International Succession Planning: An Advanced Guide Using Trusts, Holdings and Foundations Considering Jurisdictions in Asia, Europe, the Caribbean and the USA.

International Taxes
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Introduction:

International succession planning has become a critical need for individuals and families with global assets and multinational connections. With global wealth estimated at over $360 trillion, of which a significant portion is transnational, the importance of sophisticated succession planning strategies cannot be underestimated.

This comprehensive guide explores the nuances of succession planning using trusts, holding companies and foundations, with a special focus on tax considerations for US tax residents and non-residents. Our analysis will provide detailed insights and practical strategies for navigating this complex legal and tax landscape.

Part 1: Ready to Roll 🚀 – Basic Strategies and Practical Actions

Part 1, “Ready to Roll”, offers practical actions and immediate advice for entrepreneurs who need quick and effective guidance.

1. Trusts: Structure and Applications

Definition and Types of Trusts

  • Revocable vs. irrevocable trusts
  • Domestic vs. foreign trusts
  • Specific types: QDOT, IDGT, SLAT

Implementation:

  1. Choice of trust type based on client’s objectives (asset protection, tax reduction, flexibility)
  2. Selection of jurisdiction (considering asset protection laws and tax treatment)
  3. Appointment of trustees, protectors and beneficiaries
  4. Transfer of assets to the trust

Example: An American tax resident establishes an IDGT (Intentionally Defective Grantor Trust) to transfer future appreciation of assets outside his estate, while maintaining control and tax liability over current income.

2. Holdings: Structuring Strategies

Types of Holdings

  • LLC (Limited Liability Company)
  • S-Corporation
  • C-Corporation

Implementation:

  1. Choice of structure based on tax and operational objectives
  2. Incorporation in a favorable jurisdiction (e.g. Delaware for LLCs)
  3. Establishment of operating and governance agreements
  4. Transfer of operating or investment assets to the holding company

Example: A family with multiple businesses creates an LLC holding company in Delaware to centralize control and facilitate the intergenerational transfer of ownership.

3. Foundations: Alternative to Trusts

Characteristics of Foundations

  • Private interest foundations
  • Hybrid foundations (combining elements of trusts and corporations)

Implementation:

  1. Selection of jurisdiction that recognizes foundations (e.g. Liechtenstein, Panama)
  2. Drafting the foundation’s statute
  3. Appointment of the foundation board
  4. Donation of assets to the foundation

Example: A non-US tax resident establishes a foundation in Liechtenstein to hold global assets and define distribution rules for future generations.

Part 2: Deep Dive 🤿 – Technical Deepening in Advanced Strategies

Part 2, “Deep Dive”, provides in-depth analysis for those wishing to delve into the technical and complex aspects of international finance.

4. Tax Implications for US Tax Residents

Inheritance and Gift Tax

  • Unified exemption limit (2023: $12.92 million)
  • 40% tax on surplus

Strategies:

  1. Use of irrevocable trusts to remove assets from the taxable estate
  2. Implementation of estate “freeze” strategies through GRATs or sales to IDGTs
  3. Maximization of annual exempt gifts ($17,000 per beneficiary in 2023)

Tax treatment of foreign trusts

  • Grantor trust rules for foreign trusts
  • Forms 3520 and 3520-A for reporting

Implementation:

  1. Structuring foreign trusts as grantor trusts during settlor’s lifetime
  2. Planning for post-death transition to avoid classification as a foreign non-grantor trust

5. Considerations for Non-U.S. Tax Residents

U.S. Inheritance Tax Exposure

  • Limited exemption of $60,000 for non-residents
  • Up to 40% tax rate on assets located in the U.S

Strategies:

  1. Use of foreign corporations to hold U.S. assets (especially real estate)
  2. Implementation of irrevocable foreign trusts to hold portfolio investments in the US
  3. Use of life insurance to provide liquidity to pay taxes

FATCA and International Reporting

  • Reporting obligations for foreign financial accounts
  • Impact on succession planning structures

Implementation:

  1. Design of structures that minimize reporting obligations
  2. Implementing robust compliance and documentation systems

Part 3: Advanced Structures and Case Studies

6. Detailed Structure: Combined Trust-Holding-Foundation

Structure Description:

  1. Top Level: Private Interest Foundation (Liechtenstein)
    • Purpose: Family governance and asset protection
    • Beneficiaries: Family members in multiple jurisdictions
  2. Intermediate Level: Irrevocable Trust (Cayman Islands)
    • Settlor: Liechtenstein Foundation
    • Trustee: Cayman professional trustee
    • Beneficiaries: Underlying entities
  3. Operational Level: Holdings in Multiple Jurisdictions
    • LLC in Delaware (USA): For assets and operations in the USA
    • Limited Company in Singapore: For Asian investments
    • Sociedade Anônima in Brazil: For business in Latin America

Functioning:

  • The Foundation establishes the general guidelines for governance and succession
  • The Trust acts as a layer of protection and fiscal flexibility
  • Holdings manage assets and operations in their respective regions

Tax advantages:

  • Separation between control (Foundation) and legal ownership (Trust)
  • Flexibility in distributing income through Holdings
  • Potential for tax optimization in multiple jurisdictions

Implementation:

  1. Establishment of the Foundation in Liechtenstein
  2. Creation of the Trust in the Cayman Islands
  3. Incorporation of the Holdings in the relevant jurisdictions
  4. Transfer of assets to the structure in a tax-efficient manner
  5. Implementation of governance and distribution policies

7. Case Study: Global Family with Multinational Businesses

Family Profile:

  • Patriarch: Non-US tax resident
  • Children: Mix of US tax residents and non-US tax residents
  • Assets: Businesses in the US, Europe and Asia; global properties; investment portfolios

Objectives:

  1. Asset protection
  2. Global tax efficiency
  3. Orderly and flexible succession
  4. Regulatory compliance in multiple jurisdictions

Structured solution:

  1. Private Interest Foundation (Liechtenstein)
    • Governs the overall structure
    • Defines distribution and succession policies
  2. Irrevocable Trust (Jersey)
    • Holds shares in operating holding companies
    • Provides tax flexibility and asset protection
  3. Operational Holdings:
    • LLC (Delaware): Business and investments in the USA
    • GmbH (Germany): European operations
    • Pte Ltd (Singapore): Asian business
  4. Specific Structures:
    • QDOT for non-U.S. citizen spouse
    • IDGTs for efficient transfers to US tax resident children

Tax Strategy:

  • Use of tax treaties to minimize double taxation
  • Implementation of check-the-box structures for tax optimization
  • Planning distributions to minimize exposure to US inheritance tax

Governance:

Family communication and education policies

Family council overseeing the Foundation

Investment committees for each regional holding

Conclusion

International succession planning using trusts, holding companies and foundations offers powerful tools for global families. However, the complexity of these structures requires careful planning, meticulous implementation and continuous review.

Key points to remember:

  1. The structure must be adapted to the family’s specific objectives and tax profile
  2. Regulatory compliance is crucial in all relevant jurisdictions
  3. Flexibility to adapt to family and regulatory changes is essential
  4. Ongoing expert advice is key to long-term success

By implementing these advanced strategies, families can create a lasting legacy, protect

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