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New York State Renews the Three-Year Clawback for Gifts

New York State Renews the Three-Year Clawback for Gifts

Generally, Federal estate and gift taxes are imposed on a person’s right to transfer property to another person during life or upon death.  State rules may differ from the Federal regime, imposing either an estate tax, inheritance tax, or gift tax or some combination of these taxes.  New York State limits its taxation to an estate tax on the transfer of property at the time of death.  There is no gift or inheritance tax.  But, as of April 1, 2014, gifts made by a N.Y. resident between April 1, 2014, and December 31, 2018, were clawed back into the taxable estate if the gifts were made within three years of death.  The clawback has been extended to cover gifts made through December 31, 2025.  Rusudan Shervashidze and Nina Krauthamer explain.

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Valuation – More Art than Science

Valuation – More Art than Science

In a recent case, the Tax Court was asked to evaluate two Old Masters paintings from the 17th century.  Sotheby’s provided the valuation for estate tax purposes on a gratuitous basis.  The appraised value totaled $600,000 for the two works.  The estate retained the same auction house to sell one of the paintings.  The sale price at auction was $2.1 million before buyer’s premium, and the auction took place within 34 months of the issuance of the appraisal report.  Kenneth Lobo and Nina Krauthamer explain why the court had no difficulty finding that the estate’s expert was not independent and that the subsequent sale was relevant

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Cross-Border Complexities: What You Need to Know Before Your Non-U.S. Client Invests in the U.S.

Cross-Border Complexities: What You Need to Know Before Your Non-U.S. Client Invests in the U.S.

When foreign tax counsel advises a client on a personal investment in the U.S., it is common for a U.S. tax adviser to comment on the scope of U.S. income, gift, and estate taxes.  Sometimes the investment is made through a trust and other times it is made directly.  In their article, Kenneth Lobo and Fanny Karaman answer questions raised in the context of fact patterns often used.

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Tax 101: Foreign Settlors, U.S. Domestic Trusts, and U.S. Taxation

Non-U.S. tax advisers to high net worth individuals are familiar, to some degree, with U.S. tax rules involving trusts, settlors, and beneficiaries.  While they may know that a grantor trust allows for income to be taxed to a grantor, they are not always conversant with the differences between U.S. income tax rules for grantors and the U.S. gift and estate tax rules that cause trust property to be included in the taxable estates of trust settlors.  Fanny Karaman, Kenneth Lobo, and Stanley C. Ruchelman explore the way these rules exist side by side – highlighting the differences, in the context of a nonresident, non-citizen settlor establishing a U.S. domestic trust for the benefit of an adult U.S. child wishing to acquire an apartment in the U.S.

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I.R.S. Issues Proposed Regulations Affecting Valuation Discounts for Gift and Estate Tax Purposes

For corporate tax purposes, the I.R.S. maintains the view that a transaction between a taxpayer and a disinterested party – meaning a person that does not have an adverse interest to a taxpayer because tax neither increases nor decreases as a result of a particular term agreed upon – is not the result of arm’s length bargaining and can be disregarded where appropriate.  Now, the I.R.S. proposes to expand that approach to estate plans. The proposal is embedded in regulations issued under Code §2704. As a result, commonly used tools may no longer be available to reduce gift or estate tax.  Minority ownership discounts and unilateral governance rights that disappear at death are valuation planning tools that are at risk because of the common goals of the participants. Fanny Karaman, Stanley C. Ruchelman, and Kenneth Lobo explain.

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A Concise Guide to Acquisition Vehicles for Purchase of U.S. Real Estate by Foreign Individuals

Question: How many ways are there to structure an investment in U.S. real property by a foreign person? Answer: Many. Nina Krauthamer describes five.

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Planning for Canadian Parents with U.S. Children

Published in Taxes & Wealth Management by Thomson Reuters, Issue 8-4: November 2015.

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An Englishman in New York – Tax Considerations for Foreign Individuals

The phrases “green card” and “U.S. citizen” have the ability to strike panic and even terror in tax advisors around the world. What inspires this fear? What tax challenges do foreign individuals face when they are present in the U.S. on a temporary, non-immigrant basis?

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Indian Investors Purchasing U.S. Real Estate – From a U.S. Point of View

Published in International Taxation, Volume 13, Issue 3: September 2015.

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Inadequate Gift Description – I.R.S. Tries for a Second Bite at the Apple

What constitutes adequate disclosure? This topic continues to be a source of dispute between taxpayers and the I.R.S. Sheryl Shah and Nina Krauthamer discuss the statute of limitations consequences when a taxable gift that is not “adequately shown.”

