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This page contains a single entry by lsaret published on September 15, 2008 3:28 AM.

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Michael Collins, Dauphins and Other Approaches to International Estate Planning


Charles M Bruce
Partner, Moore & Bruce, LLP



Viewing international estate planning broadly, the ideal approach takes advantage of a diversity of jurisdictions, so as to achieve the best results and preserve the most flexibility.

Leaving behind some one or more family members while others enter the US is an approach that planners should consider.  If one family member is not a US taxpayer, it is widely recognized that problems with US taxes can be avoided.  The same analysis applies to some other jurisdictions, such as the UK.

A variation on this theme might be to choose a younger family member to play this important role. 

When dealing with issues of how best to organize a family and how to plan for the distant future, "people" problems can override "cut and dry" considerations, including legal issues.  The thoughts, some contrarian, contained in this article should be viewed as "food for thought".


United States estate and gift tax rules are well-known for their complexity.  The fact that the exemption levels and rates are changing over the next three years, running up to the 2010 repeal date, greatly amplifies the complexity.  For a wealthy family, the size of the estate tax burden can be significant.  The estate tax, however, often can be drastically reduced with planning and foresight.  Also, Congress may yet act to simplify the tax rules and reduce the amount of the tax liability. 

At the risk of some controversy, it might be said that the income tax is not necessarily all that bad.  As is obvious, it is simple, straightforward earned income that is most exposed to tax.  For middle income earners, it is this tax together with the social security (FICA) taxes that hit hardest.  More affluent families can defer tax on various forms of pensions and other deferred compensation; they can invest in tax-exempt securities; and, best of all, they can earn capital gains.  The idea that an individual can build up a business over some period of time and "cash out" at a 15 percent capital gains rate is very attractive.

In the eyes of many, the problems with this picture are not the obvious ones.  They are, first and foremost, the fact that things can change.  A second problem, which is not so obvious and which is not openly discussed a great deal, is privacy.  Many people instinctively believe that it is not a good idea to publicize--or have someone else publicize--information about them including information about what they own and what they spend.  Under rules safeguarding taxpayer information, the information appearing on an individual's US tax returns should not be made public.  However, US tax information is readily exchanged with authorities in other countries.  More seriously, in the context of a US lawsuit, which can involve private parties or the US government, tax returns can be discovered.  For example, if one brother in a Japanese family is suing another brother and the lawsuit involves the ownership of buildings in New York City, it is quite likely that the plaintiff will be able to discover the defendant's US tax returns.  Given the workings of certain US tax provisions, these returns might disclose just about everything that can be disclosed about the ownership of property in the US--all the way up to the ultimate beneficial owners.1

In light of all this, families are well advised to take a detailed look at the US rules.  They should then take a step back and carefully consider these rules' implications, not only for the present but also for the future.

At the same time, planners should bear in mind that the only way for many individuals to reduce significantly tax burdens is to have a "real live"--not phony--presence in more than one jurisdiction.  In addition, of course, it helps if there is a presence in a jurisdiction that imposes a relatively low tax.  A simple example that comes to mind is a US artist--author, songwriter, sculptor--who lives and works in Ireland.  He takes advantage of the US foreign earned income exclusion and at the same time enjoys an exemption from Irish tax.  Recent changes in IRC § 911 reduce the benefit, but the benefit, especially for someone in the middle-income range, is still significant.2

Many families are, in fact, present in more than one jurisdiction.  Some family members may live in the US.  Others may live in the Far East or Europe.  As families grow, individuals move around, individuals get married and divorced, and family members become nationals or tax residents of different jurisdictions.  An all-American family living in Midland, Michigan, one day can find itself relocated to Zurich, Switzerland, the next.  While this development can create unwelcome exposure to double taxation, it can also present opportunities to reduce greatly the family's total tax burden.

Recent Conversations

Two recent conversations brought to mind a number of these points.

Mr. A is a Saudi national.  His wife is US.  They have two daughters and two sons.  All of their children, of course, are dual Saudi and US nationals.  The couple lives in Riyadh.  One daughter is married to a US individual.  They have two children.  They live in Texas.  One son, who recently graduated from a US university, also lives in the US, in California.  The other son, the youngest child, lives and works in London.  The other daughter lives in Riyadh.  The husband, for many years, held a US immigrant visa ("green card").  He quite rightly relinquished this visa as he realized that he was not spending sufficient amounts of time in the US.  He recently, more or less, retired.

