First-Generation Global Wealth Builders Need Sound Tax Advice

Immigrants and first-generation wealth are changing the nature of the foreign investments—and the tax planning necessary to protect the wealth of these investors. It’s becoming even more crucial for wealth builders to have sound professional advice to be able to build and protect their assets.

Building Wealth

First- or second-generation multinationals who are building wealth often lack estate planning or private client tax planning experience. The clients often are highly educated professionals or artisans with strategic investments focused on rapid investment growth and immediate income tax reduction.

Let’s use the hypothetical example of Geeta and Sundhar, a married couple in the US who met in college in the UK and are both originally from India. They amassed a fortune of over $430 million in their 40 working years, predominantly through real estate investments in the US.

Despite the wealth, they have no estate plans and haven’t considered any assets outside of the US, as their research indicated the UK-US tax treaty mitigates any double tax issues because they are citizens of both countries.

Further investigation indicates that Geeta sent her mother over $20,000 a year for her living expenses. Geeta never accesses the account, but it’s a joint account. Geeta now has a Report of Foreign Bank and Financial Accounts compliance issue and potential income tax from the gains from the account investments.

In our example, Sundhar has no part in this transfer, but Sundhar and Geeta file joint tax returns in the US, and the funds are sent from their joint UK or US accounts. And Geeta’s foreign assets now include assets in India.

Sundhar’s aunt owns a private limited company in India, and the corporate documents provide for ownership transfers to Sundhar once certain events occur. Sundhar may have immediate tax implications depending on the nature of his ownership—and any estate plan that attempts to be all-inclusive could violate trust or transfer always in any of the three countries.

Clients’ relationships and connections with their heritage and prior countries of residency necessitate cross-border tax planning—even where they may consider themselves to be solely US-based and as US citizens. Proficient cross-border tax attorneys and other professionals advising such clients must understand the clients’ position and look into their clients’ values, relationships, and goals to fully address all risks of tax and liability exposure in their planning.

Across Jurisdictions

Failing to mitigate estate planning across jurisdictions and merely having a separate estate plan in each jurisdiction is a recipe for probate and tax nightmares. Planning for the unknown is a critical component of cross-border planning so it accounts for ownerships and assets yet to be discovered or where the boundaries of the ownership may be uncertain.

Consider the hypothetical example of a French, Canadian, and US triplicate citizen, Jean, who died in the US as a resident in the US. A local estate planning attorney advised Jean on a basic estate plan based on the US value of the estate and the decedent’s assertion of not having any foreign ties other than citizenship then.

The decedent only had a will in the US that didn’t account for any of the French property, which included an ancestral home in France that had passed under the laws of inheritance to the decedent. Additionally, the decedent inherited rural land in Canada that was discovered during administration and held a bank account in Canada that he hadn’t accessed in decades.

Due to the lack of cross-border planning, various tax compliance obligations in each country were in arrears, and the estate took over 36 months to resolve. Standard US estate planning documents including a probate-avoiding all-inclusive trust implicated additional French asset reporting requirements—which could have been avoided with cross-border planning considerations in the trust.

Nature-Based Enterprises

Another increasingly common occurrence is the desire to establish natural therapy or nature-based enterprises below the equator.

Say Clarisa bought a property in Costa Rica to start a holistic care business. Under advice of local counsel, she established a local business and planned to visit the country frequently while continuing her life in the US. A local network established for her a Panama Foundation, which incorporates elements of both a trust and a corporation.

She was told that under Costa Rican law, she would be able to mitigate domestic tax implications with the interplay between the foundation and her business. She thought this tax implication applied to the US because it was established as a foundation, but tax-exempt private foundation rules don’t apply to a Panama Foundation that has non-tax-exempt beneficiaries.

A proficient cross-border tax attorney would have considered the greater risk implications of such a strategy. Panama Foundations aren’t structured to be recognized as tax-exempt organizations under US law.

Clarisa also may be liable for withholding requirements and double taxation on income from her business in Costa Rica unless she structures the entities and the income flow-throughs to mitigate the negative tax implications.

Foreign local business relationship customs may be seen as violating the Foreign Corrupt Practices Act in the US. It’s important to navigate the nuances of transactions in accordance with local practices while still being compliant in multiple jurisdictions with multinational clients.

Outlook

The US taxes all income from all sources, and the estate tax applies to interests globally, making valuation and asset protection of such assets abroad especially complex.

Having a strategy to protect US assets may directly contradict the legally permissible structure in the foreign country. And it could further complicate transfers while also causing double taxation, penalties, and compliance burdens.

Clients may not realize that even a little investment or attenuated connection to another country requires planning for the client akin to any other multinational with large investments in multiple countries. Educating clients, conducting proper risk assessment, and a thorough knowledge of cross-border tax and planning are essential to navigate the growing global client base.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Priya Prakash Royal is managing attorney of Royal Law Firm, an international private client tax law firm representing multinationals and business owners with US and cross-border wealth preservation and asset protection.

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