’s estate.

The divorced versus the separated

In every state except Mississippi, a bequest to a former spouse made in a will executed prior to divorce is revoked by implication upon divorce. However, mere separation does not revoke a bequest to a spouse made in a will prior to divorce. Furthermore, if an individual dies while a divorce is pending but not yet final, courts have considerable discretion in determining whether a decedent leaves a surviving spouse, entitled to the previously mentioned benefits, or a divorcé(e), entitled to none.

Although inheritance laws can provide helpful recourse where an estate plan, or the lack thereof, fails, they provide such recourse only minimally and should not be relied upon, especially by those who are not quite married or divorced. An estate plan that accurately reflects marital status and donative intent is essential.
Your estate plan is not a “fire-and-forget” missile guidance system
I recently read an interesting article about so-called “fire-and-forget” guidance systems under which a missile requires no human interaction after launch. You tell it what the target is, and it just goes.

Let me be clear: your estate plan does not work this way.

Anybody who has worked with me in the past knows I advocate for a goal-oriented estate planning process. Tell me what results you want, and I will do my best to design a plan to get you there.

We work hard together on the plan design. We think carefully about your family, your business, your investments. We craft trusts, draft wills, obtain appraisals, organize transfers and file tax reports.

And then I assign homework, to you, to your trustees, to your accountants, to your CFO. Because phase one is called “phase one” for a reason. There is a phase two. Maybe a phase three. Maybe years of tasks to be completed. Why?

Because your estate plan needs care and feeding. This missile may have been fired, but it cannot reach its target unless you continue to guide it.

An example: A number of years ago a client implemented an estate plan under which she transferred ownership of her valuable home to a trust for the benefit of her children. The planning technique was very effective. Millions of dollars’ worth of property was passed to her children, and no gift tax was paid. Even better, she retained the right to live in the property for 10 years after the transfer, with an option to remain thereafter. At the end of those 10 years when title vested in her children, the property was several times more valuable than when the transfer was made and none of that appreciation was ever taxed. And from that point forward, the client continued to live in the house, right up until her death last year, with even more untaxed appreciation accruing to the trust. A huge win.

And then the state tax authority came knocking. An audit. How, the auditor asked, could we claim a gift was made 17 years ago if the decedent lived in the house until her death? Why shouldn’t the significantly appreciated value of the house be included in her estate for tax purposes?

Well, here’s why: this client guided her missile. We advised her all those years ago that if she wanted to remain in the house after the 10-year term, she would have to rent it from the trust for the benefit of her children. And not just some handshake lease, either. She would have to get appraisals every year to determine fair market rent. She would have to have a lease drafted and signed each year, and the rent would have to be paid. She would have to get renter’s insurance, and the trust would have to have insurance appropriate as owner. The trust would have to pay for capital improvements, because that’s a landlord’s obligation.

Our client pulled out the checklist each year, followed it step-by-step and kept good records. In response to the tax examination, we delivered those records to the revenue agent, and the audit was closed the next day.

Direct hit. Target eliminated.

Do not make the mistake of thinking this audit was a fluke. Tax authorities all over the U.S. and around the world are looking beyond the returns filed and checking to see if estate plans are implemented properly and followed through over time.

Our team recently reached out to a leading real estate advisor in central London to ask whether a client there should update his rental appraisal in support of a similar plan implemented there. That advisor related that he has seen multiple HM Revenue & Customs challenges in recent months to intra-family rental arrangements. Those clients who did their homework achieved positive results, and the others did not.

Do your family a favor: check whether the missile you fired is on track to hit its target. Are your leases up to date? Have you been making interest payments on those promissory notes? Are your GRAT annuities paid, with proper valuations done to support them? Have profit distributions been made to all your company’s equity owners and in the proper proportions? Have Crummey notices been sent after those gifts were made to your insurance trust? Have gift tax returns been filed? What else is on your list?

