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Al W King III TEP

Co-Founder, Co-Chairman and Co-Chief Executive Officer
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South Dakota Trust Company LLC (SDTC) and SDTC-related companies

Trusts for NRAs investing in the US

Al W King III on trust planning opportunities for non-resident aliens investing in the US

Non-resident aliens (NRAs) have viewed the US as a great opportunity for investing. US real estate, life insurance and securities have all become popular investment options for NRAs. All of these investment options need to be properly structured usually with trusts. 

 

Real estate

Many NRAs purchase real estate in the US for themselves and/or their families. USD42 billion of the total home sales in the US are to foreign buyers. US real estate is frequently purchased in a US dynasty trust or an offshore entity to minimise US estate taxes. The domestic dynasty trust also generally avoids any possible imputed rental income for use of the property by the beneficiaries, although the NRA grantor may have to pay rent if they also use the real estate. If the NRA purchases US real estate outright, they have only a USD60,000 US estate tax exemption for US-situs property. Consequently, they may need to purchase US life insurance to pay for the estate taxes owed on the real estate at their death.

 

Life insurance

US life insurance is purchased by NRAs for both investment and tax purposes. US life insurance is an exempt US-situs asset not subject to US estate taxes. Consequently, the proceeds from a life insurance policy paid by a US insurer on the life of a non-US individual is not deemed US-situs property for estate tax purposes. However, most domestic insurance companies require that the NRA have a tie to the United States to secure the insurance. Thus, a domestic trust, although not required to save US estate taxes, is frequently used to serve this purpose. If the policy is large enough and/or private placement life insurance is purchased, then the NRA frequently chooses a low-premium, tax-modern domestic trust jurisdiction. 

Generally, state premium taxes are imposed on all US life insurance premiums paid and are generally based on where the applicant for the insurance policy is a resident, domiciled or situated. Consequently, the US trust or limited liability company (LLC) that purchases the insurance policy on the NRA’s life would generally be subject to US state premium taxes. The four states with the lowest premium taxes for trusts and LLCs are Alaska, Delaware, South Dakota and Wyoming. 

 

Securities

Many NRAs are interested in investing in US securities as they have very favourable income taxes rates. For NRAs there are no income taxes on capital gains, income-tax-free ‘portfolio’ interest paid from US sources and very favourable US dividend rates; depending upon the country-specific treaty provisions.

It is important to note that if an NRA purchases US securities and owns them directly, a 40 per cent US estate tax might apply. One of the more common planning vehicles chosen by NRAs to plan for the 40 per cent estate tax on US securities is the US-situs foreign grantor trust (FGT). Usually, the grantor(s) choose modern domestic trust jurisdictions, such as Alaska, Delaware, Nevada, South Dakota, and Wyoming due to their trust protector, directed trust, privacy, tax and other modern trust statutes. These FGTs are generally revocable during the grantor’s lifetime. The grantor is typically the NRA and/or NRA’s spouse. The FGTs typically hold offshore entities that may own the NRA’s US securities. The US securities will not generally be subject to capital gains taxes unless the NRA is in the United States for 183 days or more during the calendar year. The NRA grantor(s) are usually the beneficiaries of these FGTs so that they are paid income and principal during their lifetimes. At the death of the NRA grantor(s), these FGTs are typically left outright or passed to another trust for the benefit of the descendants, usually the children. 

FGTs are especially popular with NRAs who are residents of countries subject to the risk of political instability and/or possible forced-heirship issues. These, NRAs usually prefer a US trust-situs for the FGT since the US will not be blacklisted or strong armed by the NRA’s resident country. Consequently, the FGT is a very powerful and popular option for these NRA with US securities. 

Consequently, the glass continues to be half full regarding international families with NRAs choosing the US as a favoured jurisdiction for investing as well as for trusts. Powerful investing opportunities with real estate, life insurance and securities combined with powerful trust laws, tax savings, asset protection and privacy all combine to make the US an attractive jurisdiction for NRAs.