In our shrinking world, advisors often deal with the “global economy” when advising their clients on investments and wealth management. Now, advisors must also regularly deal with the “global family,” the affluent client whose family and wealth extend far beyond the boundaries of the “home” country. Family members often live around the world, have multiple citizenships, and hold portfolios and investments that span the world. Consequently, financial and legal advisors constantly face the challenge of designing structures that manage and preserve the family’s assets while complying with the local laws of multiple jurisdictions. The complexity involved in such structures can create numerous pitfalls for the uninformed advisor. Thus, the following provides a general overview of the information and issues that advisors should consider when representing a “global family.”

Background Information.

Certainly, advisors must obtain basic information regarding their global family, including (A) the current domicile, residence, and citizenship of the family members and (B) the location and nature of the family’s assets (e.g., interests in operating businesses, real property, etc.). Most advisors and financial institutions will require this information based on current “know your customer” regulations. However, this information is crucial in determining the potential tax and non-tax issues that may affect the design and implementation of any proposed structure. Specific information regarding a family’s assets and investments is also critical. Depending on applicable law, the location of an asset may subject its owner to certain taxes or restrict its transfer, particularly when real property is involved. The nature of the asset also may affect the structure’s design. For example, many financial institutions are reluctant to hold active operating businesses and may require special business operation or indemnification provisions in order to accept the risk inherent in holding such assets.

Tax Considerations.

Numerous international tax issues arise when planning for a global family. For example, many non-U.S. families seek the stable markets and significant investment opportunities provided in the United States. Accordingly, a basic understanding of the U.S. tax consequences of U.S. investments by non-U.S. individuals is beneficial. Advisors should also have knowledge of the general taxation principles frequently applied in other countries, in order to anticipate issues that may arise in them.

A. U.S. Federal Income and Transfer Taxation.
The United States imposes (1) income tax on the worldwide income of its citizens and residents, and (2) estate, gift, and generation-skipping transfer (“GST”) taxes on the worldwide assets of its citizens and domiciliaries. The application of these taxes to an individual who is not a citizen, resident, or domiciliary of the United States (a nonresident alien, or “NRA”), however, is more limited in scope, and follows these basic rules:

1. Income and Capital Gains Tax.

The United States taxes NRAs only on income derived from U.S. sources. NRAs earning income from a U.S. trade or business are taxed at the regular graduated rates applied to U.S. persons. On certain passive (non-business related) income from U.S. sources, NRAs are taxed at a flat rate of 30% (or possibly a lower income tax rate based on a treaty). This type of income generally includes certain interest payments, dividends, rents, royalties, etc. However, the United States does not tax NRAs on gain realized from the sale of U.S. assets other than U.S. real property.

2. Transfer Taxes.

a. Estate Tax. At death, NRAs pay U.S. estate tax only on assets deemed to have a U.S. situs, including real or tangible personal property located in the United States or shares of stock in a U.S. corporation.

b. Gift Tax. NRAs normally pay U.S. gift tax only on gifts of real property and/or tangible personal property located in the United States at the time of the gift. Most gifts of intangible property, for example, shares of a U.S. corporation, are not subject to gift tax.

c. GST Tax. A generation-skipping transfer made by a NRA is subject to tax only if the transfer is also subject to estate or gift tax, or if the transfer is from a trust and the NRA’s transfer to that trust was subject to estate or gift tax.

With regard to U.S. transfer taxes, NRAs are taxed at the same rates as U.S. citizens.

B. Taxation in other Countries.
Income and/or transfer tax consequences may occur in many countries upon the creation and implementation of a global family’s structure, based on the family’s domicile, the location of the assets, or the jurisdiction of the structure. Some of these tax issues include:

1. Inheritance and Wealth Taxes.

Several jurisdictions have an inheritance tax, rather than an estate tax, where the recipient of the inherited property, and not the decedent’s estate, is taxed on the value of such property. Many countries also impose an annual wealth tax, calculated on the total net value of an individual’s assets, including in some cases the rights held by the individual as owner or beneficiary of certain receivables (i.e., the right to trust income).

