EB5 Investors Magazine Volume 3 Issue 3 | Page 20

Continued from page 16 Defer Losses and Deductible Expenses Some NRAs may have assets that have significantly declined in value from the time they were acquired. Selling or exchanging these assets prior to residence start date will adjust the tax basis downward, to current fair market value. If the acquisition basis can be substantiated, then it is best to preserve the built-in losses of these assets and trigger them only following the residence start date. These losses can then be used by the now U.S. tax residents to offset ordinary income and capital gains. Funding U.S. assets into a foreign trust removes them from the U.S. estate tax base, and funding non-U.S. assets into a foreign trust not only removes them from the U.S. estate tax base, but may also eliminate U.S. income taxation. If an NRA has an extensive investment portfolio with significant values, it would be beneficial to selectively pick stocks that will be sold and repurchased prior to U.S. tax residence (to increase tax basis), and stocks that will not be sold prior to residence start date (to preserve high basis). There are four notable points on the U.S. income tax treatment of a pre-immigration foreign trust. First, if the foreign trust ever makes a distribution to a U.S. beneficiary, the distribution will be subject to a throwback regime and an interest charge. Second, capital gains earned by the trust and not currently distributed are taxed under the ordinary income tax rules. Third, trusts funded within five years of the U.S. residence start date are taxed as grantor trusts. Fourth, U.S. beneficiaries must report distributions received from a foreign trust. Similar logic is applied to deferring the payment of those expenses that would be deductible for U.S. income tax purposes, including both business and personal expenses. Foreign Trusts A trust classified as a “foreign trust” is treated for U.S. tax purposes as an NRA. As discussed above, the United States taxes NRAs only on U.S.-source income and imposes an estate tax only on U.S.-sited assets. For these reasons, funding a foreign trust prior to the residence start date is a significant pre-immigration tax planning tool. As discussed above, NRAs are not s ubject to U.S. gift taxes on gifts of non-U.S. assets and on gifts of all intangible assets (even if in the United States). This allows NRAs to remove an unlimited amount of wealth from their possible U.S. estate prior to the residence start date. The income tax advantages of foreign trusts may be limited when they have U.S.-source income, U.S. beneficiaries or are established within five years of U.S. residence. In certain situations the practitioner may intentionally seek to have the foreign trust classified as a grantor trust. This avoids the application of the throwback regime, reporting requirements for beneficiaries and taxes the grantor on trust income, allowing the grantor to further reduce his assets otherwise subject to the U.S. estate tax. Conclusion Advance pre-immigration tax planning can significantly reduce U.S. income and estate taxes of EB-5 investors. This is commonly accomplished by transferring ownership of assets into newly created legal entities or distributing assets from existing entities to obtain a basis step-up, reincorporating entities to obtain basis step up and strip out accumulated earnings and profits, deferring deductible expenses, accelerating income, and funding foreign trusts. The planning must also account for the tax laws of the immigrant’s home country. It would make little sense to reduce U.S. taxes if home country taxes are increased by the same or nearly the same amount. As a matter of practice the author always coordinates U.S. pre-immigration tax planning with foreign tax counsel. ★ Jacob Stein is a partner at Aliant LLP, a law firm focused on international law and headquartered in Los Angeles. Stein is a certified tax law specialist, and a recognized expert in international tax planning and cross-border business transactions. His works have appeared in many publications including, The Journal of International Taxation, Bulletin for International Taxation, Business Entities and EB5 Investors Magazine. Jacob Stein 18 EB5 INVESTORS MAGAZINE