Issues in Developing Legal Structures for Global Families
By Jonathan M. Forster
and Jennifer M. Smith,
Greenberg Traurig, Tysons Corner Office
View or download the PDF version of this Alert.
In our shrinking world, advisers often deal with the “global economy”
when advising their clients on investments and wealth management. Now, advisers
must also regularly deal with the “global family,” the affluent client whose
family and wealth extend far past the boundaries of the “home” country.
Family members often live around the world, and international investment
allocation has become standard. Consequently, financial and legal advisers
constantly face the challenge of designing structures that manage and preserve
the family’s assets while complying with the local laws of multiple jurisdictions.
The complexity involved in such structures can create numerous pitfalls
for the uninformed adviser. Thus, the following provides a general overview
of the information and issues that advisers should consider when representing
a “global family.”
|"Now, advisers must also regularly
deal with the 'global family,' the affluent client whose family
and wealth extend far past the boundaries of the 'home' country."
I. Background Information
Certainly, advisers must obtain basic information regarding their global
family, including (A) the current domicile, residence and citizenship of
the family members and (B) the location and nature of the family’s assets
(e.g., interests in operating businesses, real property, etc.). Most advisers
and financial institutions will require this information based on current
“know your customer” regulations. However, this information is crucial to
determining the potential tax and non-tax issues that may affect the design
and implementation of any proposed structure. Specific information regarding
a family’s assets and investments is also critical. Depending on applicable
law, the location of an asset may subject its owner to certain taxes or
restrict its transfer, particularly when real property is involved. The
nature of the asset may also affect the structure’s design. For example,
many financial institutions are reluctant to hold active operating businesses
and may require special business operation or indemnification provisions
in order to accept the risk inherent in such assets.
II. Tax Considerations
Numerous international tax issues arise when planning for a global family.
For example, many non-U.S. families seek the stable markets and significant
investment opportunities provided in the United States. Accordingly, a basic
understanding of the U.S. tax consequences of U.S. investments by non-U.S.
individuals is beneficial. Advisers should also have knowledge of the general
taxation principles frequently applied in other countries, in order to anticipate
issues that may arise in them.
A. U.S. Federal Income and Transfer Taxation
The United States imposes (1) income tax on the worldwide income of its
citizens and residents, and (2) estate, gift and generation-skipping transfer
(“GST”) taxes on the worldwide assets of its citizens and domiciliaries.
The application of these taxes to an individual who is not a citizen, resident
or domiciliary of the United States (a nonresident alien, or “NRA”), however,
is more limited in scope, and follows these basic rules:
1. Income and Capital Gains Tax. The United States taxes NRAs
only on income derived from U.S. sources. NRAs earning income from a U.S.
trade or business are taxed at the regular graduated rates applied to
U.S. persons. On certain passive (non-business related) income from U.S.
sources, NRAs are taxed at a flat rate of 30% (or possibly a lower income
tax treaty rate). This type of income generally includes certain interest
payments, dividends, rents, royalties, etc. However, the United States
does not tax NRAs on gain realized from the sale of U.S. assets other
than U.S. real property.
2. Transfer Taxes.
a. Estate Tax. At death, NRAs pay U.S. estate tax only on assets
deemed to have a U.S. situs, including real or tangible personal property
located in the United States or shares of stock in a U.S. corporation.
b. Gift Tax. NRAs normally pay U.S. gift tax only on gifts of
real and/or tangible personal property located in the United States at
the time of the gift. Gifts of intangible property, like shares of a U.S.
corporation, are not subject to gift tax.
c. GST Tax. A generation-skipping transfer made by a NRA is
subject to tax only if the transfer is also subject to estate or gift
tax, or if the transfer is from a trust and the NRA’s transfer to that
trust was subject to estate or gift tax.
|"Income and/or transfer tax consequences
may occur in many countries upon the creation and implementation
of a global family’s structure, based on the family’s domicile,
the location of the assets, or the jurisdiction of the structure."
With regard to U.S. transfer taxes, NRAs are taxed at same rates as U.S.
B. Taxation in other Countries
Income and/or transfer tax consequences may occur in many countries upon
the creation and implementation of a global family’s structure, based on
the family’s domicile, the location of the assets, or the jurisdiction of
the structure. Some of these tax issues include:
1. Inheritance and Wealth Taxes. Several jurisdictions have
an inheritance tax, rather than an estate tax, where the recipient of
the inherited property, and not the decedent’s estate, is taxed on the
value of such property. Also, many countries impose an annual wealth tax,
calculated on the total net value of an individual’s assets, including,
in some cases, the rights held by the individual as owner or beneficiary
of certain receivables (i.e., the right to trust income).