Without going into all the details, the discussion, in general, centered on the topic of whether members of the family should give up their US citizenship.  Or, going in the other direction, should the father re-establish his status as a "green card" holder and, it follows, US taxpayer (resident alien).

The outcome, again without dwelling upon details, was that the present situation is, almost by accident, quite favorable.  The family's wealth can be centered in the father's hands.  It is not subjected to tax in Saudi Arabia or the US.  He can generally make tax-free gifts to his wife, children and grandchildren.3  The same results can be achieved but with a bit more structuring, which may be desirable from an organizational standpoint, by placing some assets in simple revocable trusts located, for example, in Bermuda or Jersey, Channel Islands.  The children can happily continue to work and pay US tax on their earnings.  No one is "is zeroing out" in an overly aggressive way.

Mr. B is a US citizen.  He has no other nationality.  He lives and works in California.  He makes a good deal of money by providing investment advice.  Sometimes he provides this advice to others.  More and more he trades for his own account.  Part of the time he works as a high-level manager for a private equity fund.  He likes where he lives, in sunny southern California, but he could live and work almost anywhere that has very good broadband and other telecommunications services.  This could be London.  It could also be Bermuda or New Providence, The Bahamas.  He has no desire or need to relinquish his US citizenship.  If it would facilitate his working in different countries, he would be happy to be a resident or national of another country.4

Because Mr. B's income is almost entirely earned income and cannot realistically be converted into capital gains, 5the discussion centered on how to mitigate US federal and state income taxes.  The ability to defer taxes on amounts directed to pension and profit sharing plans, has been significantly curtailed.  Also, having amounts "locked into" these arrangements is far from ideal.  The new IRC § 409A rules also present a major impediment.6

In this case, a number of non-tax aspects play a role.  One concern is US regulation of hedge fund managers--now and in the foreseeable future.

Mr. B, while remaining a US citizen and therefore continuing to file all required returns and reports, can, in effect, "set up shop" in, say, The Bahamas.  He would live and work there most of the year.  It appears from what is known about the new IRC § 409A regime that a properly drafted nonqualified deferred compensation plan would permit him to defer US tax on significant amounts of income.

While not at present married, Mr. B talks about getting married (he is in his early 40s) and having three or four children (he came from a relatively large family).  He is interested in building up a sizable estate for his children and grandchildren.  He is somewhat concerned about incurring a large estate tax bill if it can be avoided.  While it is impossible to predict the future, it is possible that his wife might not be US or that one of his children might cease to be US.  (A young person can give up his or her US citizenship almost without consequence if this is done before age 18½.  How this is done, as a practical matter, can be a little tricky and requires careful execution.)

Michael Collins and Dauphins

Before turning to some of the details of US tax law, reference might be made to two quite dissimilar things.

In 1969, when the US sent astronauts to the moon, two astronauts, Neil Armstrong and Edwin Aldrin, actually traveled to the surface of the moon in the lunar module, Eagle.  The third astronaut, Michael Collins, remained aboard the command module, Columbia, in lunar orbit.  Over the years, some people have commented that not walking on the surface of the moon must have been a disappointment for Collins.  This view overlooks the importance of the role played by Collins.  Armstrong and Aldrin were entirely dependent upon Collins and the skill with which he maneuvered the command module, especially during the final re-docking maneuvers.  The Apollo 11 mission would not have been possible had not someone stayed off of the moon.

Jumping a million miles away and almost as distant in time and geography, over the centuries, in French history, there have been a number of heirs to the throne that played an important role in their family's well-being.  Sometimes, in the arrangement, it was useful for the family, and sometimes the country, facially to be ruled by the young child, but, in fact, all things were determined by his or her mother, or father, or sibling, or others in a position to exercise control.  Sometimes a young Dauphin went on to become the king; sometimes not.  One suspects that sometimes those really in control would have preferred that the young man never grew up.  Where the Dauphin did become the king, occasionally, no doubt, it was useful for him to have had those years of experience.

