United States: Private Client

An individual is considered a ‘US Person’, and therefore subject to income tax on worldwide income and capital gains, if the individual is a US citizen (regardless of physical residency) or is a Lawful Permanent Resident (i.e., a ‘Green Card’ holder) or meets the ‘substantial presence test’, determined by the following formula: days (including partial) present in the US in the current tax year (which must be at least 31), plus days present in the prior tax year divided by 3, plus days present in the US in the second year before the current year divided by 6.  If the sum of this calculation equals or exceeds 183, then the individual is a US Person for the current tax year.  Thus, the individual may spend as many as 121 days in the U.S.  each year without becoming a resident under the substantial presence test.  Likewise, the individual can be present in the US for up to 182 days in the current tax year without becoming a US Person if the individual has a documented closer connection to a foreign country.  A nonresident is generally subject to US income tax only on (1) income from the sale of US real property, (2) income from a US trade or business, and (3) most interest, dividend, rental and royalty income from US sources.  Interest on US bank deposits is not subject to income tax for nonresidents.  Income tax treaties entered into between the US and certain countries can ameliorate the effect of any such taxes for nonresidents.

a.  Individual Ordinary Income Tax Rates.  There are four filing statuses and seven brackets for individual federal ordinary income tax; the brackets are indexed for inflation.  The following table shows the anticipated individual income tax rates and brackets for the 2022 tax year.

The tax owed by a taxpayer with taxable income in a subject bracket is calculated by calculating the tax owed with respect to the total taxable income in each of the brackets below the subject bracket, and by adding to the sum of those taxes the tax calculated on the taxpayer’s subject bracket.  Thus, for example, the tax owed by a single taxpayer with $100,000 taxable income will be the sum of $1,027.50 (10% of $10,275), plus $3,780 (12% of $31,500) + $10,406 (22% of $47,300) + $2,622 (24% of $10,925), or $17,835.50.

b.  Capital Gains Rates.  For individual taxpayers (i.e., US Persons and nonresidents with US source income), the capital gains rate depends on the individual’s tax bracket, and whether the gains are classified as short-term capital gains or long-term capital gains.  Short-term capital gains are gains from the sale or disposal of assets held for one year or less.  Individuals pay short-term capital gains at the same rate as their ordinary income tax rate.  Long-term capital gains are gains from the sale or disposal of assets held for more than 1 year and they are taxed at 0%, 15% or 20% depending on an individual’s income tax bracket, as follows:

Long-term capital gains on the sale of collectibles (such as works of art or other tangible personal property) are taxed at 28%.  If long-term capital gains raise an individual’s income from one bracket to another, only the portion that is in the higher bracket – not the entire gain – is taxed at the higher rate.  It is possible to defer the realization of capital gains on the sale of investment real property by investors by use of a like-kind exchange of similar investment real property.  Due to the 2017 enactment of the Tax Cuts and Jobs Act (described in the answer to question 28) and the issuance of proposed Treasury regulations, deferral of such gains on the sale of capital assets other than investment real property is unavailable, except to the extent the proceeds of sale are invested in a qualified business or property located within a special ‘qualified opportunity zone’ (i.e., generally, a listed disadvantaged area within the US) for a fixed period.

c.  Social Security and Medicare Taxes.  For the 2022 tax year, US Persons who work as employees and nonresidents with US-source salaried income are obligated to pay a 6.2% Social Security tax on compensation up to $147,000, a 1.45% Medicare tax on compensation up to certain thresholds ($125,000 for married taxpayers who file separately, $250,000 for married taxpayers who file jointly, and $200,000 for single and all other taxpayers) and a 2.35% Medicare tax on compensation above these thresholds.  (The ceiling for application of the social security tax is adjusted annually for inflation.)  For the 2022 tax year, self-employed US Persons and nonresidents with US-source self-employment income must pay 12.4% of their annual self-employment earnings up to $147,000 toward Social Security taxes, as well as 2.9% of their self-employment earnings up to the above thresholds and 3.8% of their earnings above those thresholds, toward Medicare taxes.

d.  Length of Tax Year; Tax Return Submission; Payment of Tax.  The tax year for individuals runs from January 1 to December 31.  Individuals are required to file income tax returns reporting their income and capital gains, and pay any tax due, by April 15 of the year following the end of the taxable year to which the return relates.  Individuals who cannot file by the due date for their return may request an automatic 6-month (until October 15) extension of time to file.  An extension of time to file is not an extension of time to pay, however, and individuals may be subject to a late payment penalty on any tax not paid by the original due date of their return.

Withholding is required for US Persons and nonresidents on all salary income earned in the US.  There is no set withholding rate, but generally withholding must be sufficient to cover 90% of income tax for the year to avoid an interest charge.  Self-employed individuals and salaried individuals with other non-salaried income (such as bank interest, dividends, rental and royalty income, etc.) are not required to have income taxes withheld on such income, but instead must pay estimated taxes on a roughly quarterly basis (the due dates are April 15 (for 1^st quarter income), June 15 (for 2^nd quarter income), September 15 (for 3^rd quarter income) and January 15 (for 4^th quarter income)).  For nonresidents, there is a 30% withholding (15% under certain tax treaties) on most US-source interest, dividends, rental and royalty income.  Interest on bank deposits is not subject to withholding.