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Pre-Immigration Tax Planning, Part III: Remedying The Adverse Consequences of the Covered Expatriate Regime

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INTRODUCTION

Following our previous articles regarding pre-immigration planning and the expatriation rules applicable to covered expatriates (see here and here), this article considers some techniques for implementation before and after expatriation, with the objective to reduce the adverse treatment of the covered expatriate regime to the extent possible depending on the specific facts and circumstances of each individual.

For a Green Card holder, expatriating prior to becoming a long-term resident would eliminate the application of the covered expatriate regime. For a U.S. citizen (other than children under certain situations), the circumstances that will allow for a tax-free expatriation are more restrictive. An individual is considered a covered expatriate if he or she meets one of three tests. Pre-expatriation planning can eliminate the application of the covered expatriate regime for some individuals, while for others additional planning may be needed to reduce the unfavorable effect of the covered expatriate rules.

U.S. Holiday Homes - Top 10 Tax Issues to Remember

Published by GGi in International Taxation News, No. 3: Spring 2015.

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Guidance for Canadian Snowbirds

Published in The Bottom Line, December 2014.

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Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property – Part III

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INTRODUCTION

This is the final article in a three-part series that explains U.S. taxation under the Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”). This article looks at certain planning options available to taxpayers and the tax consequences of each.

These planning structures aim to mitigate taxation by addressing several different taxable areas of the transaction. They work to avoid gift and estate taxes, and double taxation of cross-border events and corporate earnings, while simultaneously striving for preferential treatment (e.g., long-term capital gains treatment), as well as limiting over-withholding, contact with the U.S. tax system, and liability. Often, such structures are helpful in facilitating inter-family transfers and preserving the confidentiality of the persons involved.

PRE-PLANNING

As with everything else, planning can go a long way when it comes to maximizing U.S. real estate investments. Here are a few questions to ask:

Investor Background

  1. Where is the investor located?
  2. Where is the investment located?
  3. What kind of business is the investor engaged in?

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part II

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This article examines the U.S. income, gift, and estate tax consequences to a foreign owner upon a sale or other disposition of U.S. real property, including a sale of real estate, sale of stock of a U.S. corporation, or a sale of a mortgage secured by U.S. real property.

In addition to (or sometimes in lieu of) rental income, many foreign investors hope to realize gain upon a disposition of U.S. real property. The Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”) dictates how gains are taxed from the disposition of United States Real Property Interests (“U.S.R.P.I.’s”). The law has a fairly extensive definition of U.S. real property for this purpose. Most significantly, the law provides for a withholding mechanism in most cases.

WHAT IS A U.S.R.P.I.?

A U.S.R.P.I. includes the following:

  • Land, buildings, and other improvements;
  • Growing crops and timber, mines, wells, and other natural deposits (but not severed or extracted products of the land);
  • Tangible personal property associated with the use, improvement, and operation of real property such as:
    • Mining equipment used to extract deposits from the ground,
    • Farm machinery and draft animals on a farm,
    • Equipment used in the growing and cutting of timber,
    • Equipment used to prepare land and carry out construction, and
    • Furniture in lodging facilities and offices.

  • Direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property;
  • Ownership interests other than an interest solely as a creditor, including:
    • Fee ownership;
    • Co-ownership;
    • Leasehold interest in real property;
    • Time-sharing interest;
    • Life estate, remainder, or reversionary interest; and
    • Options, contracts, or rights of first refusal.

Recapitalization of L.L.C. Interests and Issuance of Profit Interests Held to be Gifts in Estate Freeze

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Code §2701 is a provision which renders the transfer of a partnership or membership interest to a family member a gift. The tax typically applies in an “estate freeze” scenario, where one generation attempts to transfer assets which appreciate in value to another generation, thereby removing it from their estate for estate tax purposes. In its latest Chief Counsel Advice (“C.C.A.”), the I.R.S. held that a recapitalization of a limited liability company (“L.L.C.”) triggers a gift under Code §2701 in a case where a mother retained a right of distribution but transferred the gain or loss attributable to the L.L.C.’s assets to her sons. The I.R.S. held that the interest retained by the transferor (a distribution right on the existing capital account balance) was a senior interest, whereas the transferred interest held by the sons (the right to future gain of the L.L.C.’s assets) was found to be a subordinate interest. What is notable and most troubling here is that the interests transferred to the sons are so-called “profits interests,” issued for future services to be rendered to the L.L.C.

