To give you a better idea of the considerations that go into structuring US investments, we’re going to take a quick look at the 6 key ways people go about doing it. That way you’ll know the basics, and be able to decide which way you want to proceed when it’s time to delve further into the details.
This is the simplest approach in that all you do is own the investments directly, either solely individually, or with your partner. It has the advantage of a favourable long-term capital gains treatment, but the large downside of zero protection against US estate tax. This means that after you pass away, things could become increasingly complex for your loved ones.
Ownership via an offshore corporation
This is the approach taken by people whose primary goal is to shield their assets and investments from the US estate tax. Whilst they work in this regard, moving your investments to a tax haven such as the Canary Islands will then see you forfeit most of your benefits from the capital gains side of things. This then complicates matters when you’re looking to sell your investments to fund other interests.
Through a US corporation
Here you would own an interest in a US corporation, which in turn holds all of the investments. This allows you to avoid tax filing obligations and retain anonymity if you so wish. It also gives the option to make tax-free withdrawals but affords no protection against US estate tax in the event of your passing. It’s also worth nothing there are no capital gains efficiencies to be utilized.
This is essentially the opposite of an offshore corporation in that it offers highly advantageous capital gains benefits, but less security against the estate tax. The basic structure comprises of an offshore partnership which creates a US partnership that actually holds the investments. Generally speaking the offshore partnership will hold up to a 99% limited interest in its US counterpart, and as a result, the maintenance and compliance costs due annually can be in excess of $20,000.
A single-tier partnership entails owning interests in US investments through a dedicated US partnership Whilst it offers no protection against the estate tax, it does offer highly favorable capitals gains rates. One key benefit that is worth considering is the step-up in basis. This means that the person inheriting the investments would be entitled to a basis equal to the market value of the investments at the time of the owner’s passing.
Irrevocable, discretionary trust
This is a trust funded by the purchase price of the US investments. With appropriate structuring and planning the trust can be deemed the owner of the US investments. This is the only approach detailed above that offers favourable capital gains rates, as well as offering the prospect of achieving valuable estate tax protection. It’s also a relatively simple and inexpensive to maintain structure. The key downside that it is worth mentioning at a first look is you would have to give up the ability to directly control the US investments and give full discretion to the trustees.
Now that you are familiar with the basics, it’s time to seek the specialist advice that will take into account the individual aspects of your circumstances. That way you’ll have the peace of mind that comes from knowing you’re getting expert advice that’s tailored to your circumstances.