The US has entered into income tax treaties with many foreign countries, and a current list of countries that have signed income tax treaties with the US include Armenia; Australia; Austria; Azerbaijan; Bangladesh; Barbados; Belarus; Belgium; Bulgaria; Canada; China; Cyprus; the Czech Republic; Denmark; Egypt; Estonia; Finland; France; Georgia; Germany; Greece; Hungary; Iceland; India; Indonesia; Ireland; Israel; Italy; Jamaica; Japan; Kazakhstan; Korea; Kyrgyzstan; Latvia; Lithuania; Luxembourg; Malta; Mexico; Moldova; Morocco; Netherlands; New Zealand; Norway; Pakistan; Philippines; Poland; Portugal; Romania; Russia; the Slovak Republic; Slovenia; South Africa; Spain; Sri Lanka; Sweden; Switzerland; Tajikistan; Thailand; Trinidad; Tunisia; Turkey; Turkmenistan; Ukraine; the United Kingdom; Uzbekistan; and Venezuela.

Generally, the effect of these treaties is to avoid double taxation on income and to provide residents of foreign countries reduced rates or exemptions from tax with respect to taxation in the US and vice versa.  As these treaties are entered into on a bilateral basis with the US, the reduced rates and exemptions vary among the treaties, character of income and countries concerned.

The US has not yet ratified, approved or accepted the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

Currently, the US does not impose a federal wealth tax.

The US transfer tax system is three pronged: a gift tax applies to certain transfers made during lifetime; an estate tax applies to certain transfers taking effect at death; and a generation-skipping transfer tax (GST tax) is imposed on certain transfers made during lifetime or at death (or at the time of distribution in the case of a transfer from a trust) to a person (a skip person) more than one generation below the transferor.  Some, but not all, states within the US also impose estate or inheritance taxes, and one state (Connecticut) currently imposes a gift tax.

The US imposes a gift tax on donative transfers from a US citizen or domiciliary to donees other than a US citizen spouse or charity, except with respect to certain transfers made directly to the provider of a donee’s education (but only for qualified tuition payments) or healthcare.  US gift tax is imposed on a flat 40% rate on cumulative taxable gifts (other than annual exclusion gifts) above an exemption amount adjusted annually for inflation ($12,060,000 in 2022).  Annual exclusion gifts are gifts of a present interest from a US citizen or domiciliary to a donee other than a US citizen spouse or charity that do not exceed $16,000 (for 2022) per donee (or $32,000 per donee (for 2022) if made by a married donor whose spouse consents on a US gift tax return to having such gifts treated as having come one-half from him or her).  Gifts to a spouse who is not a US citizen that do not exceed $164,000 (for 2022) qualify for the annual gift tax exclusion.  Outright gifts are considered gifts of a present interest.  Gifts made in trust may be gifts of a present interest if certain withdrawal powers (commonly referred to in the US as ‘Crummey’ withdrawal powers) or termination provisions are present in the trust; the absence of such entitlements will cause a gift made in trust to not qualify as an annual exclusion gift.  Reporting of taxable gifts and the payment of any US gift tax due thereon must be made by April 15 of the year following the year in which the taxable gift was made.  As in the case of income tax reporting, an automatic 6-month extension of time to file may be requested, but individuals may be subject to a late payment penalty on any gift tax not paid by the original due date of their return.  The gift tax is also imposed on non-resident aliens with respect to transfers of US-situs real and tangible personal property.

The US imposes an estate tax on the taxable estate of a US citizen or domiciliary.  A US citizen’s or domiciliary’s taxable estate consists of his or her worldwide gross estate, valued as of date of death (or the earlier of the date of distribution or sale of the assets or the date that is six months after the date of death, if the effect of choosing this ‘alternate valuation date’ will serve to reduce the estate tax due), reduced by various deductions (such as debts, administration expenses, state and foreign death taxes, qualified distributions made to or for the benefit of a surviving US citizen spouse or charity) and credits.  US estate tax is imposed at a flat 40% rate on a taxable estate above the estate tax exemption amount ($12,060,000 for decedents dying in 2022, reduced by taxable gifts made during lifetime).  Nonresidents are also subject to US estate tax on US-situs property owned at death.  US-situs property of a nonresident includes real or tangible personal property with a physical location within the US, shares of stock of a US corporation, certain debt obligations, deferred compensation of a US Person, and annuity contracts of a US obligor.  Bank deposits and life insurance are not considered US-situs property of a nonresident.  The taxable estate of a nonresident is taxed at a progressive estate tax rate capped at 40%, but the estate is allowed an estate tax exemption of only $60,000.  Estates exceeding the above estate tax exemption amounts are required to file a US estate tax return, and pay any estate tax due, within 9 months from date of death, although an automatic 6 month extension of time to file will be granted upon request.  An extension of time to pay may be granted for reasonable cause.  No further extension is available beyond 15 months from date of death.  Under the concept of portability, for a married decedent who has not exhausted his or her available estate tax exemption, the filing of a US estate tax return allows the porting of the deceased spouse’s unused exemption to the surviving spouse to avoid wastage of the predeceased spouse’s estate tax exemption.  Portability is not available with respect to unused GST exemption.

