Multiple tax and estate planning pitfalls can arise when dealing with international clients, defined as non-U.S. citizens who are either resident aliens or nonresident aliens, as well as U.S. citizens with foreign interests, says Leigh Basha, an international estate-planning attorney with Holland & Knight in Tysons Corner, Virginia. Advisors who are well versed in the tax traps that international clients run into can help them realize tax benefits and create estate-planning efficiencies, she says. Advisors should be on top of the following 15 costly mistakes that foreign clients often make.
Trap #1 Flunking the substantial presence test or otherwise not properly determining the residency status of the foreign individual.
Trap #2 Falling into the capital gains tax trap when the foreign client thinks that because he is a nonresident alien for income-tax purposes (e.g., he is exempt from day counting), that he is also exempt from capital gains tax on the sale of U.S. stock.
Trap #3 Failing to properly understand the estate and income tax consequences attributable to certain investments and special considerations for visa holders.
Trap #4 Failing to properly classify certain assets as U.S. situs (located in the U.S.), e.g., U.S. partnerships/LLCs, money market accounts, life insurance on the life of another, cash and currency.
Trap #5 Assuming that because a nonresident alien has a $60,000 exemption from U.S. estate tax at death, that he has a $60,000 exemption from gift tax during life.
Trap #6 Failing to properly understand a nonresident alien's (NRA) estate tax deductions, particularly the tax treatment of mortgages at the death of an NRA.
Trap #7 Failing to understand the tax effects of holding property jointly between non-U.S. citizens.
Trap #8 Failing to properly weigh the tax and non-tax ramifications of making the qualified domestic trust (QDOT) election or transfers to a non-U.S. citizen spouse.
Trap #9 Failing to take advantage of the benefits of tax treaties or not understanding them.
Trap #10 Failing to properly report gifts from foreign individuals, foreign estates, foreign trusts, or foreign companies.
Trap #11 Failing to properly report foreign bank and financial accounts.
Trap #12 Failing to properly plan for the Foreign Investment in Real Property Tax (FIRPTA) withholding tax on the sale of U.S. real property by a nonresident alien.
Trap #13 Failing to consider forced heirship, in which countries require a certain amount of assets to pass to children.
Trap #14 Drafting an estate plan that is U.S.-centric, including using revocable trusts without considering the tax implications of other jurisdictions.
Trap #15 Failing to understand the tax and non-tax ramifications of expatriation.