EB-5 Investors & the Perils of U.S. Estate and Gift Taxes
by Mark Ivener and Gary Wolfe
Making an EB-5 investment is an important decision for anyone interested in the EB-5 pro- gram. Investors are routinely warned to perform due diligence on the professionals and regional centers they choose, and to consult with trusted advisors on all aspects of projects they are considering, but in my EB-5 practice it is alarming to witness how few EB-5 investors obtain income, estate, and gift tax advice from qualified U.S. tax professionals. Most immigration attorneys, both verbally and in their written fee agreements, recommend that their clients seek tax counsel, even though clients rarely do so. The United States imposes income tax on the worldwide income of its citizens and green card holders, even if they reside overseas. EB-5 investors who receive their green cards through the program—or through any other means—automatically subject themselves to classification as a U.S. domicile and the tax requirements that come with it. Taxes collected by the United States government, at both the state and the federal level, go toward providing important public services in the country. Tax dollars help pay for infrastructure, public safety, health ser- vices, and notably education, which is an important benefit for investors and their children. Without taxes, the United States would not be able to fund programs that make the country so appealing to foreign investors in the first place.
Nonetheless, there are steps investors can take, with tax advisors, to ensure that they are paying the appropriate amount of tax for their situation. EB-5 investors are well-advised to seek out comprehensive tax planning advice to ensure that they achieve their immigration goals while avoiding unnecessary taxes.
A U.S. domicile is a non-U.S. citizen who relocates to the United States with the intention to reside permanently in the country. EB-5 investors who receive both conditional and permanent green cards subject themselves to classification as U.S. domiciles, and are hence subject to U.S. estate and gift tax on their worldwide estates. If EB-5 investors receive green cards, under IRS audit procedures, it may be construed as evidence of intent to permanently reside in the United States, subjecting them to U.S. estate and gift tax on their worldwide assets.
Classification as a U.S. domicile may invite increased scrutiny by the IRS—what industry insiders refer to as an audit trap—so it is important that EB-5 investors and their advisers under- stand which tax classification applies to their specific cases to avoid unnecessary trouble and costs. Additionally, classification as a U.S. domicile is especially important because it affects the amount of taxes that a tax subject is required to pay. Avoiding U.S. domicile status may seem inviting to the tax-conscious EB-5 investor, since non-U.S. domiciles living in the country are only subject to U.S. estate and gift tax in certain circum- stances. Furthermore, a non-U.S. domicile would not have a U.S. estate and gift tax on non-U.S. assets (i.e. worldwide assets), or be subject to U.S. estate tax on life insurance proceeds, and certain bank accounts and portfolio debt. However, because the very nature of the EB-5 program is to establish investors as permanent residents, and therefore U.S. domiciles according to the IRS, can EB-5 investors simultaneously protect their immigration benefits and minimize their tax liability?
Is the EB-5 investor a U.S. domicile?
Although the EB-5 program was first established in 1990, it has only picked up steam in the last decade, making it a newer program, so U.S. estate and gift tax law has not yet definitively addressed EB-5 tax issues. While the classification of a U.S. domicile applies to a variety of resident visas, rarely is the topic approached in an EB-5-specific context. Given the U.S. government’s huge deficits and need for new sources of revenue, it is likely this issue will be addressed as more foreign investors pour funds into U.S. real estate, companies, and investment portfolios.
So what is the investor’s risk? Simply put, the EB-5 visa specifically designates an investor’s intention to permanently reside in the United States, first by declaration to USCIS under her two year conditional green card, then prima facie under her permanent green card. If an investor receives her conditional green card within two years of the initial filing, her permanent green card about three years later, and then continues to reside in the United States, it is hard to imagine what evidence she could present to support her case that she is not a U.S. domicile and not subject to worldwide U.S. estate and gift tax on her total worldwide assets. What evidence would the IRS believe as credible under an IRS audit? As an IRS audit expert, I would be hard pressed to make a convincing case that EB-5 investors residing in the United States do not have an intention to permanently reside in the country, especially since such testimony is generally given to support their conditional green cards, and is prima facie evidence once they receive their permanent green cards.