The US imposes a GST tax on (1) outright transfers to a skip person (including to a trust of which all the beneficiaries are skip persons), (2) distributions from a trust to a skip person, and (3) the assets of a trust where all the remaining beneficiaries are skip persons upon the death of the last beneficiary who was not a skip person (as to each, a GST transfer).  In addition to any US estate tax or gift tax applicable to the transfer, US GST tax is imposed at a flat 40% rate on cumulative GST transfers above the GST exemption amount ($12,060,000 for 2022).  US GST tax is due by April 15 of the year following the year in which the GST transfer was made or, in the case of GST transfers taking effect upon the donor’s death, on the due date of the US estate tax return in respect of the donor’s estate.

Property included in a decedent’s estate will qualify for a basis adjustment (commonly referred to a ‘basis step-up,’ although the adjustment can be downward) to the property’s date of death (or alternate valuation date) value, for subsequent capital gains tax purposes.

All outright transfers by gift or bequest to a US citizen spouse qualify for the unlimited marital deduction and are not subject to gift or estate tax.  Transfers made during the donor’s lifetime or at death to a US citizen spouse will qualify for the unlimited marital deduction (and not be subject to gift or estate tax tax) if during the spouse’s lifetime the trust (the ‘Marital Trust’) (1) is for the sole and exclusive benefit of the spouse; (2) no distributions from the trust may be made to any other person; and (3) all the net income of the trust is required to be paid at least annually to the spouse.  Likewise, property passing in the form of a life estate to a spouse in which some or all of the income is payable to the spouse but over which the spouse is granted a testamentary general power of appointment, will qualify for the unlimited marital deduction.  The marital deduction is designed to defer the imposition of any transfer tax otherwise due on the transfer until the later death of the spouse.

No distinction is made between transfers to an opposite-sex spouse and transfers to a same-sex spouse.

No marital deduction is available with respect to a transfer outright to or in trust for a spouse who is not a US citizen unless the transfer is made by the donor spouse (or by the donee non-citizen spouse following receipt thereof) to a Qualified Domestic Trust (QDOT) containing statutorily-mandated provisions designed to ensure that any transfer tax otherwise due on the transfer will be paid eventually to the US.  A QDOT must be maintained under the laws of a US state or the District of Columbia and the governing instrument thereof must be governed by the laws of a US state or the District of Columbia.  Generally, a bank or trust company organized within the US must act as a Trustee, and QDOTs over a certain size must provide for the filing of a bond with the US Treasury.  In other respects, a QDOT must contain the provisions required above for a Marital Trust.  Distributions of principal from a QDOT to the noncitizen spouse will attract US estate tax at the donor spouse’s estate tax bracket.  Relief from the QDOT requirements may be available if the spouse becomes a US citizen and meets certain residency requirements.

Yes, US tax law encourages gifts to charity both during a donor’s lifetime and at death.  Public charities (i.e., those that receive the bulk of their support from the public) are completely exempt from US income taxation and all donations made to them are generally tax deductible to the donor within certain limits.  Private foundations (i.e., those that receive all or most of their support from a limited universe of donors – usually, but not exclusively, a single individual or family) are also exempt from US income taxation, but they are subject to strict scrutiny by the Internal Revenue Service (IRS) and are subject to many regulatory provisions and restrictions with which they must meticulously comply.  The US imposes limitations on how much of a charitable contribution may be deducted against the adjusted gross income (AGI) of a taxpayer who itemizes his or her deductions in calculating income tax due.  If all gifts made to a public charity are solely of cash, then such gifts are subject to a 60% limit, meaning that a donor’s deduction for the gift of the cash cannot exceed 60% of the donor’s AGI for the year of the gift.  Otherwise, gifts of cash to a public charity (if made along with gifts of other property to charity) are subject to a 50% limitation; gifts of long-term capital gain property to a public charity, and gifts of cash to a private foundation, are subject to a 30% limit; and gifts of long-term capital gain property to a private foundation are subject to a 20% limit.  Gifts of ordinary income property to a public charity or private foundation are limited to the lesser of the basis in such property or the AGI limitation available for cash gifts to such organization.  Bequests of property taking effect at death to a public charity or to a private foundation, regardless of the character of the property, qualify for an unlimited charitable estate tax deduction.

Real property taxes are not imposed at the federal level.  In the US, taxes on real property are imposed at the state or local level and the tax rates of the states and local jurisdictions vary significantly.  State and local governments levy taxes on real property situated within their jurisdictions, regardless of the citizenship of the owner.  Property tax is generally determined by the property tax rate and the tax base.  The tax base is determined by the assessed value of the property and assessment ratio.  The methods for assessing property tax rates vary from jurisdiction to jurisdiction.

