Multinationals and Their legacies: Decimation In Those Details?
01 March 2011
Posted by: Author: Martha Harris Myron
Multinationals and Their legacies: Decimation In Those Details? Part 1
As global citizens embrace mobility across both electronic and physical borders, multinational families (and their advisers) are grappling with increased complexity and compliance obstacles in addressing their legacy planning.In this article, we explore the first two of the following five issues, using composite case scenario for illustrative purposes. (The rest will be covered in the next issue of TAXtalk.)
• The composite family scenario.
• General issues pertaining to the individuals and their family financial profiles: residency, citizenship, cash management,investments/foreign mutual funds, tax/risk exposure, domestic/foreign corporations, the foreign family trust.
• Conflicts of laws between three or more countries.
• Cross-border planning summary.
One-The Composite Scenario
SSP – Surviving spouse
PES – Protector eldest son
Many years ago, Mr Munificence, a British subject and the patriarch of the family, settled a foreign discretionary family trust in a tax neutral country for the benefit of himself, his English spouse, and those not yet born. His letter of wishes to the family trustees of the time directed that all beneficiaries were to be treated fairly, and none to be disadvantaged.An entrepreneurial, but parsimonious individual, he was obsessed with accumulating wealth, resisting any efforts to distribute income or capital from the family trust during his lifetime. His long-term business plan generated income through his successful real estate holding company (REHC), and acting as guarantor of commercial loans to REHC. At real estate property settlements, the loans were repaid with all interest accrued; the net proceeds were then transferred to the family trust where he directed investment policy, flipping excess gains into individual securities, foreign hedge and commodity funds. When his first wife died prematurely, Mr Munificence took up residency in South Africa where he met his second wife, a South African national with a United States passport. They had three children.
Mr Munificence, in maintaining control of his assets, made numerous changes in family trustees over the years and had little patience for recent family trust legislation. He eventually conferred upon his eldest son, the PES (the protector to the family trust status) along with management control of the real estate company, and then passed to glory at age 90. Five years later, his personal estate, the family trust included, is still unsettled. His surviving spouse (SSP) is struggling with diminished cash flow at the SA family homestead, while the designated eldest son (PES) wants to retire in the United States with his US born spouse. The other two siblings as well as younger generations are scattered in the UK, married to nationals of other countries, including the United States, the UK and South Africa.
Since the patriarch’s passing, the family trustees (loyal business colleagues) have continued to engage in real estate investment business, gaining capital income traction with each sale, distributing cash intermittently to the beneficiaries on a needs basis, secure in their conviction that they are loyally following the patriarch’s letter of wishes.
Two- The General Issues
The matters arising were not even top of mind for the family. The surviving spouse and beneficiaries originally sought only investment advice due to a proposed change of asset allocation strategies for both the family trust (and individual) portfolio holdings.The trustees were considering making significant distributions from the trust in the near term.
A wholesale review of the multinational family’s finances from a fiduciary due diligence perspective ensued, as it was readily apparent that the priority planning analysis was not going to be investment specific, but international tax compliance focused. Competent investment advice could not be offered without consideration of all extenuating factors, attesting again to the observation that financial decisions should not be made in isolation. Experienced planning practitioners know that the potential for conflict across strategies, significant advisory fees, and decision paralysis is exacerbated in the cross-border context, when each step in an integrated plan must be examined from the perspective of two or more countries. Cross-border financial planning encompasses an holistic process that addresses the reconciliation and integration of many financial, non-financial and legal decisions. What follows is a general broad overview of the issues facing two members of the multinational family: the surviving spouse and the eldest son.
The Individuals Multiple Residencies
• SSP currently resides in South Africa. Is she resident of South Africa, a nondomiciliary of the United Kingdom, a citizen resident of the United States, or considered permanently living abroad but liable to tax by one or more countries?
• PES has the same issues: Where is he resident: South Africa, or the United Kingdom (where he still manages the day-to-day operations of the real estate company)? Which country deems him liable to tax? Is he is considered a UK resident able to use to his advantage the UK/South African tax treaty? What will be the residency requirements/consequences to him personally, if he immigrates/moves to the United States?
• SSP is a United States citizen born in the United States. Has she maintained any ties to the United States? How long has she resided outside the United States? Does she also possess South African citizenship?
• PES is a South African citizen, born in South Africa of a British father and a United States citizen mother. Is he a South African and a UK citizen? Does he have rights to United States citizenship through his mother? Cash management
• SSP needs a significant cash infusion to maintain her personal lifestyle and the family homestead. She has little resources in her own name.
• PES is still fully employed. He receives a salary and senior executive benefits from the real estate holding company, domiciled in the UK. He has accepted no distributions, yet, from the family trust.
• SSP – The majority of her funding is dependent on management of the assets in the family trust, with 30% assets invested in foreign mutual funds. She owns a small portfolio in her own right (estimate US $150 000), invested solely in SA mutual funds.
• PES – Owns foreign pension investments, 60% of the UK consulting company shares (privately held), and various other equity/fixed income holdings.
Multiple Jurisdiction Risk and Taxation Exposures
• What are (will be) the filing, reporting and tax obligations for both mother and son? Are they compliant with (or even aware of) the recent changes in US tax law, South African tax law, UK tax law, and possibly the tax neutral country? Are their personal financial assets structured for tax efficiency to reflect the global taxation changes that may affect them on a personal basis? Are they cognisant of the changes in the nature of the family trust distributions as applied to each of their personal financial profiles since the patriarch’s passing?Domestic/foreign corporation REHC
• The real estate holding company incorporated in the UK is owned more than 80% by one shareholder, PES, with the remaining shares owned equally by SSP and other siblings.
The Foreign Family Trust
The patriarch settled the family trust with an initial contribution of $1 million in a tax neutral country approximately 40 years ago. During his lifetime, settlor transferred an estimated average $200 000 per year (converted from sterling at time of each transfer) to the trust for an estimated total capital contribution of $9 million. Investment gains, interest and dividend income have added significantly to the cumulative total. No additional transfers have been made into the trust since the settlor passed five years ago. Trust has realised capital gains and some losses over the years, and currently has a large build up of undistributed net income.
• SSP is receiving distributions now from the foreign family trust. Does she have an obligation to declare these remittances? This is an old trust settled pre-1998. Do the provisions of Regulation 24 from SA apply to this trust? Will the trust be viewed from a US perspective as a foreign non-grantor trust, whereby the beneficiary and the foreign trustees are subject to complex tax reporting, and filing obligations relative to possible undistributed net income, and passive foreign investment company holdings?
• PES – Also a beneficiary, how will he handle distributions from the family trust? PES is also the majority shareholder in the actual real estate holding company, incorporated in the UK, and held outside the family trust. He receives dividends on a periodic basis.
Source: By Martha Harris Myron (TaxTALK)