USA – NEW YORK Law and Practice Contributed by: John M Teitler, Nancy A Murphy and Constance E Shields, Teitler & Teitler LLP
New York’s treatment of its basic estate tax exclusion amount differs drastically from the federal system. The current federal exclusion amount is approximately USD15 million, and the federal government allows a credit for the full exclusion amount regardless of the value of the decedent’s estate. In addition, the federal estate tax system includes the concept of “portabil - ity”, by which any unused federal estate tax exemp - tion at the first spouse’s death may be transferred to the surviving spouse to shelter additional assets from gift and estate tax. If the first spouse to pass away has a taxable estate of USD10 million, the unused federal estate tax exemption of about USD5 million can be transferred to the surviving spouse. In most cases, this allows the surviving spouse to use the combined exemption to shelter approximately USD20 million There are various income tax planning opportunities in the United States, particularly in New York, that should be considered. For example, private placement life insurance can be an effective way to shelter income tax as well as Section 1031 like/kind exchanges of real property. There are also other techniques that clients should assess, including various trust types. Notably, the US and NY combined tax rates can be over 55%. 1.4 Pre-Immigration and Exit Planning Pre-immigration or exit planning opportunities are generally governed by US federal law and not state laws. Pre-Immigration There are a number of planning strategies that may be considered before moving to the US. from gift and estate taxes. 1.3 Income Tax Planning • Drop off trust – for someone who may come to the US more than five years in the future, trusts com - monly called “drop-off trusts” may be used. These are created by a non-citizen who is non-resident in the US and funded with non-US assets. The trust must be an irrevocable trust. Because the trans - fer to the trust is irrevocable and completed as a non-resident, the assets are outside of the reach of US taxes. However, if the settlor becomes a US tax resident within five years of funding the trust, under the US Internal Revenue Code (IRC) §679 it may
become a grantor trust and the trust income would become taxable in the US. • Realising capital gains – a non-resident is gener - ally not subject to US taxes on most foreign capital gains. Therefore, it is common to consider selling appreciated foreign securities before becoming resident in the US. • Accelerating foreign income – any foreign income received before becoming a US tax resident is not taxable in the US. • Altering investments – many non-US mutual funds become passive foreign investment companies (PFICs) under the US tax rules which have onerous reporting and punitive tax consequences. Where possible, it is recommended to get out of any investments that would be treated as PFICs before coming to the US. Exit Planning Planning for an exit from the US depends on whether a person is a US citizen, green card holder or a US resident for tax purposes. • Individuals who are merely tax residents in the US should: (a) consider deferring income and bonus pay - ments until after they leave the US; and (b) consider delaying asset sales until residency is terminated. • Green card holders: (a) long-term green card holders (generally eight of the last 15 years) can become subject to expatriation rules when they surrender perma - nent residency. The expatriation regime can trigger a deemed sale of worldwide assets if an individual’s net worth is over USD2 million. • US citizen: (a) simply moving out of the US does not termi - nate US taxation. US citizens are taxed on their worldwide assets; and (b) to terminate US taxation, citizens need to expatriate which, similar to green card holders, can trigger a deemed sale of worldwide assets and an immediate tax. Tax and other financial and non-financial considera - tions in all relevant jurisdictions should be considered with professionals to ensure proper planning well in
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