In the case of EB-5 investors, it seems that their immigration interests and tax-minimization interests are in direct opposition; the very same evidence that the investor must prove in order to obtain her green card is what will ultimately also prove her to be a U.S. domicile, and hence, subject to U.S. estate and gift tax. Though the EB-5 investor may not be able to avoid domicile classification if she hopes to protect her immigration interests, much more goes into tax considerations than simply looking at U.S. domicile status; if the investor is to be truly prepared, she must also consider tax treaty issues and comprehensive tax planning.
Tax treaties and U.S. estate and gift tax
It is important for EB-5 investors to engage tax experts because, in many cases, there is a bi-lateral tax treaty issue at play. When dealing with international tax issues, there is a series of important questions that must be addressed: Is the investor a citizen or an estate/gift tax resident of another country? Does that country have a tax treaty with the United States? If so, what about the investor who is a citizen of a foreign country, but is also a U.S. domicile? Under the treaty rules, both governments would examine the investor’s family, social, and business connections to each country, including where her permanent home is located, where her vital interests are centered, where her habitual abode is located, and in which country she holds citizenship. With this information, the countries would apply the treaty tie-breaker rules to determine which country imposes the estate and gift tax. Another important consideration is whether there are tax credits available for taxes paid in one country if the second country has a higher tax rate.
Pre-immigration tax planning
If investors are tax conscious, pre-immigration tax planning can go a long way in determining what taxes are appropriate for an EB-5 investor to pay. There are some strategies that can help EB-5 investors minimize their tax liability, while still fulfilling their duty as permanent residents.
For example, investors can work with their advisors to establish an offshore trust in a reputable jurisdiction with an established banking system, infrastructure, “secrecy laws,” and favorable asset protection legislation. The trust should be irrevocable and non-amendable so the trust assets will not be subject to U.S. estate tax (i.e. the trust assets would not be included in the U.S. estate for estate and gift tax purposes). Advisers can also assist investors in planning the best way to bring their funds to the United States. In one such strategy, investors should establish non-U.S. accounts in the (non-domiciliary) investor’s name, and transfer funds to it. Next, they should have a U.S. donee (someone who will receive the investor’s gift) set up a non-U.S. account in the donee’s name and make gifts from the investor’s non-U.S. account to the U.S. donee’s non-U.S. account. The U.S. donee may then wire transfer funds from their non-U.S. account to the U.S. donee’s U.S. account. Another consideration for non-domicilaries who own stock in a U.S. corporation is to gift the stock while alive so there will be no U.S. estate tax upon death. The non-domiciliary’s gift of U.S. stock is U.S. gift tax free.
The wealthiest of investors (i.e., those with assets totaling over $10.5 million) should use the funds in their offshore trusts to purchase U.S. life insurance policies (after they get their green cards), ensuring that the offshore trust is the owner and beneficiary of the U.S. life insurance policy. If they purchase the policy before they get their green cards, there is a 30 percent U.S./NRA withholding tax on the life insurance policy proceeds paid on the death of the insured. If they establish the “pre-immigration trust,” and fund it before they move to the United States, they hit the “tax trifecta”: no U.S. gift tax on funding the trust, and no U.S. estate or income tax on the life insurance death benefit proceeds.
Pre-immigration tax planning should begin as soon as possible. Because many of the strategies described above require maneuvering that takes time and coordination, the process should be started at least six months before the investor plans on making her investment, if not sooner.
Although no EB-5 investor will be able to avoid taxes altogether, as she must prove a desire to permanently reside in the United States to obtain her green card, some pre-immigration tax preparation can mitigate the payment of unnecessary taxes. EB-5 investors are often very familiar with the benefits of permanent residency and citizenship, but these benefits are balanced with responsibility—paying taxes being among the chief requirements. Without tax revenue, the U.S. government would not be able to provide services that make the country so appealing to investors; infrastructure that supports business development and public education are two notable products of tax revenue. Nonetheless, investors are not expected to pay more than what they are legally obligated to pay, and tax planning can ensure that investors are making a fair contribution. This preparation can help balance the investors’ tax minimization interests with their immigration and business interests, allowing them to get their green cards and pay the least amount of tax necessary. While it may seem inconvenient in the short-term, consulting a tax professional can save an EB-5 investor hassle, time, and money during a future in the United States and will help them understand the contribution that they are making to the country.