General Parnership and Inheritance Taxes

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General Parnership and Inheritance Taxes

Gian Piero Bandieramonte
Member since 2018 · 6 posts · 1 vote

Hi,

As I understand, the inheritance tax that a foreigner has to pay to inherit a property from another foreigner is 40% from the excess in the market value of $60k of the inherited rental property located in the US.

To mitigate this low exemption compared to US citizens, I am thinking of establishing a general partnership. Why? Please consider this example to express my point:

Let's suppose the rental property is purchased for $200k by 2 foreigners in a general partnership. They both are spouses and my parents. For simplicity, let's assume that on the moment of inheritance the property's market value is unchanged.

When the 1st of them dies I would inherit 50% of their share in their partnership, that is, $100k of the property's value. I would have to pay an inheritance tax out of the excess of $60k from that 50% share. That is, I pay 40% out of $40k = $16k.

Then I would become the new partner together with my surviving parent, owning 50%-50%.

When the 2nd of my parents passes away, and I get to inherit the 2nd half of the rental property, would again an exemption of $60k be applied on their 50% share of the partnership? That would make a total exemption of $120k. The total inheritance tax would be $32k.

This is in contrast to having to having one of my parents purchase the property as a sole proprietorship, where at the moment of death, a single exemption of $60k would be applied, making it an inheritance tax of 40%($200k - $60k) = $56k. The savings from the general partnership from inheritances taxes would be $24k.

Is this legally possible?

I could not find this info clearly anywhere on the internet.

Thank you.

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    7y

    Your scenario is certainly possible. I highly recommend you consult with a knowledgeable CPA in the area of international/cross-border taxation especially as it pertains to estate taxes.

    You are correct - a nonresident alien is generally subject to an estate tax on their U.S. situs assets of 40% on the excess of $60,000. There are ways to mitigate this tax, by either using a double corporation strategy, discretionary irrevocable trust, or life insurance. 

    Example: By creating an irrevocable U.S. domestic trust, a nonresident alien (NRA) may be able to exclude US situs real property from US estate taxes. The key to this planning technique is that the NRA may not retain any interest in the Trust. 

    Another technique is the use of Corporations. Shares of stock issued by a foreign corp, regardless of the location in which the stock certificates are held, are not USA situs property. A foreign corp would own the shares of the US corp, which, in turn owns the US real estate. This is a good estate tax planning technique; however, do consider the income tax implications. This is also an expensive structure to maintain.

    Life insurance may be your simplest and best option. As always, speak to your team of advisors before implementing any strategy (CPA, attorney, life insurance advisor [if applicable]).

    2Reply
  • Gian Piero Bandieramonte
    OP
    Member since 2018 · 6 posts · 1 vote
    7y

    Thanks @Lance Lvovsky, for your good post. The property to purchase is worth $133k, so I guess the double corp structure is kind of an overkill considering the market value of the property. Also, to minimize the income taxes is a top priority as well. 

    I had also explored the idea of the life insurance; only it would lower the net income when paying the insurance's yearly premiums, and the wish is to maximize the cash flows while my parents live, not after they pass away, so I am leaving this as last resort. 

    The case of an irrevocable trust is interesting, I just have some ignorance regarding it and must ask some questions:

    -Can the beneficiary also be the trustee?

    - What happens with the monthly income generated by the rental property when it's held inside the trust? Does this cash flow pass through directly to me, the beneficiary? Does this mean that I would have to declare this income, just as if I had held this property directly in a sole proprietorship? This would be an issue since I am a resident of a high income tax country. Would it be possible to structure the trust so that I, the beneficiary, inherit the trust's asset on the moment of the settlors' death (my parents) without paying the inheritance tax, but the income generated would be received by the settlors during their lives (and they are the ones to report the income in their tax returns)?

    Lastly, I would certainly be looking forward to talking to a CPA experienced in international/cross-border taxation. If you happen to know one in this forum, or perhaps one I could call or write to ask a couple of questions, I would be very happy to know.

    Thank you.

    0Reply
  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Gian Piero Bandieramonte "Lastly, I would certainly be looking forward to talking to a CPA experienced in international/cross-border taxation. If you happen to know one in this forum, or perhaps one I could call or write to ask a couple of questions, I would be very happy to know."

    It appears one has already replied to you in this post...  : ) @Lance Lvovsky

    Most US tax CPAs/EAs are extremely busy with the 10/15 statutory deadline at this point in time and getting a hold of one for a consult now will be an uphill battle.

    My advice, read international posts on this forum, jot down the names of CPAs/EAs whose posts you like, and reach out in a few days.

    1Reply
  • Gian Piero Bandieramonte
    OP
    Member since 2018 · 6 posts · 1 vote
    7y

    Hi @Eamonn McElroy, it certainly helps to know about the statutory deadline, thank you. 

    I will try to reach @Lance Lvovsky in a few days to obtain a bit more info regarding this subject. 

    0Reply
  • Gian Piero Bandieramonte
    OP
    Member since 2018 · 6 posts · 1 vote
    7y

    Lance suggested earlier in this thread to use a foreign corp structure owning a US corp, which would ultimately own the rental property. Why use this double corp structure instead of simply using one corp? What is the difference between using a single foreign corp, a single US corp, or this double corp structure from the point of view of estate tax planning?'

    I take this opportunity to correct a wrong assumption I had expressed in my original post: 

    When a foreigner inherits a rental property located in the US from another foreigner, the exemption is not actually $60k. What happens is that if the rental property's value exceeds $60k then the tax return 706 NA must be filled and the exemption would be any amount between $13k and $46.8k depending on the proportion of assets located in the US compared to those located in the rest of the world. So it is indeed more complex that I had thought.

    That being said, my original idea of establishing a general partnership as a estate planning method is not that attractive anymore. Hence I am looking into either the double corp structure or trusts. 

    Thank you.

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