IN GENERAL

Code §2701 imposes special gift tax valuation rules when partnership or membership interests are transferred to family members. Family members covered under Code §2701 include the spouse of the transferor, any lineal descendant of the transferor or the transferor's spouse, and the spouse of any such descendant. In general, Code §2701 devalues interests of senior family members in order to increase the value of interests transferred to junior family members. Code §2701 generally applies to situations where the transferor retains a senior interest and transfers a subordinate interest to the transferee – such as when a parent keeps preferred shares and transfers common shares to family members.

Cross-Border Estate Planning: Canadian Parents of U.S. Children

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U.S. transfer taxes (U.S. gift, estate and generation skipping taxes) should be a concern to any practitioner creating an estate plan with U.S. links. The following article addresses U.S. estate tax consequences of a family comprised of Canadian citizen/resident parents with American children.

IN GENERAL

Transfer tax is imposed on the fair market value of the property transferred, reduced by any consideration received.

U.S. citizens, and non-U.S. citizen individuals that are domiciled in the U.S., are subject to the U.S. transfer tax system on global assets.

A person acquires a domicile in a place by living there, for even a brief period of time, without the presence of a definite intention to leave.

A facts and circumstances test is used to determine domicile. Factors include, e.g.:

  1. Statements of intent (as reflected, e.g., on tax returns filed, visa application, and similar evidence);
  2. Time spent in U.S. versus time spent abroad;
  3. Visa status (e.g., green card holder);
  4. Ties to the U.S. versus abroad;
  5. Country of citizenship;
  6. Location of employment, business, and assets;
  7. Other indicators such as voting, affiliations, membership, driver license, and similar items.

Residence without the intention to remain indefinitely will not constitute a domicile, and the intention to change domicile will not effect such a change unless accompanied by actual relocation.

New York State Makes Major Changes to Estate and Gift Tax Law

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New Exclusion Amount: Prior to April 1, 2014, an estate was required to file a New York State estate tax return if the total of the federal gross estate plus the federal adjusted taxable gifts and specific exemption exceeded $1 million (the “basic exclusion amount”) and the individual was either: (i) a resident of the state at the time of death or (ii) a resident or citizen of the U.S. at the time of death but not a resident of the state, whose estate includes real or tangible personal property located in the state. (Other rules apply to individuals who were not residents or citizens of the U.S., but who died owning real or tangible personal property located in the state.)

Recent N.Y.S. legislation has increased the basic exclusion amount as follows:

  • For individuals dying on or after April 1, 2014 and before April 1, 2015 - $2,062,500
  • For individuals dying on or after April 1, 2015 and before April 1, 2016 - $3,125,000
  • For individuals dying on or after April 1, 2016 and before April 1, 2017 - $4,187,500
  • For individuals dying on or after April 1, 2017 and before January 1, 2019 - $5,250,000

After January 1, 2019, the basic exclusion amount will be indexed for inflation from 2010, which should link the state exclusion amount to the federal amount.

The I.R.S. Extends the Time for Estate Tax Portability Election for Small Estates

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On January 27, 2014, the I.R.S. released Rev. Proc. 2014-18. This revenue procedure provides an automatic extension of time to file a late portability election for estates of the first to die of a married couple provided that certain requirements are met. “Portability” refers to the option of the surviving spouse to make use of any gift and estate tax exemption that was not used by the deceased spouse. Thus, if the executor missed the opportunity to elect portability, now is the time to take advantage of this election, as this opportunity will end on December 31, 2014.

BACKGROUND

In 2010, Congress amended §2010(c) of the Code to allow the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s unused exclusion (“D.S.U.E.”) amount toward the surviving spouse’s own transfers during life and at death.

Notice 2011-82, issued on October 17, 2011, provided preliminary guidance regarding the requirements to elect portability of the decedent’s D.S.U.E. amount. Notice 2012-12, issued on March 3, 2012, provided temporary (and limited) relief by, in general, extending the deadline to file an estate tax return (Form 706, Unified States Estate (and Generation-Skipping Transfer) Tax Return) for portability election purposes by six months if certain requirements were met. In June 2012, temporary regulations were issued that provided more detailed guidance on portability.

New York Estate Tax on Real & Intangible Property - When Intangibles Become Tangible

Published by the American Bar Association in the Real Property Trust & Estate eReport, February 2013.

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