US inheritance taxes

[ERICOPOLY]

I am starting to think about keeping as much of my future wealth in the family.  I am a dual citizen of Australia so naturally I have an idea.

 

At some future time when I am fabulously wealthy, is it possible to just move my residence to Australia and then gift the money away to family?  Australia has no gift tax.  Australia has no inheritance tax.

 

Is there some "gotcha" in there that would prevent me from doing this?  Would it mean that I would owe a big tax in the US if I moved back and got residency in the US once again?

 

It seems too easy, what am I missing?

[JAllen]

The U.S is notorious for taxing former residents for life.  I (very) briefly looked into moving to Switzerland and began looking at tax issues.  Most of what I learned is that the U.S will (at least attempt to) tax you wherever you are.  I imagine if you weren't wanting to come back to the States you could shield more of it and the States will have less power over you, but that doesn't sound like what you want.

 

I don't know your exact age but I know through gifts to your children (you are relatively young and you do have one or two right?) you will be able to transfer large amounts to them, over time.

 

Of course, an attorney is in order here. 

[ERICOPOLY]

The U.S is notorious for taxing former residents for life.  I (very) briefly looked into moving to Switzerland and began looking at tax issues.  Most of what I learned is that the U.S will (at least attempt to) tax you wherever you are.  I imagine if you weren't wanting to come back to the States you could shield more of it and the States will have less power over you, but that doesn't sound like what you want.

 

I don't know your exact age but I know through gifts to your children (you are relatively young and you do have one or two right?) you will be able to transfer large amounts to them, over time.

 

Of course, an attorney is in order here. 

 

I am 37, and have two kids but they are ages 2 and 4.  I can dribble money to them but I don't yet know how they will turn out.  I know people who inherited too much money at 18 and it has effectively robbed them of their initiative.  They have low self esteem because of it.

 

Instead, I want to keep it as much of a secret as possible to make sure that they try their best to build a life for themselves.  Then, when they are 35 or 40 I will know at that time if it is safe to give them a large sum.

[CONeal]

If your concerned about ruining your kids due to money (a very legitimate worry) you might want to set up a trust that makes the money available to them once they have established themselves in life.  I have never really understood why someone would give alot of money when someone is 18 or 21, it ruins a person very early in their life.  In my view a more approperate age would be a minimum age of 30, then again thats just me. 

 

On a side note, I have two cousins that came into a couple 100k when they were under the age of 21.  Both of them burned through all the money and have nothing to show for it.  They also do not have a concept of living within their means.

 

Of course a legal professional would be able to help address your concerns better.

[nodnub]

Instead, I want to keep it as much of a secret as possible to make sure that they try their best to build a life for themselves.  Then, when they are 35 or 40 I will know at that time if it is safe to give them a large sum.

 

I think this is the right approach. If they know about the money then they will not be as motivated to "build a life" as you say. It's better when a gift comes as a surprise later in life instead of something that has been expected all along.  This approach does not preclude you from helping them out with life expenses earlier on if you consider it necessary.

[JAllen]

Eric,

 

Great point.  I hadn't even considered that.  I am a unique case where being given some money turned me into an obsessive work-a-holic/investor.  My parents gave both my sister and I $15,000 about 4 years ago (I'm 29 now) and said lose this much now, learn a few lessons, or lose much more later (or something along those lines).  Them doing this had a VERY positive effect on me.

 

But yes, I think you're right in that people take money for granted when they know their parents have a bunch.  I have seen it happen with most folks that I know that grew up with well-to-do parents.

 

How to balance between the two will be tough.

[SharperDingaan]

 

Your kids will think you a bastard but .....

 

Do nothing other than further their education (university, global travel, etc.) untill they marry, settle down, & have their 1st kid. AFTER they've bought their house, buy out 50% of it with the proceeds repaying mortgage principal; & 'will' the equity stake to the kid.