Is your missile on course? If not, let us help you grab the controls now.
New foreign reporting deadline & U.S. reporting requirement
If you have assets overseas, the June 30 deadline (no extension) for filing the Report of Foreign Bank & Financial Accounts (FBAR) is a date with which you are familiar. However, Section 2006(b)(11) of the Surface Transportation Act enacted on July 31, 2015, changed the due date to April 15 to better align and sync up with other individual tax filing deadlines. Additionally, the Act permits FBAR forms to go on extension for up to six months to October 15.

Beginning in 2017 for the 2016 calendar year, the FBAR form (FinCEN Form 114) will be due on April 18, 2017. While the filing deadline is two and a half months earlier this year, the reporting requirements remain the same.

Who must file?

All U.S. persons (including citizens, green-card holders and entities (corporations, partnerships or LLCs) who have a financial interest or signature authority over an account (or accounts) held at a financial institution physically located in a foreign country and whose aggregate maximum value exceeds $10,000 at any time during the calendar year must file an FBAR form.

What types of accounts are reported?

Deposit and securities/brokerage accounts maintained at a financial institution physically located in a foreign country must be reported on the FBAR form. Individual stocks and/or security holdings of foreign corporations held outside of a custodial account are not required to be reported on the FBAR (i.e., direct ownership of Nestlé stock). However, accounts at a foreign branch of U.S. financial institutions are required to be reported (i.e., an account at Chase in London).

When and how to file?

While the FBAR form and Form 1040 are both due on April 18, the FBAR form is a separate filing, which must be made via electronic submission (no paper filings accepted). In 2017, the FBAR form filers will be able to request a six-month extension to Monday, October 16, 2017.

My account closed during the year. Do I still need to report it?

If an account was closed and has a zero balance at year-end, it still needs to be reported if the aggregate maximum value of all foreign accounts exceeded $10,000 at any time during the calendar year.

My foreign account didn’t earn any income. Do I still need to report it?

Yes, an interest in a foreign financial account is present if income, gains, losses, etc. from the asset are required to be reported or included on your individual income tax return, even if there are no items for the current year’s return.

I have joint ownership of the account. Do I have to report it?

Yes, the entire value of jointly titled accounts must be reported by each owner and must indicate who the other owner is.

How should I value my account and what currency exchange rate should I use?

If the financial account is denominated in a foreign currency, convert the maximum value of the account to U.S. dollars using the U.S. Treasury currency exchange rate on the last day of the tax year. This rate is used to calculate the maximum value throughout the year (as well as the year-end value) even if the account was closed during the year.

What happens if I don’t disclose my foreign financial accounts?

Penalties are steep for failure to file an FBAR form. If non-willful, a penalty of up to $10,000 per violation may be assessed. If the violation was willful in nature, a penalty may be assessed up to the greater of $100,000 or 50% of the account balances.

How will the IRS know that I have a foreign account?

The U.S. currently has bilateral agreements to exchange tax-related information with the following 87 countries:

Antigua & Barbuda

Dominica

Jamaica

Philippines

Aruba

Dominican Republic

Japan

Poland

Australia

Egypt

Jersey

Portugal

Austria

Estonia

Kazakhstan

Romania

Azerbaijan

Finland

Korea, Republic of

Russian Federation

Bangladesh

France

Latvia

Saint Lucia

Barbados

Germany

Liechtenstein

Slovak Republic

Belgium

Gibraltar

Lithuania

Slovenia

Bermuda

Greece

Luxembourg

South Africa

Brazil

Grenada

Malta

Spain

British Virgin Islands

Guernsey

Marshall Islands

Sri Lanka

Bulgaria

Guyana

Mauritius

St. Maarten (Dutch)

Canada

Honduras

Mexico

Sweden

Cayman Islands

Hong Kong

Monaco

Switzerland

China

Hungary

Morocco

Thailand

Colombia

Iceland

Netherlands

Trinidad and Tobago

Costa Rica

India

Netherlands island territories: Bonaire, Saba & St. Eustatius

Tunisia

Croatia

Indonesia

New Zealand

Turkey

Curaçao

Ireland

Norway

Ukraine

Cyprus

Isle of Man

Pakistan

United Kingdom

Czech Republic

Israel

Panama

Venezuela

Denmark

Italy

Peru

 


How can we help?