A property owner who has no connection with the jurisdiction other than ownership of property there should be mindful of the Foreign Investment in Real Property Tax Act (FIRPTA), which authorizes the US to tax nonresidents on dispositions of US real property interests.  A disposition includes, but is not limited to, a sale or exchange, liquidation, redemption, gift or transfer.  Persons purchasing US property interests from nonresidents are required to withhold 15% of the amount realized on the disposition (unless the nonresident transferor has requested from the IRS a withholding certificate prior to the sale specifying the amount of the tax due).  A refund may be obtained by the nonresident transferor should the withheld FIRPTA tax exceed the tax due on the realized gain.  If the purchaser fails to withhold, the purchaser may be liable for the tax.

See the answers to questions 4 and 5 in respect of the transfer and capital gains taxes imposed on US-situs real property owned by a nonresident.

In addition to the taxes described above, many states also impose an income tax on state residents.  State income taxes are levied by many, but not all, of the states, as well as some local jurisdictions, and the rates vary greatly.  Individual taxpayers may elect to deduct state and local sales, income, or property taxes (SALT taxes) up to a limit of $10,000 ($5,000 for a married taxpayer filing a separate return).  Under current law at the time of this writing, SALT taxes in excess of those limits are not deductible in calculating a taxpayer’s US income tax.

Sales and use taxes are other taxes imposed on individuals, generally at the state and/or local level.  Sales and use tax rates of the states and local jurisdictions vary widely.  Excise taxes, also known as luxury taxes, can be imposed at the state and federal level.  US excise taxes are imposed on the purchase of heavy tires, gasoline, beer, wine and liquor, cigarettes, airplane tickets and fishing equipment.

All individuals taxed as US Persons are subject to the same income taxes.  Nonresidents are not subject to income tax on most capital gains or on interest on bank deposits.  As noted above, individuals who are not US citizens and are not considered domiciled in the US (separate from the substantial presence test for income taxation) are not subject to gift, estate, or GST tax on non-US property.

An individual should consider contributing assets to a foreign trust prior to entering the US.  If done more than 5 years prior to becoming a US Person, the trust assets in most cases will not be subject to US income taxation.  If an individual is very wealthy (more than $10 million of liquid assets), the individual may want to consider investing through a private placement life insurance policy, which is not subject to US income tax.  If the individual is moving to a US state that imposes an income tax, the individual may want to establish a trust in a US state that does not impose income tax to avoid state income tax on those assets.

The rules of succession in the US are determined at the state, not federal, level.  In almost every state, an individual is free to choose the beneficiaries of his or her estate by executing a Will (or Will substitute) detailing his or her wishes.  However, most separate property states have elective share statutes that prohibit the disinheritance of a spouse, instead requiring that some portion of a person’s estate (usually about one-third) pass to his or her surviving spouse.  Louisiana is the only state with forced heirship, requiring that some portion of a person’s estate be left to his or her children if such children are under age 24 or permanently incapable of taking care of their persons.  (In Louisiana, the forced portion is typically one-fourth of the estate if there is only one forced heir, and one-half of the estate if there are two or more forced heirs.  However, the fraction may be smaller in the situation where the testator has five or more children and only one or two of them are under age 24, or otherwise forced heirs, as well as in certain instances where disabled grandchildren are forced heirs.)  If an individual should die without a Will (i.e., in intestacy), the distribution of his or her estate will be subject to the intestacy laws of the state of his or her residence (except for real property, the disposition of which under intestacy is determined by the laws of the jurisdiction in which the property is physically located).  Each state has its own set of intestacy laws, but the surviving spouse and children generally are favoured.

Under the US tax system, married couples are treated differently than couples who are not married.

With respect to income tax, a married couple who files jointly sometimes may pay more than they would as two single people (a so-called ‘marriage penalty’).  On the other hand, when one spouse earns all or most of the income, the couple often receives a ‘marriage bonus’, paying less in income taxes for their joint income than they would have paid had they filed individually.  A married couple also receives a standard deduction that is twice as high as the deduction for a single person.  The capital gains tax exemption on the sale of a primary residence (for 2022) is $500,000 for a married couple as opposed to $250,000 for a single person.  Spouses can also roll over a traditional or Roth IRA received from a spouse into a spousal rollover IRA.

With respect to succession, the rules for matrimonial property vary from state to state.  The states are divided among community property states and common law property states.  Currently, there are nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).  Alaska permits a married couple to opt-in to community property status.  All other states are common law property states.

In a community property state, the union is viewed as a partnership in which each spouse contributes labour.  Each spouse automatically has a 50% interest in all community property, regardless of which spouse acquired the community property.  Community property is generally defined as all property acquired during the marriage that is not established to be separate property.  Separate property is property owned solely by one spouse or the other.

In community property states, each spouse is taxed on 50% of the total community property regardless of which spouse acquired the income.  Each spouse is taxed on 100% of his or her separate property.

For federal tax purposes, a taxpayer’s rights and interests in property are determined under the laws of the taxpayer’s state of domicile.  In a community property state, each spouse has the right to dispose of his or her share of community property in whatever way he or she desires, including giving his or her half of the community property to someone other than the surviving spouse.

