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  1. Phil,

    Interesting post on a very interesting topic. There’s a huge amount one could say, but I’ll just toss out a handful of observations:

    1. The corporate structure (whereby the foreign investor forms a foreign corporate holding company and possibly a US corporate holding company subsidiary to hold the property) is, of course, very effective for preventing imposition of the US estate tax, but inefficient from an income tax perspective, since long-term capital gains rate are not available on exit and there may be a second level of tax (either a dividend withholding tax or a branch profits tax) on operating income.
    2. The irrevocable trust structure is an absolute home run, in the right circumstances. If the client is willing to accept the terms that make it work, there is a clear defense against estate tax inclusion and the income tax consequences are the same as with individual ownership. The only problem (and it’s a big one) is that clients seem very rarely willing to accept the terms that are needed to make it work. Even if they accept that can’t have any of the trust value, they still want control (which they can’t have) over who enjoys that value, or when they enjoy it. Any control whatsoever results in estate tax inclusion.
    3. I like (and have recommended) the approach of using term insurance to mitigate the risk of the estate tax. If the property is expected to appreciate significantly, the cost of the term insurance may be substantially less than the hoped-for income tax savings. Of course, this depends on the age, health, etc of the particular investor.
    4. I absolutely agree about the uncertainty of using one or more partnerships to hold the property. We simply don’t have clear rules for when, or whether, we “look through” a partnership for estate tax purposes. (We have the same problem for income tax purposes as well, see e.g., RR 91-32, which is currently in litigation, but that’s a topic for another day.) Having said that, there’s nothing wrong with some uncertainty if the client understands the risks. For example, suppose the client is unwilling to do what’s needed to implement the trust structure, and prefers the estate tax risk to the income tax disadvantages of holding the property through a corporate structure. I would urge the client to purchase term insurance, as suggested in your post, but I don’t see why he couldn’t hold through a partnership (or two) as well. In the event of an untimely demise, I’d still like to have an argument against imposition of the estate tax. I’d also like the client to be able to give away interests in the partnership during his lifetime. It should be possible to do so with no gift tax.
    5. I like the idea of using debt (nonrecourse debt, specificially) to reduce the value of the property that may potentially be subject to the estate tax (potentially along with other approaches, such as insurance and perhaps a partnership or two). For example, if I’m buying a $10 million property (I should be so lucky!) and don’t need bank financing, I might supply $6,000,000 with nonrecourse financing from, say, my BVI company to reduce the value to $4,000,000. But if I get greedy and try to finance the entire $10 million with NR debt, I’d have trouble defending the “debt” as real debt for tax purposes.

    Thanks for such an interesting post! Would love to hear your thoughts on the above, if you have the time.

  2. Couldn’t someone abroad simply get all the assets in other people’s names as per the legal process in a foreign country, don’t tell the US embassy, and give their SS check to charity until the Social Security Administration finally sends out someone to see if that person is still alive in (London etc.). I know the procedure because I know a guy who works for the SSA and he told me.

    So someone dies at 85, send off their SS check to the Isaac Brock Society or some other use, and when they get to around 100, the SSA starts to question if the person is still alive? Not sure about FATCA data, but a dead person’s bank account wouldn’t be unheard of.

    So the IRS catches wind about this situation 15 years later, what are they really able to do about it in today’s world? I believe as foreign banks start sending out 1099s and generate their own negative publicity, FATCA blowback will become more apparent.

    Are they going to try to charge people abroad with Defrauding the US Government because they didn’t want to pay US tax only their local taxes?

    Or is the US government going to hire a obituary specialist to track deaths etc.?

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