Our Private Clients attorneys and tax professionals have experience with FBAR form filings and with making voluntary disclosures for unfiled FBAR forms. We can work with you to assess your foreign accounts and help you meet your tax filing requirements.
Non-citizen, non-residents: planning for your U.S. assets
Like the challenges faced when a U.S. decedent hold assets overseas, non-citizen non-residents of the U.S. (“NCNR”) can have similar difficulties with regard to their U.S. assets owned at death. With careful practical planning by an NCNR, however, the NCNR’s estate can avoid delays, estate tax and administrative expenses.

What are non-citizen non-residents of the U.S. subject to with regard to U.S. real estate?

U.S. Probate. If U.S. real estate is held in an NCNR’s individual name, then a U.S. probate process will be needed to transfer the ownership to the NCNR’s beneficiaries (possibly in addition to their country of domicile’s probate process).

U.S. Estate Tax. Regardless of the domicile of the owner, U.S. real estate and tangible personal property are subject to U.S. estate tax at the death of the owner. NCNR decedents have a $60,000 exemption against U.S. estate tax, effectively making the entire U.S. real estate subject to U.S. estate tax, at rates up to 40% (subject, potentially, to treaty benefits).

If the U.S. real estate is located in a U.S. state that also imposes a state estate tax, then there will be an additional state estate tax due.

What if an NCNR owns shares in a U.S. company?

Whether privately held or publicly traded, held in a U.S. or non-US account, an NCNR’s shares in U.S. companies are subject to U.S. estate tax.

What if an NCNR has a U.S. bank account or money market fund?

Cash deposits held in an NCNR’s U.S. bank account are not subject to U.S. estate tax. However, many U.S. banks are difficult to navigate for foreign executors, sometimes requiring a personal appearance in order to collect the NCNR’s account or requiring U.S. probate documentation.

While money market funds look and feel like cash, they are not. Many U.S. money market funds are mutual funds organized as U.S. companies, creating exposure to U.S. estate tax.

What planning can an NCNR do?

The transfer of assets into a properly designed trust can result in the trust’s assets being excluded from the U.S. probate and estate tax systems. In addition, an offshore holding company is not considered a U.S. situs asset and can be used to exclude U.S. situs property.

What if an NCNR wants U.S. assets to go to a U.S. taxpayer?

Any structuring for non-U.S. investors must be reconsidered if assets eventually will be transferred to a U.S. taxpayer. Offshore structures are terrific for non-U.S. holders but might not be ideal once a U.S. taxpayer is benefitting from them.

What is the key for an NCNR?

Proper pre-death planning. Without it, the NCNR’s estate administration can be difficult and more expensive. The savings in time, hassle and taxes could be substantial. Overall, the U.S. is a pretty friendly place for foreign investors as long as they structure their holdings properly.
Real estate: new IRS policy affects deceased non-citizen, non-residents

If you are a non-citizen, non-resident of the U.S. planning to purchase (or who owns) U.S. real estate or tangible personal property, aside from the tax savings there is a new incentive to hold these assets in a manner which avoids U.S. estate taxation.

As a non-citizen non-resident (“NCNR”), your estate is subject to U.S. taxation if you own $60,000 or more of assets subject to U.S. estate tax. U.S. real estate and tangible personal property located in the U.S. is subject to U.S. estate taxation.

If a NCNR dies owning U.S. real estate, or, in some cases, tangible personal property, the NCNR’s estate will very likely be required to obtain the appointment of a U.S. executor, to file a U.S. estate tax return and to pay U.S. estate tax.  The U.S. real estate and tangible personal property owned by a decedent is subject to the automatic federal estate tax lien, which adheres at death.