 

1) Kids stay 'poor' as long as possible, 2) No money until they settle down, 3) More cashflow when they most need it (babies are expensive), 4) They can't really do anything stupid without your approval (you own 50% of their house), 5) If they divorce simply change the will ...... AND the beauty is that it is entirely the kids decision - as ONLY they can sell you 50% of their house.

 

We've used versions of this to move grandparents to more accessable locations, & to help the parents of our UK based nephews. A timely purchase can also give you an FX advantage (20%+ UK pound devaluation), & drive home the 'money is the servant, not master' ethos.

 

SD

 

   

[ERICOPOLY]

I think this country is on the wrong course with these stupid incentives to give your money to your kids too young (annual gifting from an early age), rather than just eliminating the gift tax & inheritance tax.

 

We're already spending 1 month a year in Australia as it is (visiting family and the beach), but will need to cut it back to 3 weeks a year when the kids start school.  Then once their school is done, I want to spend at least 1/2 of the year there  (to avoid Seattle's rainy season) and spend July,Aug,Sept in Seattle when it is beautiful.

 

The things I need to figure out are:

1)  will the US still be able to get their greedy clutches on my gifting program

2)  will Australia respect the tax-free status of my RothIRA if I fall under their tax laws

 

I think I definitely need to hire an expert in these matters.

 

 

[shalab]

US permanent residents and citizens world wide income is taxable - dont know the rules in other countries.

 

I am not entirely opposed to inheritance tax - I think we had a thread on this sometime back, it allows for more innovation than would be the case otherwise. In Asia, there are tons of family owned enterprises that stifle creativity and innovation by managing the government.

 

cheers!

 

 

[Munger_Disciple]

Ericopoly,

 

I am originally from India and am a naturalized US citizen now. Like many on this board, I am also of the opinion that the US is on the wrong track. I came to the US as a 21 year old graduate student and since then noticed the increase in the entitlement mentality of the US population in the 23 years I have been here. I have never been to Australia and am wondering if they are still a free market capitalist society or also moving in the wrong direction like the US. It appears you travel there frequently, so your thoughts would be helpful.

[manualofideas]

You should listen to what Buffett has to say on estate taxes and the perpetuation of family dynasties.

[ERICOPOLY]

You should listen to what Buffett has to say on estate taxes and the perpetuation of family dynasties.

 

I just think that our inheritance tax is really dumb.  Next year, the inheritance tax threshold will be $3.5m per person ($7m for a married couple).  But you talk about family dynasties... well, if you have 10 kids a "dynasty" is $350k per child, or $700k per child per married couple?  And if you have 1 kid he can get either $3.5m or $7m?  What does it matter if its a "family" dynasty, isn't the real point here HOW MUCH each person (as in individual) stands to inherit?  Why do my kids only get 1/2 of the amount tax-free compared to an only-child situation?  

 

I forget where I read it but things like family "ranches" get special exceptions and far greater wealth can be passed down this way -- way in excess of the typical $7m maximum.  The moment I read that I thought  "OH, that explains what the Bush family is doing with the Crawford ranch".  

 

I've heard Buffett on this issue, and Gates.  I'm reading the Andrew Carnegie biography right now (richer in his day than Gates and Buffett put together), who clearly predates Buffett on this matter and Carnegie spend the latter days of his life giving his wealth away (at age 50 he publicly declared that he would no longer attempt to grow his wealth but rather focus on giving it all away).  Carnegie pleaded with his fellow millionaires to follow him.  Carnegie believed that a man should be ashamed if he died with his wealth.

 

[JAllen]

Bush's ranch isn't worth more than $7M, probably nothing close to it actually if I remember the size somewhat accurately. 

 

That rule is so family farms can be kept.  It lowers the annual payment to 1/14 (or something close) of the original tax payment on the value so the farm can keep producing and not have to be sold to pay the taxes.  I know this because my grandparents have been dealing with estate tax issues the past few years.  They have owned their farm for 60 years so yes, the farm exemption isn't just for wealthy folks shielding their wealth from the estate tax.