US Tax Rules:  Some Highlights

The following is not intended to be a comprehensive survey of US gift and estate and income tax rules.  It is intended, instead, to highlight some of the most important aspects of such tax rules as context for a handful of observations.

Taxation Of US Citizens And Resident Aliens With Foreign Involvements (Income, Assets, Etc.)

US citizens and resident aliens are taxable under US gift and estate taxes on their worldwide assets and gifts.  The importance of this one fact cannot be underestimated.  Also, it should be emphasized that this is a very real obligation.  Individuals born and raised outside the US commonly have a great deal of difficulty fully appreciating this point.

US tax law provides that estate taxes apply to the estate of a person who was a US citizen or resident at death.  A "resident" decedent is a decedent who, at his death, was domiciled in the US.  "A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.  Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal." 7Planners must consider state and local tax rules as well.

Under present law, in general, a gift tax is imposed on certain lifetime transfers and an estate tax is imposed on certain transfers at death.  A generation skipping transfer tax generally is imposed on certain transfers, either directly or in trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more than one generation younger than that of the transferor).  Transfers subject to the generation skipping transfer tax include direct skips, taxable terminations, and taxable distributions.

Under present law in effect through 2009 and after 2010, a unified credit is available with respect to taxable transfers by gift and at death.  The unified credit offsets tax computed at the lowest estate and gift tax rates.

Before 2004, the estate and gift taxes were unified.  A single graduated rate schedule and a single effective exemption amount of the unified credit applied for purposes of determining the tax on cumulative taxable transfers made by a taxpayer during his or her lifetime and at death.  For years 2004 through 2009, the gift tax and the estate tax continue to be determined using a single graduated rate schedule, but the effective exemption amount allowed for estate tax purposes is increased above the effective exemption amount allowed for gift tax purposes.

Under present law in effect through 2009 and after 2010, the generation skipping transfer tax is imposed using a flat rate equal to the highest estate tax rate on cumulative generation skipping transfers in excess of the exemption amount in effect at the time of the transfer.  The generation skipping transfer tax exemption for a given year (prior to repeal) is equal to the unified credit effective exemption amount for estate tax purposes. 

Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the estate, gift, and generation skipping transfer taxes are gradually reduced between 2002 and 2009.  The estate and generation skipping transfer taxes are repealed for decedents dying and generation skipping transfers made during 2010.  The gift tax remains in effect during 2010, with a $1 million exemption amount and a gift tax rate equal to the top individual income tax rate of 35 percent.

Also in 2010, except as provided in regulations, certain transfers in trust are treated as transfers of property by gift, unless the trust is treated as wholly owned by the donor or the donor's spouse under the Code's grantor trust provisions.

Table 1 summarizes the estate and gift tax rates and unified credit effective exemption amount for estate tax purposes from 2002 through 2010.

Table 1
Estate and Generation Skipping Transfer Tax Exemption Amounts
and Estate and Gift Tax Rates for 2002-2009
Estate And Generation Skipping Transfer Tax Exemption Highest Estate And
Gift Tax Rates
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.51 million 45%
2010 N/A
(taxes repealed)
(gift tax only)

The estate, gift, and generation skipping transfer tax provisions of EGTRRA are scheduled to sunset after 2010.  Thus, those provisions (including repeal of the estate and generation skipping transfer taxes) will not apply to estates of decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As a result, in general, the estate, gift, and generation skipping transfer tax rates and exemption amounts as in effect prior to 2002 will apply--spring back to life--for estates of decedents dying, gifts made, or generation skipping transfers made in 2011 or later years. A single graduated rate schedule with a top rate of 55 percent and a single effective exemption amount of $1 million will apply for purposes of determining the tax on cumulative taxable transfers made by a taxpayer by lifetime gift or bequest.

Additionally, as a result of the EGTRRA sunset, the modification to the gift tax rules for certain transfers in trust, described above, will not apply for gifts made after December 31, 2010.

Numerous other changes were made by EGTRRA.  Some changes relate to the basis of property received from a donor of a lifetime gift and from a decedent's estate.  Others relate to the state death tax credit and the deduction for state death taxes paid.  Additional changes were made to the gift tax annual exclusion and to the treatment of transfers to a surviving spouse.  The generation-skipping transfer tax rules were affected as well.