In common law property states, ownership is determined by the name on title.  Most common law property states have right of election statutes, which prevent a decedent from disinheriting his or her spouse.  For example, in New York, a decedent must leave his or her spouse the greater of $50,000 or one-third of his or her estate.  If the decedent does not provide in his or her Will for the spouse to receive his or her ‘elective share’, the spouse can elect against the Will.  In some states, the elective share is dependent on the number of years the parties were married.

Generally, the rights and interests of a surviving spouse in the estate of the predeceased spouse are determined under the laws of the predeceased spouse’s domicile.  In common law property states, the elective share of a surviving spouse cannot be curtailed without that spouse’s consent.

Additionally, the surviving spouse of an owner of certain retirement accounts subject to the Employee Retirement Income Security Act of 1974 (ERISA) is automatically entitled to receive 50% of the retirement account at the employee’s death, regardless of whether the spouse is named on the beneficiary designation, unless the spouse has executed a spousal waiver with respect to any such account.

Two main factors determine which state’s succession or intestacy laws control the disposition of a decedent’s estate: (1) the property classification, or type, of each item of property, and (2) the state of a person’s domicile at the time of death.

Generally, there are three types of property: (1) real estate; (2) intangible personal property (such as cash and stock); and (3) tangible personal property.

Domicile is the geographic location of a person’s permanent legal residence.  A person’s domicile is the place he or she intends to use as his or her dwelling for an indefinite period.  It is the place to which the person intends to return.  A person’s intention regarding domicile is determined by his or her actions, such as where the person votes and where he or she pays state income taxes.  An individual can have only one domicile.

The law of a person’s domicile generally determines the disposition of intangible and tangible personal property, even if located in different states.  The disposition of real estate, however, is controlled by the jurisdiction in which it is located.  Accordingly, ancillary probate or administration will be required if a decedent dies owning real property outside of his or her state of domicile.

The doctrine of renvoi is a legal doctrine which applies when a court is faced with a conflict of law and must consider the law of another jurisdiction.  The doctrine of renvoi is the process by which the court adopts the rules of a foreign jurisdiction with respect to any conflict of law that arises.

The US does not accept the doctrine of renvoi.  The US treats choice of law in matters of inheritance based upon the location and domicile of the decedent as discussed above.  For real property, the law of the location of real property governs.  For intangible and tangible property, the law of the decedent’s domicile applies.

Some states have a comprehensive choice of law statute that considers issues such as revocation and interpretation of testamentary dispositions and the exercise of powers of appointment.  Principles of conflict of laws provide guidelines to determine whether a court of the forum jurisdiction will apply its own laws or the laws of another jurisdiction to a dispute.  The choice of law question is different from the question of whether a court has jurisdiction and requires a determination of what law to apply to a given issue.

States without choice of law statutes apply a reasonableness or fundamental fairness analysis by analysing contacts, such as length of residence, physical location of assets, domicile and intention.  The traditional conflict of law approach turns to the law of the domicile to determine succession to immoveable property and tangible personal property and the law of the situs of real property.  A choice of law analysis requires the court to weigh and balance the policies of the competing jurisdictions and the interests that those jurisdictions have in the application of their respective laws at issue.

Another issue that arises when a decedent dies owning foreign property is the risk of double taxation.  As noted in the answer to question 5, when a US citizen dies owning property in a foreign country, the property in the foreign country will be subject to US estate taxes.  The US currently maintains estate tax treaties with 15 countries (namely, Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, South Africa, Switzerland and the United Kingdom), and an income tax treaty with Canada, which contains estate tax provisions.  These treaties can ameliorate the effect of any such taxes.

There are two main reasons an individual should make a Will: (1) to name a guardian of any minor child; and (2) if he or she (a) has assets in his or her sole name, and (b) would like his or her wishes, rather than the relevant laws of intestacy, to govern the disposition of those assets at death.  The statutory requirements for executing a valid Will differ by state, but a person generally must be over age 18, of sound mind and under no apparent duress or undue influence.  As noted in the answer to question 12, if an individual should die without a Will, the distribution of his or her estate will be subject to the intestacy laws of the state of his or her residence (except for real property, the disposition of which under intestacy is determined by the laws of the jurisdiction in which the property is physically located), regardless of the decedent’s wishes.  In addition, the process of administering an estate of a decedent who died without a Will is a more arduous process than the administration of a testate estate.  If a non-resident owns US-situs real property outright, his or her foreign Will that dictates the disposition of the real property might not be honoured by a court in the state where the property is located (or the probate thereof may be complicated by the existence of the foreign Will, causing delay).  As such, the non-resident may wish to consider executing an American Will to dispose of such property at death to ensure that it is distributed in accordance with his or her wishes.  However, see the answer to question 5 above, for a discussion of the estate tax consequences of a nonresident directly owning US-situs property.

