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GUEST COLUMN: TAX ASPECTS OF TAKING UP RESIDENCY IN THE UNITED STATES
By Richard S. LeVine (rlevine@dancona.com)
"Tax reduction is not evil if you do not do it evilly." Murphy Logging Co. v. United States, 378 F.2d 222 (1967).
Many foreign individuals are not familiar with the system of taxation imposed by the United States on its citizens and residents. When these individuals move to the United States, they are often unpleasantly surprised by the long arm of the U.S. tax collector. Unfortunately, by the time they discover how the system works, they have already taken up U.S. residence and the ability to redirect their income is significantly reduced.
Background - U.S. Income Tax
Citizens and residents of the United States (as defined for tax purposes- which includes more than merely those who have been admitted for permanent residence, commonly known as "green card" holders) pay federal income tax on their worldwide income. In addition, there are numerous anti-deferral and penalty tax regimes which apply to the undistributed income of foreign corporations owned by U.S. persons. This can come as a shock to those individuals who are more familiar with a territorial system of taxation in which a particular country imposes tax only on income which is earned within that country - and who may believe that their "offshore" income will always be exempt from income tax. Even more shocking is the impact when they are forced to pay tax on income earned by their offshore corporations, income which may never be distributed to the U.S. shareholder and which may create a severe cash-flow problem for the business if it must be removed from the corporation to pay U.S. taxes.
Background - U.S. Estate Tax
Generally, a person who is domiciled in the United States is subject to U.S. estate tax on all of their worldwide assets. Since the maximum estate tax rate is currently 55%, an unexpected death shortly after moving to the United States can quickly wipe out a substantial portion of a family's hard earned wealth, most or all of which may have been earned outside the United States before taking up U.S. residence. This sort of result is tragic and can be avoided with proper planning.
Domicile for estate tax purposes is not the same as residence for tax purposes. In many cases, an individual can be a U.S. resident for income tax purposes but not a U.S. domicile for estate tax purposes. Arranging one's affairs to obtain this status is often a relatively easy way to dramatically reduce exposure to U.S. estate tax.
Background - U.S. Gift Tax
In addition to estate tax, persons who have a U.S. domicile are generally subject to gift tax on all gifts in excess of certain annual limits, regardless of the location of the property given. As with the estate tax, U.S. gift tax rates can be as high as 55%. To the extent that the potential immigrant has family members or favored charities that are located outside the United States, it is prudent to consider either avoiding U.S. domicile, or if this cannot be accomplished, placing some assets in a foreign trust to avoid future gift taxes.
Solution
Proper tax planning can help potential immigrants arrange their affairs in ways that minimize subsequent exposure to U.S. tax jurisdiction. Common techniques include the use of trusts and reorganizations of foreign corporations to reduce the ownership attributed to the U.S. shareholders. The rules in this area are very complex, and it takes education and experience to prepare a structure that will avoid all or most of the burdensome reporting and tax-paying requirements. Be sure that your tax adviser has the education and experience needed to properly advise potential immigrants regarding their U.S. tax planning. This is a very specialized area of law and many professionals who are quite competent tax advisers in general are not equipped to give adequate advice to non-residents.
Furthermore, in light of the recent changes to U.S. tax treatment of foreign trusts, all potential immigrants and their immigration attorneys should review their plans with knowledgeable tax counsel as soon as possible. Many of the "standard" tax structures for immigrants have been rendered worthless by the new laws, with effective dates retroactive back to February of 1995. Moreover, there are now "look-back" provisions which will unwind tax planning even if it is put in place up to 5 years before taking up U.S. residency. Immigrants with any significant amount of non-U.S. assets really cannot afford to forego careful tax planning before they arrive here. The difference in tax results can be astonishing.
For more information about tax planning for immigration, please contact me in any of the following ways: 
Tel: (312) 580-2011.
Fax: (312)580-0923
rlevine@dancona.com 
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Disclaimer: This newsletter is provided as a public service and not intended to establish an attorney client relationship. Any reliance on information contained herein is taken at your own risk.