Foreign Nationals in the U.S. – Invest AND Protect Your Assets - Part 2

Going Local

Once again, in the same manner that tax and compensation policies may focus on allowance phase-outs and the weaning off any income tax reconciliation program in place, localization also raises the specter of a fundamental shift in the estate planning issues facing foreign national assignees, particularly in the context of application for permanent resident status. The treatment of foreign pension arrangements, for example, has attracted increasing attention in the last couple of years due to detrimental changes in the cost basis treatment of such plans for income tax purposes upon distribution. This is but part of the picture, however. With permanent residence status, very often also comes the inclusion of foreign assets into the U.S. estate tax as a domiciliary for U.S. estate tax purposes. While the exemption amounts are considerably higher, the assets within the tax horizon very often broaden equally, if not disproportionately. To be informed, such decisions should be met by careful pre-planning at the departure gate. Indeed, there may be some very effective tax strategies available to such individuals, the timeliness of which is of the absolute essence.

Protecting Those Assets – Yours and Theirs

The tax rules outlined – and the risks they pose - all seem very unfair, if not scary in their application. But what are some of the key procedural and tax technical solutions available?

Policy review and comprehensive letters of assignment would seem essential from the perspective of clarifying who is liable for any additional estate liability arising from an assignment. Other practical measures taken by some employers are to engage the services of tax advisors and estate planners with respect to these specific issues at the option of at least certain (perhaps more senior) groups of assignees. At minimum, a simple recommendation to assignees that are intending to purchase U.S. real estate, or otherwise are localizing, that they should seek comprehensive income and estate tax planning advice is a valuable - and perhaps critical - first step.

The foreign national should also give serious consideration to exploring whether a U.S. Will is advisable in circumstances where he/she purchases US estate taxable assets (even if additional to – and coordinated with - a Will in his/her country of domicile). Indeed, in any event, if he/she has accompanying children while on assignment here, a U.S. Will may be critical to avoiding potential guardianship issues in the event of a fatal accident common to both spouses. The kids come first! In addition, if an individual transfers assets to his/her non-U.S. citizen spouse, the estate tax due may at least be deferred via a properly drafted Will incorporating what is known as a Qualified Domestic Trust (QDOT). Such a trust may be created in life or shortly after the death of the first spouse.

Estate tax risks facing non-domiciliaries may also be hedged very effectively with life insurance proceeds. Indeed, life insurance vehicles are extremely versatile tools for the protection against both income and estate tax liabilities in a number of situations. They also carry the advantage for estate tax non-domiciliaries that they are per se not estate taxable on death benefits paid (whether obtained through a U.S. insurance carrier or not).

Lastly, a foreign national could try negotiating a “non-recourse” debt with his or her mortgage lender. A non-recourse debt is one with respect to which a lender has a lien only on the asset securing the loan, without recourse to the borrower’s other assets. The advantage of this mechanism is that it permits a full deduction for the value of the debt against the estate taxable real property asset. Compare this to a recourse loan situation noted above of requiring worldwide disclosure of assets in order to qualify merely to prorate the offset of mortgage debt on the ratio of U.S. to worldwide assets.

In summary, understanding how the estate tax rules apply to a foreign national’s circumstances is the first notch in an action plan to mitigate any potential adverse estate tax consequences.

The moral of the story? While that new dream home looks attractive, the foreign national should avoid creating a potential estate tax and administration nightmare for those left behind!

*R. Scott Jones, Esq. is a partner with New York law firm Goldstein Jones LLP. For more information, contact Scott at (914) 214 5579 and visit

Copyright©, GOLDSTEIN JONES LLP - March, 2007

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