We’ve had several encounters with people and prospects that tell us that they want to live or have been living in the United States, and in some cases, they have already returned to their countries of origin without having sought out or obtaining U.S. citizenship. However, all of them either pretend to obtain, or already have obtained, their permanent residence or green card without really understanding the consequences if they ever decide to relinquish that permanent residence or green card in the future.
First, those that have not arrived yet, don’t know if they will be able to obtain their permanent residence, and if they do, don’t know whether they are going to like living in the United States, or whether they or their families will be able to adapt to a new life style, or if they are going to tire of having to come and go periodically to their countries of origin to run their businesses, and believe that as long as they don’t become U.S. citizens nothing happens. However, once any foreigner becomes a permanent resident, the odds of the game change permanently.
For their part, those that have their green cards already and continue to live in the country, or even those that have gone back to their countries, after becoming long-term residents of the U.S., will receive the same tax treatment as citizens do when expatriating, and relinquish their permanent residence.
The U.S. Internal Revenue Code (IRC) provides for a long-term residence that is triggered when an individual has been a permanent resident for 8 of the last 15 years prior to the appropriate tax period in question. Moreover, the IRC provides that legal residents shall be treated in the same manner as any U.S. citizen expatriate.
This is very important because those that have been legal residents for at least 8 years and relinquish it, they are obligated to pay an exit tax as any other citizen expatriate in addition to having other non-tax obligations. The exit tax is calculated over the entire estate or net worth of the ex-resident and the rate for capital gains tax is applied as if the expatriate would have sold at market value, all of his assets the day the green card is relinquished or lost.
Regardless, there is an exemption in 2019 for the first $725,000 in assets without regard to their location. Also, this exemption is per person, and the tax for each spouse, if married, is calculated separately. Therefore, who owns what and how those assets are titled, play an important role when planning ahead.
Foreigners Treated Equally
Notwithstanding the foregoing, the exit tax covers or applies to those individuals whose tax liability (i.e., the tax to be paid, not the net amount subject to tax) is equal to or exceeds a specific amount in any given year ($168,000 in 2019), or if they have a net worth of $2 Million or more, among other requirements. However, if the ex-resident’s net worth or tax liability do not exceed these numbers or amounts, he can still be considered a covered expatriate if he cannot certify, to the satisfaction of the IRS, that he has complied with all of his tax obligations during the 5 tax years prior to relinquishing his permanent residence, or for having filed a tax return as a nonresident or for having claimed benefits under any tax treaty at any time after becoming a permanent resident.
Future Planning Problems
Now, as far as the non-tax consequences are concerned, or rather, as to those that are not subject to the mere calculation and payment of the exit tax, when an expatriate or ex-resident relinquishes his permanent residence, he also loses the ability to plan as a foreigner even after three years of having lost or relinquished his residence.
This is so even after three years of losing or giving up the permanent residence. The IRC does not allow a new foreigner or expatriate with assets or beneficiaries in the U.S. to plan their estate, or rather, the distribution of their estate as any other foreign nonresident would.
For example, if a foreigner has beneficiaries or heirs in the United States, he can make gifts or bequests to them without any problems or issues. However, on the contrary, the IRC obligates these beneficiaries and heirs to pay income tax for the value of any gift above the annual exclusion ($15,000 in 2020) or for any bequest received, from the new foreigner or expatriate. The time to enforce this provision is indefinite.
To avoid these harsh consequences, these permanent residents need to adequately plan a possible exit or relinquishment of their residence. And, for those that have created irrevocable or nongrantor trusts, or any type of trust for that matter, during their permanent residence, is necessary to review them to determine if the expatriate rules, specifically those regarding the definition of nongrantor trust, which is very different to such definition within a normal context outside of expatriation, shall apply and thus, if the trustees must withhold 30% from any future distributions they make to the ex-resident or expatriate.
As you can see, this is a very technical and complex topic which can be addressed in a majority of cases with anticipation and good planning. If you have any additional questions or concerns, call us at (800) 694-6604 to schedule an appointment to address them.