For residents of Asian countries who are seeking an American passport or "green card," careful planning and ongoing vigilance are critical. For many years, Asian nationals have made up a large and growing percentage of immigrants to the United States. A recent Census Bureau study identifies China and India as the top countries of origin for U.S. immigration, contributing 147,000 and 129,000 immigrants, respectively, in a single year.1
The U.S. has become increasingly attractive for wealthy Asians for a number of reasons. The freedom and cultural diversity found in the United States is particularly attractive to the Chinese. Real estate is also a draw. An analysis by Sotheby's indicates that Asian buyers are now major players in the purchase of luxury residential real estate — and the top 10 markets for such properties are in the U.S.2
Access to top-caliber education is perhaps the key motivation behind these trends. The number of international students in the U.S. has grown annually, with a 14% increase from 2014 to 2015.3 The majority of international students in U.S. colleges and universities are Chinese and Indian.4 Many of these students choose to stay in the U.S., and are later joined by family members. Once these immigrants achieve U.S. resident status or citizenship, few consider giving it up — even if they ultimately decide to move back to their native country.
Asians wishing to obtain U.S. residency or citizenship have several options available to them, but one of the most popular programs for those with moderate-to-high net worth is the Immigrant Investor Program, commonly known as the EB-5 program. This program provides permanent U.S. residency and a path to citizenship for foreign investors and their immediate families (including children up to age 21). There are two ways to qualify:
Directly invest $500,000 or $1 million (depending on location) in a new American business that employs at least 10 people.
Invest at least $500,000 in an American business or real estate venture that has been approved by the U.S. Customs and Immigration Service and is administered by an EB-5 region center in a targeted employment area.
In the latter case, the investment must create, directly or indirectly, 10 new jobs, and the investor must pass source-of-funds and background checks. Provided those criteria are met, the investor can receive a green card after two years.5 The EB-5 program has grown significantly since its creation in 1990. In 2014, the 10,000 annual maximum number of EB-5 visas was met, the large majority being granted to Chinese nationals.6
Given these recent trends, it's clear that the desire for American citizenship is strong. But as attractive as American citizenship and resident status may appear, it is wise to remember the old adage, “look before you leap," and to thoroughly understand the tax, legal and other implications before proceeding.
Important Considerations Before Seeking Citizenship
Unlike many national taxation authorities, the U.S. Internal Revenue Service (IRS) assesses taxes on residents and citizens living abroad. All “worldwide income" is subject to U.S. taxation. Furthermore, all U.S. persons are subject to transfer taxes on gifts and bequests of property, wherever those assets may be situated.
Make Sure Planning is Done Far Enough in Advance
As soon as the decision is made to seek U.S. citizenship or permanent residency, some actions can be taken to minimize future U.S. taxation. Income tax planning is best begun well ahead of moving to the U.S., as this often requires a minimum of five years' lead time. Avoiding U.S. transfer tax may require less lead time, but still benefits from thoughtful planning over multiple years.
Case Study: Pre-Immigration Transfer Tax Planning
Mr. Chan, a widower, plans to move permanently to America from Hong Kong this coming May. He intends to join his two sons, who established permanent residency in California after graduating from UCLA and marrying U.S. citizens.
Mr. Chan has a net worth of $70 million. In February, he plans to establish a trust in Delaware for the benefit of his descendants and fund it with $50 million, leaving $20 million to live on. If Mr. Chan lives for 20 more years after becoming a U.S. taxpayer, and spends $15 million during that time, his estate will not be subject to estate tax (using current U.S. estate tax rates and exemptions — the exemption is $5.49 million in 2017). The remaining $5 million can pass to his children under a will or living trust.
Alternatively, if Mr. Chan chooses to keep all of his assets when he moves to the U.S., and still spends $15 million after 20 years, his estate would be valued at $55 million. At today's estate tax rates (40%, reached at $1 million of assets), approximately $20 million would go to the IRS. Any gifts Mr. Chan made to his children or grandchildren after coming to the U.S. would also be subject to the U.S. gift tax and possibly generation skipping transfer taxes. However, had he made a gift to an irrevocable U.S. trust for his children and grandchildren before he became a U.S. person, that money could grow in trust for the benefit of many future generations without transfer taxes ever applying.