The estate of a deceased individual who has left a Will is administered through a process known as probate.  Administration is the process by which a deceased individual who did not leave a Will is administered.  Probate and administration are court-supervised processes through which a decedent’s assets are collected, debts and expenses of administering the estate are paid, and remaining property is distributed to beneficiaries according to the terms of the decedent’s Will, or, if the decedent died without a Will, according to the intestacy statute of the state or states in which the property is located.  A court-appointed individual, called an executor or administrator or personal representative, is responsible for administering the decedent’s estate.  Typically, a decedent’s Will names the executor or personal representative, while an administrator is chosen by the court where no Will exists or where no executor is effectively appointed pursuant to the terms of the Will.

Probate or administration occurs in the state where the decedent was domiciled at death, as well as in any states in which the decedent owned real or tangible personal property.  Generally, the law of the state where the decedent was domiciled at death governs the disposition of intangible property.  The disposition of real or tangible personal property, however, is governed by the law of the state in which such property is located.  Where such property is located in multiple states, ancillary probate or administration may be required.

Yes, US tax law and the laws of the various states and other jurisdictions within the US recognize a wide variety of trusts, both revocable and irrevocable, private foundations, both operating and grant-making, and family limited liability companies (FLLCs) and family limited liability partnerships (FLPs).  Generally, wealth transfer planning for US clients will involve use of some or all of these structures.

Domestic trust structures, including trusts with a charitable component, are created pursuant to the governing law of a state or other jurisdiction of the US.  The various states compete against each other to provide favourable trust law (including the extension or repeal of the common law rule against perpetuities, the limiting of beneficiaries’ rights to receive information on trust assets, and the creation of favourable laws relating to trustees and protectors) and tax law to attract trust business.  Generally, the creation of a domestic trust does not require the filing of the trust instrument with any governing authority or regulator, and the trust’s existence and terms may remain private.  If a US gift tax return is filed to report a gift or sale to a trust, it is common to include a copy of the trust instrument with the return.  US gift tax returns are confidential and not subject to public examination.  US income tax returns that may be required for domestic trusts are likewise confidential.

As in the case of trusts, domestic private foundations, FLPs and FLLCs are created pursuant to the governing law of a state or other jurisdiction of the US; and the various states compete against each other to provide favourable partnership and corporate law applicable to these entities.  Private foundations may be formed as a trust or as a corporation (the latter provides additional flexibility and less court oversight), and in general, the creation of a private foundation or FLP or FLLC requires the filing of a certificate of incorporation or of limited partnership with the office of the Secretary of State of the chosen state.  Annual tax reporting must be made to the IRS and, depending upon the chosen state, may be required to be made to the state.  Annual information returns filed by a private foundation with the IRS are public documents.  Annual income tax returns of FLPs and FLLCs are confidential.

1. Generally, the creation of a domestic trust does not require the filing of the trust instrument with any governing authority or regulator, and the trust may remain private, subject to a few exceptions. If a US gift tax return is filed to report a gift or sale to a trust, it is common to include a copy of the trust instrument with the return. US gift tax returns are confidential and not subject to public examination.  US income tax returns that may be required for domestic trusts are likewise confidential.  Similarly, annual income tax returns of FLPs and FLLCs are confidential.  However, during the administration of a testamentary trust, the trustee may be required to file information pertaining to the trust’s assets on the state death tax return.  The extent to which such returns are available to the public may vary from state to state.
2. Third parties that are associated with a domestic trust, such as banks, brokerage firms and insurance companies, can demand to see the trust document. Some states permit the Trustee to take steps to protect the beneficiaries’ privacy by furnishing a so-called certification of trust, incorporating relevant excerpts from the trust document, instead of the trust itself. The contents of the certification of trust vary depending on the state.
3. The beneficial owner of residential real property held in a domestic trust or FLLC also can remain confidential, subject to certain exceptions. Generally, the documents that are available to the public that pertain to the transfer of the residential real property to the domestic trust or FLLC include only the name of the legal entity. However, in certain regions throughout the US (notably states and municipalities with high-value residential real property), the identity of the beneficial owner of residential real property must be disclosed upon the purchase by an FLLC of residential real property where the total purchase price exceeds $300,000, the purchase of the residential real property is made without obtaining financing from a financial institution and any portion of the purchase price is made using currency, cashier’s check, certified check, traveller’s check, personal check, business check, money order in any form, funds transfer, or virtual currency.  (The disclosure requirements do not apply to purchases through a trust.)
4. The confidentiality of the beneficial ownership of FLLCs is under attack. In late 2019, New York State enacted a law requiring the disclosure of the individuals who ultimately hold the beneficial ownership of an FLLC that purchases or sells certain residential real property interests. It remains to be seen whether other states will follow suit.  And as part of anti-money laundering provisions enacted in early 2021, newly-formed corporations and limited liability companies (including FLLCs), unless specifically exempt, will be required to file disclosure reports with the government identifying the beneficial ownership of and related information for those companies.  Existing corporations and LLCs have two years after final regulations are issued by the US Treasury Department (expected January 2022) within which to comply with the legislation’s reporting requirements.  Failure to accurately file can result in significant civil penalties and possible criminal liability.  Trusts are not included in this legislation.
5. Private foundations are required to file annual information returns with the IRS. These are publicly available documents. However, the names and addresses of contributors are not required on the return and can remain confidential.
6. In addition to many of the income tax treaties entered into between the US and foreign countries (see question 4), which provide for information sharing between the contracting parties, the US has also entered into tax information exchange agreements with several countries, including Aruba, Antigua and Barbuda, Bahamas, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Netherlands Antilles, and Panama.

