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New Expatriation Rules Keep Wealth Stateside

Foreign nationals working in the United States have already had to jump through hoops to work here, navigating immigration, visa and green card requirements, and dotting every "i" and crossing every "t" the U.S. government requires. Clearly, getting into the U.S. is a challenge - and now, getting out could be a lot more expensive.

If you are an individual with more than $2 million in net worth, the U.S. has a new tax law for you. Passed in September 2008, this new "exit" tax regulation is designed to deter wealthy people from leaving the U.S. to avoid paying income taxes.

Covered individuals include U.S. citizens and long-term permanent residents who have a net worth of $2 million or an annual taxable income for the five previous years of more than $139,000. The law covers U.S. citizens who renounce their citizenship and move out of the country, along with long-term permanent residents who have held green cards for eight out of the last 15 years before leaving the country.

Both U.S. citizens and green card holders are taxed on their worldwide income and assets, assessed at fair market value the day before they exit the United States, subject to a $600,000 exemption. Green card holders’ property tax basis is calculated as the fair market value at the date of their green card application.

New Gift & Estate Tax Rules, Too

Covered expatriates are also bound by a new estate and gift tax covering gifts to U.S. beneficiaries. Gift taxes are typically imposed on the donor, but under this new law, the beneficiaries pay the tax and are subject to the highest applicable gift or estate tax rate - currently 45% - on any gifts from covered expatriates.

In addition, the new law dictates that:

All grantor trust assets are considered sold at market value
All tax-deferred retirement accounts are considered to be distributed, and subsequent distributions are adjusted to account for taxes paid
Future distributions from domestic or foreign non-grantor trusts are subject to 30% withholding
Non-U.S. property is subject to the generation-skipping tax, which means that the tax-free transfer of such property is disallowed

Consider Tax Planning Opportunities

Such a drastic change in the tax law presents sophisticated tax, estate and immigration planning challenges. For permanent residents - those who already hold green cards - the time to begin exit and estate planning is now. This is especially true for those who have held green cards for fewer than eight years. Opportunities to minimize the exit, gift and estate taxes under the new law will certainly arise. It is important to be positioned properly to exit the country while preserving as much wealth as possible.

Expatriate Exceptions

U.S. citizens are exempt from the exit tax if they meet the following criteria:

The individual’s U.S. citizenship was attained solely by reason of birth and he or she is also a citizen of another country where he or she pays taxes
The citizen has not resided in the U.S. - has spent fewer than 183 days in the U.S. in any one year - for more than 10 of the previous 15 years
The citizen exits the country before reaching the age of 18.5 years old

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