 

By the way, 1/14 of the land value per year to the government is HUGE to a farmer. 

[jasonw1]

I'm currently living aboard but need to file US tax (going through it right now), hereis what I know.

 

1) If you're a US citizen or resident, your world-wide income needs to be reported to IRS and taxed. There are foreign earned income exclusion and foreign tax credit, but it's relatively small sum.

2) Your property and bank account overseas, if they're >$10,000 at any given point of the past year, will need to be reported to Dept. of Treasury by US law.

 

 

[ERICOPOLY]

I'm currently living aboard but need to file US tax (going through it right now), hereis what I know.

 

1) If you're a US citizen or resident, your world-wide income needs to be reported to IRS and taxed. There are foreign earned income exclusion and foreign tax credit, but it's relatively small sum.

2) Your property and bank account overseas, if they're >$10,000 at any given point of the past year, will need to be reported to Dept. of Treasury by US law.

 

 

I've been both an Australian citizen and US citizen since birth (mymother was an Australian citizen but I was born in California).

 

Australia has no similar requirement -- I've never once reported my income to them nor have I ever disclosed any bank balance to them.

 

But you think the US would require this of me even if I live overseas and get residency in Australia?  I suppose I could give up my US citizenship and just get travel visas.  I like Australia more anyhow... but we live here in the US today because our parents (my wife's too) still live in the US. 

 

 

[jasonw1]

But you think the US would require this of me even if I live overseas and get residency in Australia?

Yes

I suppose I could give up my US citizenship and just get travel visas.

I "heard" even that IRS may still come to you for several years, until it's clear there is no US ties.

[ERICOPOLY]

I have never been to Australia and am wondering if they are still a free market capitalist society or also moving in the wrong direction like the US. It appears you travel there frequently, so your thoughts would be helpful.

 

Prior to roughly 1980, they didn't even have a capital gains tax.  Today, they have a capital gains tax but they (I'm not sure exactly) only tax you on 1/2 of your gain (the theory being that some portion of your gains are due to inflation, and thus not "real" gains).

 

They also have a system of dividend "franking".  This system acknowledges that your dividends were already taxed on the corporate level.  After speaking with my Australian cousins, I discovered that if you hold Australian shares and earn dividends, your tax rate will be roughly 9% or so.

 

They all live in Sydney.  Their property taxes are really "land taxes".  The tax is based strictly on the land itself, ignoring the value of the improvements!  Further, your primary home gets a $1m valuation tax-free.  So if you have a $5m house on land only worth $1m, then you pay no tax at all!  You only pay tax if the land value exceeds $1m.

 

So to sum it up:

1)  9% tax on dividends

2)  reduced capital gains rate

3)  no gift taxes

4)  no inheritance taxes

5)  no property tax on your home if land worth less that $1m.

 

Australia is WAY MORE capital friendly than the US.

 

There are other intangibles:

1)  friendly people

2)  health care affordable  (an emergency room visit in Sydney is only $75 -- less than it costs us to have a scheduled preventive care visit in US)

3)  beautiful weather

4)  beaches

5)  Australia's government is in good financial shape

 

[jasonw1]

That sounds too good. The question is how long can they keep it that way :)

 

You may want to find out how Rupert Murdoch dealth with this tax issue, otherwise he sure seems lost quite a bit when he acquired US citizenship.

http://en.wikipedia.org/wiki/Rupert_murdoch#Acquiring_American_Citizenship

 

Acquiring American Citizenship

In 1985 Murdoch became a United States citizen to satisfy legislation that only United States citizens could own American television stations. This also resulted in Murdoch losing his Australian citizenship.

 

 

[ERICOPOLY]

That sounds too good. The question is how long can they keep it that way :)

 

I was there a few months ago -- spent all of January in Palm Beach (a beach a little bit north of Sydney).