Until recently, the IRS had a procedure to release the U.S. estate tax lien during the period of the administration of an NCNR’s estate. Upon application by the executor, the IRS issued a “Restricted Transfer Certificate,” which required that the executor hold the net sale proceeds in escrow pending IRS review and acceptance of the estate tax return.  Acceptance was indicated by the IRS’s issuance of a Federal Estate Tax Closing Letter. The release allowed the executor to sell the property and to use the proceeds to pay specified expenses and debts.

Unfortunately, the IRS has ceased issuing Restricted Transfer Certificates for NCNR estates. This means that an executor of the estate of an NCNR estate cannot give clear title to real estate or tangible personal property until the federal estate tax return is filed, estate tax is paid and the estate tax closing letter is received.

If you are an NCNR contemplating the purchase of U.S. real estate or tangible personal property, or contemplating moving valuable tangible personal property to the U.S., there are mechanisms to avoid U.S. estate tax implications.  Please consult with one of our international estate tax specialists.

FBAR reporting requirements
The June 30 deadline for filing your Report of Foreign Bank & Financial Accounts (“FBAR”) is fast approaching. Here are some answers to frequently asked questions on the FinCEN Form 114.

Who must file?

All U.S. persons (including citizens, green-card holders and entities (corporations, partnerships or LLCs) that have a financial interest or signature authority over an account (or accounts) held at a financial institution physically located in a foreign country and whose aggregate maximum value exceeds $10,000 at any time during the calendar year must file an FBAR.

What types of accounts are reported?

Deposit and securities/brokerage accounts maintained at a financial institution physically located in a foreign country must be reported on the FBAR. Individual stocks and/or security holdings of foreign corporations held outside of a custodial account are not required to be reported on the FBAR (i.e., direct ownership of Nestlé stock). However, accounts at a foreign branch of U.S. financial institutions are required to be reported (i.e., an account at Chase in London).

When and how to file?

The FBAR form is filed separately from the Form 1040 and must be received via electronic submission (no paper filings) by June 30, no extensions. However, beginning next year (2017) with the 2016 filing season, the FBAR will be due on April 15 and filers will be able to request a 6-month extension to October 15.

My account closed during the year. Do I still need to report it?

If an account was closed and has a zero balance at year-end, it still needs to be reported if the aggregate maximum value of all foreign accounts exceeded $10,000 at any time during the calendar year.

My foreign account didn’t earn any income. Do I still need to report it?

Yes, an interest in a foreign financial account is present if income, gains, losses, etc. from the asset are required to be reported or included on your individual income tax return, even if there are no items for the current year’s return.

I have joint ownership of the account. Do I have to report it?

Yes, the entire value of jointly titled accounts must be reported by each owner and must indicate who the other owner is.

How should I value my account and what currency exchange rate should I use?

If the financial account is denominated in a foreign currency, convert the maximum value of the account to U.S. dollars using the U.S. Treasury currency exchange rate on the last day of the tax year. This rate is used to calculate the maximum value throughout the year (as well as the year-end value) even if the account was closed during the year.

What happens if I don’t disclose my foreign financial accounts?

Penalties are steep for failure to file an FBAR. If non-willful, a penalty of up to $10,000 per violation may be assessed. If the violation was willful in nature, a penalty may be assessed up to the greater of $100,000 or 50% of the account balances.

Bottom Line

Foreign reporting continues to be a “hot button” for the IRS and due diligence has never been more important.
Your 1040 is filed, but are you done? Not if you have foreign financial assets!

U.S. persons have until June 30, 2016, to file their 2015 Report of Foreign Bank and Financial Accounts (“FBAR”). There are no filing extensions available for the FBAR, but some filings may be deferred until June 30, 2017. Those who do not comply with the filing requirement may face steep civil penalties and criminal sanctions. Our attorneys and professional specialists can help you assess whether you are subject to the FBAR reporting requirements and whether you qualify for the limited filing deferral.

