We have previously indicated in this space that the law in the United States pretends to tax all estates at least once every generation. However, when dealing with the estates of foreigners, these can only be taxed when the assets of the estate are located within the geographic boundaries of the United States.

Now that the world has become a smaller place in the last few decades, it has become more frequent for foreigners whose estates and assets are also located abroad, to intend to benefit U.S. citizens and residents. Such is the case when their children immigrate to or are born in the United States, but the family’s source of income continues to be from businesses and companies located outside its borders. In this situation, the number one question to ask is what is the most efficient way to inherit my children that are U.S. citizens or residents? As always, the answer is, it depends…

Factors That Determine the Estate Plan Strategy

It depends on numerous factors, among them, what is the share of the estate that will pass to the children who are citizens or residents, what is the share that belongs to the children or spouse in the foreign country, whether you want to transfer your estate during life or after death, what type of assets and income belong to the estate, whether there be any limitations or restrictions that you would like to impose on your heirs, etc. Each inheritance and each family are different worlds. Regardless, the owner of the estate is happy when he or she finds out that under the circumstances he or she will not have to pay a single cent in estate taxes with regard to the assets that are located abroad and are inherited by his heirs in the United States. However, the income that is subsequently generated by these assets for the heirs in the United States will most likely be taxed in this country.

If You Do Not Plan, Your Heirs Will Pay

Also, when the owner of the estate learns that those same assets will be subject to estate taxes once they are in the hands of his U.S. heirs, and will subsequently be taxed at least once every generation at an average tax rate of 40%, then the foreign estate owner wants to create a plan through which he can benefit not only his children, but also his grandchildren, and great-grandchildren, and if possible, even the subsequent generations without losing a portion of his assets to estate taxes through time.

Faced with this situation, the question then becomes whether the inheritance that benefits two or more generations beyond his children has to pay any taxes. The short answer is no. But, if assets are located within the United States, then the generation-skipping transfer tax applies, which for all intents and purposes, results in a tax double the amount than the estate tax. So now, if the assets are passed-on directly to the grandchildren, how can you then benefit your children at the same time?

The Engine That Runs the Strategy is a Trust

Generally, this is achieved through strategic planning that may include the creation of one or more domestic or off-shore trusts, one or more domestic or off-shore entities, and occasionally the creation of a private trust company. As it was mentioned before, each family is a different world, and its plan depends on a number of factors that may tip the scale one way or the other. Regardless, the legal vehicle that is the engine of the strategy in the majority of circumstances must be a common-law trust.

Obviously this type of strategy is not for everyone, either because the value of the estate does not justify it, because the owner of the estate does not want to invest in planning, because he does not want the beneficiaries to have to deal with tax obligations, or simply because he does not want to relinquish control of his assets or businesses to a fiduciary institution, although this fear can be alleviated by implementing technical committees, a trust protector, or drafting the trust pursuant to laws that require an accounting and adherence to the intentions of the settlor by the trustee, among other strategies.

It’s Important to Review the Strategy After Implementation

In addition to the foregoing, when the transfer of the assets to the beneficiaries becomes effective, there is a need to periodically review the strategy and continue doing tax planning to avoid the application of U.S. tax rules to the income of foreign businesses such as the “controlled foreign corporation” and “branch profits tax” rules, among others, so the income tax burden for the U.S. citizen and resident beneficiaries is minimized.

There is not one tax strategy or business structure that works for all foreigners and their estates. Do not trust this important decision to anyone. Instead, please call Antonio Gastélum​and María Elia Gastélum today. Our firm will provide you with trustworthy and reliable representation so you can make the right decisions.