Thinking of Expatriating? Consider Estate and Tax Planning Consequences First...

By: Jim Dossey, MS, MBA, JD

According to a front page story in the Wall Street Journal on Tuesday, June 17 th, record numbers of Americans are giving up their US citizenship and becoming expatriates. If this year's current pace continues, over 4000 citizens will renounce their citizenship, topping last year's record of 2,999.

Reasons for expatriating are varied, but the current exodus has been heightened by a recent push by the US government to force US citizens to disclose foreign bank accounts. If a US taxpayer has "a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, etc. exceeding certain thresholds", the Bank Secrecy Act may require them to file an annual report to the IRS. Failure to file a Report of Foreign Bank and Financial Accounts (FBAR) results in very significant penalties, up to 50% of the balance in the account at the time of the violation, for each violation.

Although most people believe that expatriation is a game of the super wealthy (i.e. Facebook co-founder Eduardo Saverin), the recent increase in renunciations has been driven by Americans with relatively modest means. Because of the draconian FBAR rules, an American may often face penalties that greatly exceed the balances in foreign accounts if the foreign accounts were not reported for several years. In an example given by the Journal, a couple having an unreported foreign bank account with approximately $100,000 calculated their potential penalties of up to $455,000. For that couple, expatriating was the logical choice to avoid being forced to sell their home and retirement savings to pay the possible fines.

The decision to renounce your citizenship must not be taken lightly. Expatriating can have serious gift, income, estate, and expatriate tax consequences. For example, expatriates are subject to a "mark to market" revaluation of assets; all assets are deemed to have been sold the day before expatriation, possibly resulting in a large capital gain during the expatriation year. It is very important to work with an estate planning / tax attorney to help minimize the tax impacts.

The following strategies should be considered:

  • Expatriating can result in significant tax savings if the wealthy individual does not intend to make gifts or bequests to US persons

  • Consider expatriation when asset values are low to reduce possible capital gains incurred due to "mark to market" revaluation

  • Gift tax is "tax exclusive"; expat tax is "tax inclusive" --> if possible structure so that gift tax applies rather than expat tax

  • Opportunity to turn "tax inclusive" estate tax property into "tax exclusive" if foreign funds are used to pay estate tax on US situs property

  • Lifetime giving - Ability to give $14,000 real or tangible property located in the US (not included in expat tax calculation) plus $14,000 non US situs property

  • Pre-pay tuition and medical expenses for a US person before expatriating.Unlike gift tax, these gifts are not excluded from expat tax

  • Pre-immigration strategy - consider not getting a green card to avoid being classified as a covered expatriate

  • Prior to expatriating, consider blowing out unified credit (currently $5.34MM) through lifetime giving to US persons.Once a covered expatriate and not a US resident, exemption is no longer available.This strategy is not effective for gifts to non US citizens and residents because a covered expatriate can give unlimited gifts of non US property to individuals who are not US citizens or residents

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