2. Taxation Based on Degree.

In some cases, transfers to a structure, rather than directly to individual family members, may result in higher tax liabilities. Countries that impose an inheritance tax may determine the rate of tax by the heir’s degree of relationship to the decedent. Thus, bequests to an unrelated trustee, rather than a family member, would likely be taxed at the country’s highest inheritance tax rate.

3. Imposition of Tax.

Income, inheritance, or wealth taxes may be imposed based on concepts of citizenship, residency, and/or domicile, and countries have varying definitions for each, depending on the nature of the tax and to whom it applies (i.e., an individual, a corporation, etc.). For example, some countries with an inheritance tax look to the domicile of the beneficiary, not that of the decedent, to determine its application.

4. Immediate Gain Recognition.

Depending on the applicable jurisdiction, a transfer of property to a structure, such as a revocable trust or wholly owned corporate entity, may trigger an immediate recognition of, and tax on, any unrealized appreciation.

5. Application of Tax Treaties and Tax Credits.

The application of an income or estate tax treaty may significantly lower the amount of tax due on certain transfers or the receipt of certain types of income. For example, under the U.S.-German income tax treaty, a German’s receipt of U.S. dividends will generally be taxed at a rate of 15%, rather than the 30% rate normally applicable to NRAs. Even if a treaty does not apply, countries may offer tax credits for taxes paid to another jurisdiction, depending on the source of the income, the rate or type of tax paid, etc.

Non-Tax Considerations.

While tax considerations have a significant impact on the design of a proposed structure, advisors must also consider several non-tax issues, particularly when a structure involves multiple countries. Failure to address and resolve these issues may actually result in unintended tax consequences, or worse, the failure of the structure to hold and protect the global family’s assets.

A. Conflict of Laws. The potential for conflicts of law arises whenever multiple jurisdictions are involved in the planning process, and may include the following:

1. Failure to Recognize Trusts.

The trust is a typical estate planning structure in common law jurisdictions like the United States and England and is often used as a means to avoid probate proceedings with regard to real property located outside of the owner’s domicile. However, most countries governed by civil law regimes (including most of Latin America) do not recognize trusts as separate legal entities, which may consequently expose trust assets to a creditor’s claims. For example, certain civil law countries deem property placed in trust as owned personally by the trustee, allowing the trustee’s creditors, including the heirs of an individual trustee, to demand satisfaction of their claims from the trust property.

2. Forced Heirship.

The laws of succession in most civil law countries give lineal descendants and certain ancestors rights to a predetermined share of a decedent’s estate. Conflicting dispositions under a will, trust agreement, or restrictive shareholders agreement may violate these rights, provoking a forced heir to seek legal enforcement of his or her entitlement.

3. Marital Property.

Certain countries have marital property regimes that allow a spouse to dispose freely of only his or her separate property. Forced heirship and marital property regimes vary from country to country, and when taken as a whole, may significantly limit a decedent’s free disposition of property.

4. Treatment of Entities.

Different countries may classify an entity differently for income and/or estate tax purposes, resulting in disparate tax consequences. For example, the United Kingdom treats a U.S. limited liability company as a separate taxable entity for income tax purposes, even though the United States taxes it on a pass-through basis.

B. Asset Protection. In addition to concerns about forced heirship or trust recognition, families concerned about potential creditors need a structure in a jurisdiction with well-developed asset protection laws. Jurisdictions will vary as to the frequency and ease with which creditors can satisfy a grantor’s debts with trust assets or attach corporate assets to settle a shareholder’s personal liabilities.

C. “Blacklisted” Jurisdictions. Some countries have enacted legislation designating “blacklisted” jurisdictions. These are typically low or no-tax jurisdictions. Depending on the country’s legislation, families with structures in blacklisted jurisdictions may have additional disclosure and reporting obligations, or be subject to additional taxes and penalties based on the value of assets held in those jurisdictions.

D. Family Governance. Any structure established for a global family must consider the family’s desires regarding control, business succession, and current and future family participation in the management of the structure.

Conclusion.

Clearly, planning for a global family is a complex undertaking, and the above is certainly not an exhaustive list of the potential issues and challenges. Advisors should always consult with local counsel in the applicable jurisdictions to ensure they have accurate advice regarding the tax and other consequences of any proposed structure. However, a general understanding of these concepts will help an advisor spot issues and ask questions that facilitate the design and implementation of an appropriate structure for the global family.