 

It was not just a vacation from winter (middle of summer there), but a vacation from the financial doom and gloom.  Australia has not even entered a recession yet despite the global financial crisis.

 

They will feel a lot of pain if China implodes. 

 

 

[Guest misterstockwell]

There is an exit tax for those giving up US citizenship. That was enacted last year since everyone wants to get the hell out of here since Obama became head socialist. It's brutal, and includes your retirement accounts.

[ERICOPOLY]

There is an exit tax for those giving up US citizenship. That was enacted last year since everyone wants to get the hell out of here since Obama became head socialist. It's brutal, and includes your retirement accounts.

 

Crap, I didn't know of any exit tax but you're right!

 

 

 

The stock market plunge of late 2008 and early 2009 may also have played a role in the spike in expatriations. Since 2008, Americans with net worth greater than $2 million have had to pay an exit tax assessed on their assets. With gains reduced or wiped out by the market collapse, those seeking to give up their U.S. citizenship had an opportunity to do so with less exit tax required.

 

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201004050814dowjonesdjonline000053&title=more-americans-give-up-citizenship-as-irs-gets-aggressive-overseas

 

 

[ERICOPOLY]

There is an exit tax for those giving up US citizenship. That was enacted last year since everyone wants to get the hell out of here since Obama became head socialist. It's brutal, and includes your retirement accounts.

 

No, it was Bush that did this to "us".  Bush signed it into law.  But notice I put the "us" in quotes -- it doesn't apply to me because I was born with my dual citizenship!  I merely have to live as a resident of Australia for at least 5 of the 15 years prior to renouncing my citizenship.

 

It seems to be aimed at people who came to the US for a time, made their fortune, and then intend to leave with that fortune.  And it only makes it a capital gain taxable event (requires them to pay any tax on capital gains as if sold) and gives them a $600,000 capital gain exemption.  

 

http://www.withersworldwide.com/news-publications/324/exit-tax-u-s-expatriates-to-become-law.aspx

 

 

Here is the part that makes a special exception for me:

 

The Act contains two exceptions, which are broader than those contained in current law.  An individual is not a ‘covered expatriate' if he certifies compliance with US federal tax obligations as specified in item (iii) above, and: (i) he was at birth a citizen of the U.S. and another country, provided that (a) as of the expatriation he continues to be a citizen of, and a tax resident of, such other country, and (b) he has been a resident of the U.S. for no more than 10 of the 15 taxable years ending with the taxable year of expatriation; or (ii) he relinquished U.S. citizenship before reaching the age of 18 ½, provided that he was a resident of the U.S. for not more than 10 taxable years before relinquishment.

 

 

 

 

[ERICOPOLY]

Page 41 actually explains an "alternative tax regime" for the 10 yr period following renouncement of US citizenship:

 

http://www.jct.gov/x-44-08.pdf

 

Essentially, during that 10 yrs it looks like you still fall under full income tax and estate and gift tax rules if you spend more than 30 days in any calendar year in the US.  If you spend less than 30 days, you fall under partial tax rules to the extent that the taxable assets or income are based out of the US.

 

 

It's really complicated/confusing.  But again, it looks like the provision does not apply to me since I've been a dual citizen since birth and if I am a resident of Australia for at least 5 of the prior 15 yrs prior to renouncing my US citizenship.

[sswan11]

Eric,

I hold AUD balances in IB account (for the ~3.5% interest), and I have to say, you are giving me confidence.

 

BTW, I spent 5 yrs at MS as a contractor, running stress tests on Unimodem in the NT days.

 

My father is a neurologist at the UW and Michael Burry is my new hero  :)

 

 

[rmitz]

Do nothing other than further their education (university, global travel, etc.) untill they marry, settle down, & have their 1st kid. AFTER they've bought their house, buy out 50% of it with the proceeds repaying mortgage principal; & 'will' the equity stake to the kid.

 

Sorry, Dad, no deal.