Make Gifts Before You Come
Before becoming a U.S. person, it is possible to transfer unlimited amounts of assets deemed to be "non-U.S." for gift tax purposes, without incurring U.S. transfer tax. Once one becomes a U.S. taxpayer, gifts of any property, no matter where in the world it is located, are subject to a transfer tax when the gifts (on a cumulative basis) are in excess of the $5.49 million lifetime exemption. Certain assets, such as U.S. stocks, are not included in the gift tax calculations, but are subject to estate tax upon the death of the owner.
Step Up Your Basis
The cost basis of retained assets, such as investments, real estate or a family business, should be marked to market wherever possible. In other words, the current valuation of assets should be established via sale and repurchase. For example, shares of publicly traded companies can be sold and repurchased since foreigners, unlike U.S. persons, are not subject to U.S. capital gains taxes. Then when later sold, any future gains will be calculated using the latest purchase price, not the original price. However, since taxes in the home country may apply upon the initial sale or the sale of underlying assets held in corporate form, it is important to have good local tax advice before engaging in this strategy.
While real estate or a family business is not the type of asset to be easily sold and repurchased (as this would likely lead to unwanted tax consequences in the foreign country), the basis of the corporate entity could be stepped up so that a subsequent disposition of the shares of that entity would be more favorable from a U.S. tax perspective, provided that the real estate or shares of the family business were held in a corporate form. This could be accomplished by making the check-the-box election on Form 8832, which would allow the entity to be treated as a pass-through for U.S. tax purposes. This would be considered a "deemed liquidation" of the company for U.S. tax purposes. However, this election is unique to the U.S. tax regime, and so would not be considered a sale or liquidation of the asset in the foreign country.
Review Current Asset Holdings and Structures
Prior to becoming a U.S. person, an individual should carefully review each current asset and how it is owned. Some forms of ownership may not be tax efficient or advisable for a U.S. person. For instance, interests in a passive foreign investment company (PFIC) or a controlled foreign corporation can subject a U.S. person to negative tax consequences and burdensome reporting. A foreign mutual fund is a prime example of a PFIC.
Wealth Transfer Planning
U.S. persons, including non-U.S. citizens with long-term permanent resident status, are subject to U.S. estate and gift taxes. Transfer taxes kick in when total lifetime gifts and/or testamentary bequests exceed certain thresholds ($5.49 million per person, or $10.98 million per married couple). Furthermore, some key offsets for mitigating the 40% transfer tax are not available to non-citizens. This makes careful planning critical for green card holders, especially those living outside the U.S., who may also be subject to gift and estate tax in their country of residence.
One of the most basic planning issues concerns provisions for a spouse who is not a U.S. citizen. U.S. persons with spouses who are not U.S. citizens should place any assets that exceed their remaining gift and estate tax exemption in a qualified domestic trust (QDOT) in order to limit the taxation of their estate in the event they predecease their spouse. This should be coordinated with other structures such as an exemption trust and possibly an irrevocable life insurance trust (ILIT), since these vehicles are not subject to estate tax on principal distributions to the surviving non-citizen.
A U.S. citizen should also consider relatives when planning. When parents or others who are foreign to the U.S. transfer substantial wealth to a child who is a U.S. person, they may increase the child's eventual exposure to U.S. estate and gift taxes. A U.S. dynasty trust to benefit that child's descendants may be preferable. Alternately, the non-U.S. parents might establish an offshore revocable trust, also known as a foreign grantor trust, with the children designated as beneficiaries. This can provide significant tax advantages for the family while maintaining flexibility for the parents regarding future gifts and access to their money.
Asian nationals contemplating moving to the U.S. need to carefully consider the implications of becoming U.S. taxpayers, weigh those issues against the benefits of U.S. citizenship, and, if they decide to move forward, seek expert advice regarding tax- and wealth-planning strategies before becoming a U.S. taxpayer.