Taxpayers and their advisers are left with the impression that the US estate and gift tax rules are chaotic.  Estate planning calls for a great deal of care and looking into the future.  The present rules, which clearly cannot remain in place, are very discouraging.

As most people are aware, Congress and the Treasury Department have put forward a number of "reform" proposals.  To date there seems to be no consensus on how best to proceed.  There is political deadlock.  The political parties have converted the subject into a political "football" to be tossed around and used to try to score points.

If US gift and estate taxes are reduced, the US will be a very attractive jurisdiction for many people if they can obtain an appropriate immigrant or multiple reentry nonimmigrant visa. Many countries have onerous wealth taxes that apply during life and inheritance taxes that apply at death.  Some of these countries do not impose exit taxes at the time an individual emigrates.

Taxation of Non-US (Foreign) Individual with US Involvements (Income, Assets, Etc.)

Nonresident alien individuals are generally not subject to US gift and estate taxation.  The problem, it follows, is avoiding US residency for gift and estate tax purposes.  Residency for these purposes, as previously noted, is not the same as residency for income tax purposes.

Nonresident aliens are subjected to US gift and estate tax on certain lifetime transfers and certain US assets. 

Nonresident aliens should take care not to inadvertently trigger the gift tax.  For example, assume that a nonresident alien father transfers US$50,000 to his daughter who is living in New York.  He does so by transferring online cash from his Citibank (NY) account to her Citibank (NY) account.  The US gift tax applies, although it is widely ignored in this situation.
It is possible to avoid US estate tax on US intangible and tangible property, including real property.  A validly formed and operated non-US corporation is a good approach.  Another good approach is a non-US trust that will be treated as a separate entity (probably not a revocable trust or one where there is a power of appointment in place).  It might be advisable to place a corporation below the trust.

Issues Affecting Multi-Jurisdiction Families with US Connections

When dealing with individuals or families that have a presence in more than one jurisdiction (and frequently several jurisdictions), it is generally desirable to have some form of holding structure.  A family trust located in a common law jurisdiction with underlying companies is a common approach.  This jurisdiction should be one with a good reputation and competent trust companies.

There is great virtue in leaving behind one or more family members while other family members enter the US.  Some member of the family should not become subject to US taxation as a resident alien, for income tax purposes, or a resident, for gift and estate tax purposes.  If everyone concerned is a US taxpayer, it is almost impossible to avoid or defer US taxes.  On the other hand, if one family member is not a US taxpayer it is quite simple to avoid problems with US taxes.  For example, the nonresident alien individual can create revocable trusts in a low-tax jurisdiction, such as Bermuda or Jersey, Channel Islands; either the trust can make distributions to the US beneficiaries or the settlor can partially revoke the trust (to the extent of the amount required to fund the payment to the US beneficiary) and make a gift to the US recipient.  The US recipient of the distribution or gift is not taxable on the amount in question.  He or she will have to file a Form 3520, in the case of a distribution or a gift in excess of US$100,000.  Unless there are special considerations, the filing of these forms should not be a point of concern.

This approach is improved where the trust settlor is relatively young.  If this is the case, the structure can be expected to remain intact for many years.
Special Issues Arising In The Case Of Migratory Individuals And Families

On the subject of pre-immigration planning, it must be emphasized that planning well in advance makes things easier and surer.  For example, if initiated more than five years before becoming a US resident for income tax purposes, an individual can settle a foreign nongrantor trust benefiting US beneficiaries.  The settlor will not be treated as the owner of the assets in the trust.  The trust can own assets in the US; the income earned by the trust need not be taxed in the US; and the US beneficiaries and the settlor can use the assets owned by the trust.  However, if the arrangement is initiated within five years of the settlor becoming a US resident alien, then the grantor trust rules in IRC § 679 apply; and as a result, the trust in effect will be ignored for tax purposes and the settlor will be treated as the owner of the assets. 8