The US Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions maintaining financial accounts for US persons to report certain account information to the US tax authorities.  The US has entered into agreements with various foreign countries to facilitate the implementation of FATCA.

Domestic trusts are generally either ‘grantor trusts’ or ‘non-grantor trusts.’  Grantor trusts are trusts that are disregarded for income tax purposes, so that all items of income, gain, expense and loss are attributable to the grantor thereof and not to the trust.  To be a grantor trust, the trust must contain certain provisions that the IRS deems indicative of grantor trust status (or be administered in a way that confers grantor trust status, such as, for example, the grantor or the grantor’s spouse serving as trustee).  Grantor trust status may confer beneficial treatment upon a trust in that all gains in the trust are taxed to the grantor and not to the trust, thereby allowing the trust to grow tax-free while it remains a grantor trust.  There are ways in which grantor trust status may be turned off during the grantor’s life, so that future earnings are taxed to the trust.  If not turned off previously, grantor trust status ends upon the grantor’s death.  Non-grantor trusts are taxed on their income and gains, although distributions from a non-grantor trust to a beneficiary generally carry out distributable net income (DNI) to the beneficiary, so that such income becomes taxable to the beneficiary, not the trust.  Because trust tax brackets are more compressed than those for individuals, carrying out DNI to a beneficiary may result in a lower tax than if the income were taxed at the trust level.

Generally, private foundations are required annually to pay out an amount equal to at least 5% of their assets for charitable purposes, which includes, for grant-making foundations, grants to public charities.  In addition, private grant-making foundations must pay an excise tax of 1.39% on net investment income.

Single member LLCs are not required to file US income tax returns; their income is taxed to and reportable on the income tax return of their member.  However, single member LLCs owned by foreign persons must file an information return with the IRS when certain reportable transactions (such as capital contributions, withdrawals or sales) occur.  Multimember FLPs and LLCs are required to file US income tax returns and are subject to US income tax on their earnings; generally, their income is passed out to their partners or members.  Certain non-corporate taxpayers, including multimember FLPs and LLCs, may deduct up to 20% of their ‘qualified business income’ (generally, domestic business income from a ‘qualified trade or business’), subject to certain limitations in calculating their taxable income.

Foreign trusts are recognized but are disfavoured for US beneficiaries or grantors.  There is a heavy reporting burden for US Persons who establish or are beneficiaries of a foreign trust.  Foreign private foundations are recognized but are taxed differently depending on whether they are charitable foundations or are privately-owned.

The US Person settlor of a foreign trust is taxed on all the trust’s income and capital gains.  For foreign trusts that are not taxed to the settlor, income and capital gains must be distributed each year (and are subject to tax if distributed to a US Person).  Any income and capital gains not so distributed accumulate and are subject to punitive tax and interest charges if ultimately distributed to US Persons.  Income earned by certain foreign entities held in a foreign trust are taxed currently to the US beneficiaries, even if trust income is not itself taxed currently to US Persons.

If a foreign private foundation is considered a charitable entity, it is generally not subject to US taxation.  If it is considered privately-owned by a US Person, a US Person owner may be taxed on the private foundation’s income as though the foundation were a corporation.  No income tax charitable deduction is permitted for contributions by a US Person to a foreign private foundation.  A charitable contribution to a foreign private foundation is deductible against estate and gift taxes in certain circumstances.

Irrevocable trusts set up by a settlor for third parties are generally protected against the creditors of the settlor if the settlor no longer owns the property and no longer controls the beneficial enjoyment thereof.  In such cases, upon transfer into the trust, the settlor no longer has power to use the trust assets, and, in the absence of fraud, the settlor’s creditors (other than, in certain states, the settlor’s divorcing or widowed spouse) generally cannot reach the trust assets if the settlor has given up complete control.

A self-settled spendthrift trust is a type of irrevocable trust that provides the settlor with protection from creditors but does not require the settlor to give up total control.  Under a self-settled spendthrift trust, the settlor can be a beneficiary and retain certain controls, such as the ability to direct investments.  Once an asset is transferred to the trust, the settlor’s creditors have a limited period within which to challenge the transfer and assert a claim against the asset.  If the creditor fails to do so, the asset is protected.  Self-settled spendthrift trusts currently are permitted in several states.

Irrevocable trusts can also provide asset protection for beneficiaries.  A trust agreement may provide that the beneficiary’s interest is purely discretionary and can include a spendthrift provision that prevents creditors of the beneficiary from making a claim against the beneficiary’s interest in the trust.  However, once trust assets are distributed to the beneficiary, the assets are subject to the claims of the beneficiary’s creditors.

