Wealth Preservation, Tax Planning and . . . Sports?

Wealth Preservation, Tax Planning and . . . Sports?
by Asher Rubinstein

Sports isn’t something we usually write about on a blog dedicated to matters of wealth preservation and taxation.

Say what you will about LeBron James signing with the Miami Heat, his decision may have been based as much on taxation as on proximity to the nightclubs of South Beach.  By moving to low-tax Florida from high-tax Ohio, it has been estimated that $11 million more may remain in Mr. James’ pockets, rather than going to taxes.  I’ve been to Cleveland, and it has its charms, but saving $11 million from taxes is on par with sunshine and palm trees as reasons to move south.

Regular mortals of more modest height may also avail themselves of tax planning maneuvers to keep more wealth for themselves and their families.  We can advise on tax-compliant structures and strategies to minimize income tax, capital gains tax and estate tax.  And if, like LeBron James, moving somewhere new may minimize your tax bite, we can advise on where to go, including expatriationContact us to discuss your situation.

Expatriation to Avoid Taxation: New "exit tax" is a deterrent, but there are legal ways to minimize the exit tax

Expatriation to Avoid Taxation: New “exit tax” is a deterrent, but there are legal ways to minimize the exit tax
by Asher Rubinstein, Esq.

We’ve noticed an interesting trend lately: more and more clients are asking about EXPATRIATION options.  They feel that they are paying too much in taxes, their taxes will keep increasing, and the benefits of U.S. citizenship or a green card just aren’t worth the burden of taxes.   Cognizant that many foreign countries are excellent places to live, and don’t have tax regimes as onerous as that of the U.S., clients envision a low-tax lifestyle in Europe, the Caribbean or elsewhere.

Renouncing U.S. citizenship is relatively easy.  All that is required is a formal declaration and surrender of passport.  But the tax consequences may be immediate and severe.

If your total world-wide assets are more than $2 million, or your average annual tax liability was more than $139,000 per year during the past five years, then:

The IRS will deem that you sold all of your appreciated assets at fair market value, on the day before you expatriate, and will impose a tax on that deemed sale.  In other words, expatriation will result in an immediate capital gains realization on all your appreciated assets, also known as a “mark to market” tax.  Let’s make it clear:  you will pay tax as if you sold your home, your bank and brokerage accounts, and all of your appreciated property, even if none of these assets are actually sold.  Moreover, the tax applies to worldwide assets, not only those within the U.S.  Consider it an “exit tax” for renouncing U.S. citizenship.

But it’s not all bad.  The first $600,000 in gains from the deemed sale are not taxed.

What if you expatriate, leave the country and don’t pay the tax?  Have you escaped the IRS?  No.  If you don’t pay the exit tax, then the IRS will take the tax from any assets you leave behind.  The IRA or 401(k) that still sits at a US brokerage house, while probably exempt from the reach of a private creditor under state law, would be seized by the IRS under federal law and used to pay the exit tax that you thought you escaped.

Moreover, if you expatriate, the new law will tax any gift or bequest you make to any beneficiary in the U.S.  The highest gift or estate tax rate will be imposed, on the recipient of your gift or bequest.  You also lose the exemption from gift tax ($1 million) and the exemption from estate tax ($3.5 million).

For some clients, expatriation may remain a viable option even after the new exit tax.  We can help you investigate whether it makes legal and financial sense to expatriate.

We can also suggest tax-compliant strategies to help mitigate or eliminate expatriation taxes.  One such strategy is the exchange of appreciated assets for a foreign deferred variable annuity (DVA) policy.  After the exchange, you will own an annuity policy with a value equal to the assets which were exchanged.  Thereafter, those assets are now owned by the annuity company, and any future appreciation will not be taxable to you.  The annuity policy would not be subject to the new expatriation tax, because the annuity policy, like a life insurance policy, is not an appreciated asset.  Thus, if you exchange appreciated assets for a DVA prior to expatriation, your new annuity policy is not taxable, and future appreciation of the underlying assets is not taxable either.

Please contact us to discuss expatriation options and tax planning strategies.



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