2. Taxation Based on Degree. In some cases, transfers
to a structure, rather than directly to individual family members, may
result in higher tax liabilities. Countries that impose an inheritance
tax may determine the rate of tax by the heir’s degree of relationship
to the decedent. Thus, bequests to an unrelated trustee, rather than a
family member, would likely be taxed at the country’s highest inheritance
3. Imposition of Tax. Income, inheritance, or wealth taxes may
be imposed based on concepts of citizenship, residency and/or domicile,
and countries have varying definitions for each, depending on the nature
of the tax and to whom it applies (i.e., an individual, a corporation,
etc.). For example, some countries with an inheritance tax look to the
domicile of the beneficiary, not of the decedent, to determine its application.
4. Immediate Gain Recognition. Depending on the applicable jurisdiction,
a transfer of property to a structure, such as a revocable trust or wholly
owned corporate entity, may trigger an immediate recognition of, and tax
on, any unrealized appreciation.
5. Application of Tax Treaties and Tax Credits. The application
of an income or estate tax treaty may significantly lower the amount of
tax due on certain transfers or the receipt of certain types of income.
For example, under the U.S.-German income tax treaty, a German’s receipt
of U.S. dividends will generally be taxed at a rate of 15%, rather than
the 30% rate normally applicable to NRAs. Even if a treaty does not apply,
countries may offer tax credits for taxes paid to another jurisdiction,
depending on the source of the income, the rate or type of tax paid, etc.
III. Non-Tax Considerations
|"While tax considerations have
a significant impact on the design of a proposed structure, advisers
must also consider several non-tax issues, particularly when a structure
involves multiple countries."
While tax considerations have a significant impact on the design of a
proposed structure, advisers must also consider several non-tax issues,
particularly when a structure involves multiple countries. Failure to address
and resolve these issues may actually result in unintended tax consequences,
or worse, the failure of the structure to hold and protect the global family’s
A. Conflict of Laws
The potential for conflicts of law arises whenever multiple jurisdictions
are involved in the planning process, and may include the following:
1. Failure to Recognize Trusts. The trust is a typical estate
planning structure in common law jurisdictions like the United States
and England and is often used as a means to avoid probate proceedings
with regard to real property located outside of the owner’s domicile.
However, most countries governed by civil law regimes (including most
of Latin America) do not recognize trusts as separate legal entities,
which may consequently expose trust assets to a creditor’s claims. For
example, certain civil law countries deem property placed in trust as
owned personally by the trustee, allowing the trustee’s creditors, including
the heirs of an individual trustee, to demand satisfaction of their claims
from the trust property.
2. Forced Heirship. The laws of succession in most civil law
countries give lineal descendants and certain ancestors rights to a
predetermined share of a decedent’s estate. Conflicting dispositions
under a will, trust agreement or restrictive shareholders agreement may
violate these rights, provoking a forced heir to seek legal enforcement
of his or her entitlement.
3. Marital Property. Certain countries have marital property
regimes that allow a spouse to dispose freely of only his or her separate
property. Forced heirship and marital property regimes vary from country
to country, and when taken as a whole, may significantly limit a decedent’s
free disposition of property.
4. Treatment of Entities. Different countries may classify an
entity differently for income and/or estate tax purposes, resulting in
disparate tax consequences. For example, the United Kingdom treats a U.S.
limited liability company as a separate taxable entity for income tax
purposes, even though the United States may tax it on a pass-through basis.
B. Asset Protection
In addition to concerns about forced heirship or trust recognition, families
concerned about potential creditors need a structure in a jurisdiction with
well-developed asset protection laws. Jurisdictions will vary as to the
frequency and ease with which creditors can satisfy a grantor’s debts with
trust assets or attach corporate assets to settle a shareholder’s personal
C. “Blacklisted” Jurisdictions
Some countries have enacted legislation designating “blacklisted” jurisdictions.
These are typically low or no-tax jurisdictions, such as Bermuda, the Bahamas
and Liechtenstein. Depending on the country’s legislation, families with
structures in blacklisted jurisdictions may have additional disclosure and
reporting obligations, or be subject to additional taxes and penalties based
on the value of assets held in those jurisdictions.
D. Family Governance
Any structure established for a global family must consider the family’s
desires regarding control, business succession and current and future family
participation in the management of the structure.
Clearly, planning for a global family is a complex undertaking, and the
above is certainly not an exhaustive list of the potential issues and challenges.
Also, advisers must always consult with local counsel in the applicable
jurisdictions to ensure they have accurate advice regarding the tax and
other consequences of any proposed structure. However, a general understanding
of these concepts will help an adviser spot issues and ask questions that
facilitate the design and implementation of an appropriate structure for
the global family.
© 2004 Greenberg Traurig
For more information, please review our Tax Practice description, or
feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.