The FBAR is entirely separate from any required U.S. income tax return and must be filed electronically using a specific e-filing system administered by the Department of Treasury Financial Crimes Enforcement Network, or with software used by certain tax preparers.

Who needs to file an FBAR?

An FBAR must be filed for any U.S. person who has a financial interest in, or signature or other authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year.

A U.S. person is (i) a U.S. citizen; (ii) a U.S. resident (including green card holders living offshore); or (iii) an entity, such as a corporation, partnership, trust or limited liability company, formed under U.S. law. (A U.S. lawful permanent resident who elects under a tax treaty to be treated as a non-resident for federal tax purposes must still file an FBAR.)

IRS guidance on the FBAR indicates that a person holding a power of attorney, the “agent,” generates in the agent the same obligation to file an FBAR with respect to foreign financial accounts as the U.S. person owning the account. The agent, therefore, is liable for non-filing, along with the principal, if the power of attorney gives the agent signature authority over a foreign account that exceeds the $10,000 threshold.

Individuals with signature authority over, but no financial interest in, foreign accounts of their employer, may be able to defer the filing of their FBAR to June 30, 2017.

What accounts should be listed on an FBAR?

The filing requirement applies to financial accounts such as bank, securities, security derivatives, debit card, prepaid credit card and any other financial instrument accounts with an aggregate value exceeding $10,000 at any time during the calendar year. An FBAR is required whether or not the account generates any income.

What should you do if you had foreign accounts exceeding $10K in 2015?

You should electronically file an FBAR for 2015 by June 30, 2016, using FinCEN Form 114. Paper filing is no longer allowed.

Failure to file an FBAR on a timely basis can result in severe civil penalties of up to the greater of $100,000 or 50% of the value of the unreported foreign accounts, for willful violations.
Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation.

The IRS may also impose criminal penalties for willful failure to file an FBAR of up to $250,000, five years of imprisonment (or both), or up to $500,000 and 10 years of imprisonment if the non-compliance is in conjunction with other criminal activity.

What should you do if you had foreign accounts exceeding $10K before 2015?

It is not too late to report your foreign financial accounts. In fact, the IRS has an Offshore Voluntary Disclosure Program for those U.S. persons who have income generated in foreign accounts that was not previously reported on an FBAR.

How will the IRS identify my foreign accounts?

Under the U.S.’s Foreign Account Tax Compliance Act (“FATCA”) reporting requirements, foreign financial institutions can be penalized for failing to properly report and (in some cases) withhold U.S. taxes on their U.S. customers’ accounts.

The U.S. government is steadily increasing the pressure it applies on foreign financial institutions to report U.S. persons’ account information.

How can we help you?

Our attorneys and professional specialists can help you assess whether you are subject to the FBAR reporting requirements, prepare your current FBAR filing and assist you with submitting an application to the IRS Offshore Voluntary Disclosure Program for prior years.

Do you have overseas accounts?
As the world becomes increasingly interconnected and more Americans are investing or working abroad, we are seeing more situations where an American citizen died owning financial accounts in overseas banks or brokerage houses. If you have expatriated for work or retirement, you will need one or more financial accounts in your new locale for convenience of daily living. Or perhaps you are investing abroad for other reasons.

Whatever your purpose, it is prudent to structure your account so that it can be accessed in the event of your incapacity or death.

There are many obstacles that face the U.S. executor of a U.S. citizen who died holding foreign financial accounts. They include:

     — Failure to communicate: the foreign financial institution may not be willing to speak with an executor, even to inform the executor of its requirements.

     — Time zone differences.

     — Additional foreign probate: financial institutions in other countries may require the appointment of a local executor by the local probate court. In these countries, the U.S. executor must hire local (foreign) counsel to open local (foreign) probate proceedings and accept the appointment of a local (foreign) person to act as the executor for purposes of collecting the funds. This process can take a year—or longer.

