DOMESTIC PROFESSIONALS MUST RESPOND TO
UNSETTLED TIMES IN SOUTH & CENTRAL AMERICA

By Richard S. Lehman, Esq., principal of Richard S. Lehman, P.A., Boca Raton, FL.
Posted: March 15-21, 2002
South Florida Business Journal

Unsettled times in Argentina, Venezuela, Columbia and other regions are leading to an "immigration of the wealthy". While racing to establish some sort of United States presence these people will need to take a lot of care and receive good professional advice if they are to avoid financial problems and delays.

Financial and legal professionals in South Florida would be well-served to understand these issues and provide a variety of services that will make the area a welcome haven for these individuals and businesses seeking a new start here.

If one immigrates to the United States or remains here for an extended period of time, the prospective immigrant is urged to seek a strong professional team that includes among others an immigration lawyer, a tax lawyer, a Certified Public Accountant and other professionals that can make a major difference in the ease which one obtains a desired immigration status and with the amount of accumulated wealth that can be preserved and protected from U.S. taxation.

From the tax lawyer's view, the main focus among many others, is to make sure that the wealth and income that has been built up outside the U.S. over the years is not taxed by the U.S. after arrival here. The best single way to avoid the pitfalls is to be sure one sees their professional advisors before and not after major steps have been taken.

Here are some important factors to take into account when it comes to taxes that effect immigrants.

First, there is a vast difference in the manner in which the U.S. will apply its income, estate and gift taxes to a would-be immigrant that is considered a "tax resident" and one that still has "non resident alien status". A tax resident will be subject to U.S. income taxes, estate taxes and gift taxes on a worldwide basis. On the other hand non-residents will generally only pay a United States income tax on income earned from United States sources and will pay U.S. estate taxes only on real property and tangible personal property situated in the United States; and selected intangible assets.

How does one distinguish between an alien who is a tax resident and the non resident alien? The definitions are different depending upon whether one is considering the U.S. income taxes or U.S. estate taxes. For income tax purposes a resident alien is a person whose immigration status is that of a permanent resident or a green card holder or a person that has a "substantial presence" in the United States for the year. An alien who is physically present in the United States for at least 31 days during the calendar year and a total of 183 days during the last three years meets the substantial presence test. For purposes of the 183-day requirement, each day present in the U.S. during the current calendar year counts as a full day, each day in the preceding year as one-third of a day, and each day in the second preceding year as one-sixth of a day. There are two less common ways of obtaining income tax residency, either by voluntary election or by the status that is given by virtue of a U.S. treaty with the individual's home country.

The definition of a resident for purposes of the Federal estate and gift taxes is completely different from the income tax definition. It is determined by the very subjective test of whether an immigrant is domiciled in the U.S. or in his or her home country until demise. Thus, domicile for estate and gift tax purposes is essentially a questions of an individual's intent. Because intent is necessarily a subjective inquiry, intent is inferred from objective actions and circumstances.

There is a big difference in an immigrant's United States taxes depending on exactly how he or she handles their assets, businesses and income before the change is made from non resident alien to that of a tax resident. We will look at certain pitfalls when it comes to income and gains and assets that may be subject to an estate tax.

Assume Mr. Santos from Buenos Aires has been collecting Argentinean paintings for over thirty years prior to his rushed immigration to the United States. Due to his expertise during this time he acquired a substantial art collection at a total cost of $500,000. Assume the value prior to his leaving Argentina was $10,000,000. If Mr. Santos became a tax resident in the United States on January 1, 2002 and sold his art collection on January 2, 2002 for $10,000,000 he would incur a U.S. capital gains tax on $9,500,000 worth of gain. Had Mr. Santos sold his collection on December 31, 2001 while still a non resident alien there would be no tax on this gain.

When it comes to estate tax planning, the client's objectives in the planning process must be understood. For some, it is as simple as reducing to the maximum extent possible United States gift, and estate taxes, while maintaining support for himself and his family. For others, objectives may include creditor protection, avoidance of statutory rights for surviving spouses, and probate avoidance.

To reduce one's estate that may be subject to a U.S. tax on death, certainly any gifts that an immigrant intends to give should be made while one is still a non resident alien to avoid U.S. gift tax. Depending upon the circumstances, it is often possible to transfer assets to creatively structured family trusts prior to residency to accomplish the goal of minimizing estate assets.

The above deals with only a few examples of the tax planning concerns for the would be immigrant. It is important to understand that tax planning for residency is not done in a vacuum and that close coordination with the immigration status plan is an absolute must to avoid problems in both the tax and immigration areas.

Once here in the United States the new immigrants will need to structure their holdings like their fellow American taxpayers using the various proven tax planning vehicles available to U.S. persons.

Richard S. Lehman, Esq. (LL.M in Taxation) is the managing partner in the Boca Raton law firm of Richard S. Lehman P.A. The firm specializes in tax law focusing on tax and asset protection planning, document drafting and litigation strategy in the areas of income, estate, trust taxation and probate litigation. Contact him at (561) 368-1113

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