Assets can be held and managed for minor children and/or grandchildren by a custodian or a Trustee.

Under the Uniform Transfers to Minors Act (UTMA), a person can open a custodial bank or brokerage account for the benefit of a minor child.  The assets in an UTMA account are managed by a designated custodian and distributed to the child when he or she attains the age of 18 or 21, depending on the state and the donor’s preference.  A UTMA account for a child that is under the age of 19 or a full-time student under the age of 24 and holds unearned income above $2,300 (for 2022) is taxed at the ordinary and capital gains rates applicable to trusts and estates.

Assets can also be transferred in trust for the benefit of a minor child or grandchild.  Most standard trust arrangements will work, but some are more tax advantaged than others.  For example, certain trusts allow the donor to make gifts that qualify for the annual exclusion.  One type of trust that qualifies for the annual exclusion requires that each beneficiary receive (a) notification of any contribution made to the trust, and (b) is given the opportunity to withdraw all or a portion of his or her share of the contribution (a ‘Crummey trust’).  Another type of trust gives the minor child the right to withdraw the assets of the trust upon attaining the age of 21 (a ‘2503(c) trust’).  Under either trust structure, if the child chooses not to exercise his or her right to withdraw the assets within a specified period, the assets can remain in trust until some later date (designated by the settlor of the trust).  Yet another type of tax-advantaged trust can make use of the settlor’s GST exemption, thereby sheltering assets from transfer tax for multiple generations.  The taxation of income generated by assets held in trust varies based on the type of trust and the way in which it is structured.

Yes, individuals are advised to execute documents to deal with both medical and financial decisions in the event of mental or physical incapacity.  The names and forms of these documents differ by state, but the concepts are the same.  The first document, often referred to as a ‘Living Will’, allows an individual to provide specific instructions about his or her medical treatment in the event of incapacity where death may be near; for example, an individual can direct that he or she does not wish to have a feeding tube inserted to be kept alive.  The second document, often referred to as a ‘Health Care Proxy’, allows an individual to appoint someone to make medical decisions on his or her behalf (to the extent not already provided for in the Living Will) if he or she is unable to do.  Finally, a durable power of attorney is recommended to name an agent to act on a person’s behalf with respect to his or her financial matters.  Some states require that this document be effective immediately, but most states permit the principal to direct that the powers granted by the document become effective only upon the principal’s incapacity.  Under either scenario, a durable power of attorney remains effective during the principal’s incapacity (unless otherwise specified) and terminates at his or her death.

Individuals in the US commonly establish private grant-making foundations, private operating foundations, public charities, and supporting organizations, which are tax-exempt charitable organizations typically structured as either charitable trusts or non-profit corporations.  Individuals may also establish split-interest trusts, which are trust arrangements that allow individuals to make charitable contributions of property, while retaining (or transferring to non-charitable beneficiaries) a temporal interest in the property transferred.

Private grant-making foundations are non-profit organizations primarily funded by one donor, family or business.  The private foundation’s endowment is invested to generate returns, and the foundation uses its endowment to fund its operations and to make grants to other charitable organizations chosen by the foundation’s governing body.

Private operating foundations are private foundations that directly conduct charitable activities.  Examples of private operating foundations include certain museums, zoos, and libraries that do not receive substantial support from donations by the public.

Public charities are publicly supported, in that that they receive significant support in the form of contributions from government units and/or the general public.  Public charities make grants to other charitable organizations and directly provide charitable services.

Supporting organizations are charitable organizations that support one or more public charities by providing them with financial resources and/or conducting charitable activities that the public charities would otherwise have to undertake themselves.

To establish a private grant-making foundation, private operating foundation, supporting organization, or public charity, an individual must first establish a legally recognized trust or corporation in the state in which the charitable entity will be located.  Then, to receive federal tax-exempt status, the individual must apply for recognition of exemption from the IRS.

Split-interest trusts are trust arrangements in which an individual retains (or transfers to non-charitable beneficiaries) either an income interest for life or a term of years or a remainder interest in the trust property, while passing the other trust interest to a charitable organization.  The individual may receive income, gift and estate tax charitable deductions for the present value of the property that is expected to pass to charity.  To establish a split-interest trust, an individual need only create a legally valid trust arrangement, but there are strict rules regarding the language required in the Trust Deed.

There are no current tax policies or approaches effective for the 2022 tax year that take account of the COVID 19 pandemic.  Furthermore, there are no current provisions in the tax laws taking account of involuntary presence in the U.S. due to pandemic travel restrictions.

President Biden has been championing a ‘Build Back Better’ framework involving significant investments to combat climate change and expand certain social programs.  The current version of the bill has passed the U.S. House of Representatives but will likely emerge from the Senate with considerable changes.  As currently drafted, the bill would impose a high-income surcharge equal to 5% of a taxpayer’s adjusted gross income in excess of $10 million ($200,000 for a trust), as well as 3% of a taxpayer’s adjusted gross income in excess of $25 million ($500,000 for a trust).  The bill would also expand the SALT tax deduction cap from $10,000 to $80,000.