     — Local (foreign) income and estate taxes: the foreign jurisdiction may require that income taxes be paid on the funds in the account or that the estate submit a certification that no local (foreign) tax is due.

While collection is pending, the executor must remember the requirements to properly report the account’s income on the appropriate U.S. tax forms and the account’s existence on U.S. Reports of Foreign Bank and Financial Accounts.

In our experience, dealing with offshore accounts opened by a decedent in his own name runs the gamut from cumbersome but relatively quick in some countries, to nearly impossible in others. In one ongoing matter in our offices, it is taking over six years to collect a bank account that a decedent left in a country in which he was employed several years prior to his death.

While there are many good reasons for Americans to establish overseas financial accounts, please consider whether such accounts can be readily accessed after your death or incapacity and—if possible—plan accordingly. If your offshore accounts hold significant sums, please consider a strategy that enables a co-owner or easily-appointed successor to have full access in the event of your incapacity or death. A simple strategy is to hold accounts in joint name with someone who has full access in the event of your incapacity or death. Alternatively and depending on local law, you could establish a business entity or trust to hold your offshore accounts that can be accessed with proof of management authority by the trustee, your delegate, or successor. Check with local counsel before taking any action in order to avoid problems with income, capital gains, gift, or corporate taxation, or other unanticipated issues. And of course please consult with your U.S. advisor to ensure that the holding structure does not cause tax problems at home!
Moving to the U.S. from a foreign country?
If you are not a U.S. citizen or green card holder, and you plan to move to the United States in the foreseeable future because of a job, investment or marriage, you might want to consider advance tax planning to minimize future U.S. taxes.

Because different countries have different ways of taxing their citizens, many foreign nationals are surprised to learn that U.S. citizens and permanent residents (often called “green card holders”), and some resident aliens, are taxed on their worldwide income and gains. While there are other countries that have higher tax rates than the United States, there may be opportunities for pre-move planning that can reduce the overall tax burden in future years.

Currently in the United States, tax rates on income range from 10% to 39.6%. Income tax is levied on worldwide net income, and the tax code provides for many deductions and tax credits to arrive at net income. Gains from the sale of worldwide capital assets also are taxed, currently at rates ranging from 0% to 39.6% depending on the holding period and character of the asset, as well as the tax bracket that the taxpayer is subject to. In addition to federal taxes, most states have their own income taxes, with rates ranging up to 13.3% in California.

Prior to becoming a U.S. resident for income tax purposes, a foreign national can take steps to mitigate future income tax impact in the United States. These generally involve accelerating income and capital gains so that income earned and gains accrued prior to resident status will not be subject to U.S. tax, including:

     ∙ Securities—a sale and repurchase can lock in a new cost basis for highly-appreciated securities
     ∙ Appreciated real property—can be sold, possibly to related parties, without recognition of gain
     ∙ Income—obtain payment prior to resident date
     ∙ Stock options—consider exercising them
     ∙ Deferred compensation—consider taking payments early
     ∙ Postpone losses, for possible use against income or gains later
     ∙ Defer paying expenses that may be deductible for U.S. income tax purposes

A foreign national who is a nonresident alien generally is not subject to U.S. estate or gift tax, except with respect to assets that are considered U.S. situs. If a foreign national expects to become subject to U.S. estate tax, he or she may prefer to take steps prior to U.S. residency to rearrange the ownership of assets, to make gifts of non-U.S. situs assets, or to create a pre-immigration trust. Outright gifts to adult children or other donees can be beneficial to all involved.

Because there are significant differences between the definitions of “resident” for immigration purposes and for tax purposes, planning for tax outcomes can be a complicated undertaking. However, a foreign national who focuses on income, capital gains, and estate and gift tax planning well before U.S. residency is established can often obtain significant tax savings over the long term.
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