Oftentimes I receive phone calls or emails from Kuwait nationals and residents requiring assistance with their US assets. Therefore, I want to highlight a change in the US Tax law, which complicates estate tax planning for nonresident aliens (non-US persons) with US beneficiaries (e.g. heirs with US passports).
Investors should be aware that certain US assets owned directly by a non-US person are subject to US estate tax upon the death of the non-US person.
Specifically, the Tax Cuts and Jobs Act eliminated the 30-day safe harbor against controlled foreign corporation status, which impedes the ability to pass appreciated US assets held in a foreign corporation to US heirs without a tax cost. The result is that the new US shareholder-heirs of a foreign corporation that is deemed to be a controlled foreign corporation must report and pay US income tax on their pro rate share of the income (including capital gains, interest and dividends), on a flow-through basis and at ordinary income tax rates (which are , even if no income is distributed to the US shareholder-heirs.
It is important that non-US persons/settlors with US beneficiaries and trustees consult US tax counsel on their current structure before death, as well as immediately after death and before making any elections to ensure that all opportunities with respect US tax minimization and restructuring, if suitable, are considered, and to confirm reporting requirements.