A television ad from a few years back had an auto mechanic, portrayed as somewhat of a rube, looking at an imported automobile and saying, “Let me do it! I’ve never fixed a foreign muffler before!” The commercial sponsor was a company whose only service was muffler replacement and repair and their message emphasized the need for a specialist, especially in uncommon circumstances.
If you haven’t had occasion to assist a foreign national with his or her life insurance planning you might feel as unqualified as the mechanic appears, only less inclined to muster his level of aplomb.
Planning for foreign nationals does require the assistance of qualified legal and tax advisors, but that shouldn’t discourage you from making folks aware of some disturbing facts about the tax law that may well ingratiate you with them when the time comes to purchase life insurance to solve planning problems unique to non-U.S. citizens.
Consider a few eye-openers you can use to get attention:
A resident alien (RA) is a foreign national whose domicile is in the United States. That often means they have a Green Card. If a RA dies here then everything that he or she owns anywhere in the world is subject to Federal Estate Tax. It may be that death taxes paid on property in another country generate a credit against the U.S. tax, but maybe not.
If a deceased RA, or a U.S. citizen, leaves property to a RA surviving spouse there is no UMD available unless the property is left in a qualified domestic trust (QDOT). Long story short: 1) the QDOT can be established up until the time an estate tax return is due; 2) among other things the trustee must be a U.S. citizen; 3) property passed to the trust can qualify for the UMD; 4) distributions over the trust income or not for hardship expenses are estate taxable; 5) the remainder is subject to estate tax at the eventual death of the spouse.
A non-resident alien (NRA) is a foreign national who lives outside the United States. The good news for a NRA is that only their assets in the U.S. are subject to federal estate tax. The bad news is that everything over $60,000 is taxed (not $5,430,000). But some other good news is that the death benefits from a policy owned by a NRA on his or her life are not subject to taxation.
Just because tax hurdles are overcome in the U.S. doesn’t mean that the assessors are through with either RAs or NRAs back in their country of origin. Not only might additional death taxes apply, but there may be other surprises; e.g. Mexico has an income tax on life insurance policy death benefits.
It has never been good planning advice to recommend a course of action because the IRS was unlikely to find it out. But more so as things progress. The increasing number and reach of international agreements among national tax reporting agencies is making it unreasonable to hope that transactions or assets will be overlooked by revenue departments at home or abroad. Most countries have signed on to reciprocal cooperative reporting agreements such as the Foreign Account Taxation Compliance Act (FACTA), or the Global Account Taxation Compliance Act (GACTA) that will eventually make hiding economic activity next to impossible.
The fact is that many or most non-U.S. citizens have gotten little attention regarding tax traps they may want to avoid. Call us for assistance getting started as you help your foreign national clients begin to address these issues.
Excellence, Passion, Integrity, Collaboration and Creativity – our core values since 1974
The EPICC Center is the online source for financial professionals, designed to provide them with the essential elements they need to run their practice and increase their bottom line including breaking news, carrier / product information, market trends, sales ideas, marketing tools & resources and more.