It is normally possible to avoid becoming a US resident for gift and estate tax purposes.  In order to achieve this end, it is highly recommended that the individual maintain a residence outside the US and evidence the fact that he or she intends always to return to that residence.  Avoiding becoming a US resident for income tax purposes can be more problematic.  If the individual sets foot in the US with an immigrant visa permitting him or her to remain on a permanent basis (typically a permanent residence visa ("greencard"), then he/she is a resident from that day forward.  If not present in the US on an immigrant visa, then the individual only becomes taxable after "flunking" the physical presence test in IRC § 7701(b).  The "day-counting" exercise to determine whether the test is flunked is a complicated one.  Simplified, it means that the individual cannot be present in the US year after year for more than an average of about 120 days.9

Individuals should consider Treaty Trader/Treaty Investor (E-1/E-2) nonimmigrant visa status in lieu of an immigrant visa.  The issue then becomes one of "day-counting."  For people who are able to split their time between the US and elsewhere, this can be a very useful approach.10

Lessons for International Tax Planning

Families should try to have a presence in more than one country.  This posture creates the possibility of taking advantage of rules that reduce income and death taxes.  With respect to the US, a foreign grantor (revocable) trust created by a non-US member of the family will protect the assets and income earned on those assets from tax.  Distributions to beneficiaries that are US citizens or residents are not taxed.  Interestingly, a similar result can be achieved under UK tax rules.  There, the individual need not rely upon a foreign trust and the creator of that trust.  So long as he or she avoids domicile status in the UK, that individual need only avoid remitting income earned outside the UK.

The lesson is to remember Michael Collins and the importance of keeping someone in a different status.

This approach requires having an individual fill the critical post.  It is not possible to substitute an entity.  With this in mind, a family might look to a younger member.  Remembering the concept of a Dauphin, the family might look to a trust created by one of the youngest children.  Issues of impermissible indirect transfers and "who is the true owner" have to be dealt with, but it is an approach worth considering.   


11. See IRC § 6038A and the regulations thereunder relating to reporting information with respect to US corporations owned by foreign persons.  All statutory references are to the Internal Revenue Code of 1986.

2 US international tax rules at times can be a little quirky.   The IRS's recent announcement (Notice 2006-87) is a perfect example.  The Notice is intended to adjust the $24,720 housing cost limitation in IRC § 911 to reflect "geographical differences in housing costs relative to housing costs in the United States."  However, it ignores a number of high-cost foreign locales where many US individuals live, such as the countries of China (other than Hong Kong), the United Arab Emirates, India, and Australia.  Also, the relief provided might apply to someone living in London but not outside the M25 ring road.

3Mr. A also generally avoids holding US dollars.  He avoids US withholding tax on passive income, such as, interest and dividends by investing in companies, like BP, listed outside the US.  He is not subject to European withholding tax rules embodied in the recent EU Directive on Taxation of Savings Income.  Nor is he required to file bank account reports like those required of US citizens and residents.

4  A US citizen, of course, can become a citizen or resident of another country without jeopardizing his or her US citizenship.

5Converting some of his income to capital gains is not entirely out of the question, but discussing this would be a digression.

6 IRC § 409A (Inclusion In Gross Income Of Deferred Compensation Under Nonqualified Deferred Compensation Plans) was enacted as part of the American Jobs Creation Act of 2004 (P.L. 108-357).  It arose in reaction to the Enron scandal.  Its ramifications, especially for individuals living and working outside the US, are still unfolding.  Although Treasury hopes to issue final regulations under IRC § 409A by the end of the year, the timetable, according to new reports, could slip.  "Deferred Comp Guidance Could Be Delayed, According to Treasury Official",   2006 TNT 212-3 (Nov. 2, 2006).

7Treas. Reg. § 20.0-1(b)(1).

8IRC § 679(a)(4).

9 The figure is actually 122 days, but a little leeway is generally a good idea.  Also, a special "closer connection" rule in IRC § 7701(b)(3)(B) can give further relaxation.

10 There are currently approximately 40 countries with a Treaty of Commerce and Navigation or Bilateral Investment Treaty with the United States permitting issuance of an E-1/E-2 visa; approximately 6 permitting E-1 visas only; approximately 27 permitting E-2 visas only.  An E-1/E-2 visa can be issued for 2 or 4 years and can be renewed again and again.  The individual can come and go as often as he or she desires.  It is common for the visa to be renewed for as long as the individual wishes, so long as the circumstances permitting issuance of the visa remain in place.