Global Assets, U.S. Persons: Cross-Border Tax Planning Mandatory

We are living in an interconnected world. Couples reside across borders, own assets in multiple countries, and use complex structures involving trusts, foundations or corporations. The U.S. tax system reaches further than many realize. Identifying U.S. person exposure, pinpointing U.S. situs assets, and documenting matrimonial property rights are now essential parts of global estate planning.

getty

In her recent Forbes article “Foreign Trusts – How Structure Can Prevent a Million-Dollar Penalty,” Priya Royal emphasizes a core maxim of cross-border tax planning: whenever U.S. persons are part of the “clan,” heightened vigilance is required.

The same principle holds true when U.S. situs assets are involved in foreign families or their structures. Global couples, global assets, and global financial flows mean that U.S. tax exposure can creep in unexpectedly. The case of Estate of Charania v. Schulman decided by the Tax Court and affirmed by the First Circuit is a cautionary tale of how U.S. estate tax liability can be triggered by U.S. assets held by non-U.S. persons and how foreign marital-property regimes, citizenship, and domicile all play a decisive role.

From Trusts To Estates: The “U.S. Connection” Takeaway

Priya Royal’s article discusses foreign trusts with non-U.S. grantors who mistakenly believe they are insulated from U.S. tax risk, only to discover that the presence of U.S. beneficiaries, U.S. trustees, or U.S. persons in the “clan” triggers heavy penalties and cross-border disclosure consequences. The takeaway: structure is only the beginning; governance and compliance must be built around U.S. person tax risk.

The same logic applies to holdings of U.S. situs assets. Even if the holder is non-U.S., once U.S. stock, U.S. real estate, or other assets located in the United States enter the mix, the same vigilance is required and planning and structuring are paramount.

The Charania Case: Facts And Lessons

In Estate of Charania, the decedent, Noordin M. Charania, a nonresident alien for U.S. estate tax purposes, held U.S. situs assets at the time of death, specifically, he held 250,000 shares of U.S. Citigroup Inc. stock. He and his wife had moved to Belgium in 1972 after being exiled from Uganda and were living there at the time of Noordin’s passing in 2002. Both were U.K. citizens by birth. The issue concerned whether all or some of the stock shares were included in the decedent’s U.S. estate for tax purposes.

The estate claimed that under the Belgian community-property regime, the surviving spouse owned a half interest in the shares, so only half the stock’s value should be included in the decedent’s U.S. gross estate. However, the U.S. Tax Court held that, under Belgian conflict-of-law rules, English law (because of the couple’s U.K. citizenship) governed their matrimonial property regime. English law did not recognize community property, so the entire 250,000 shares were included in the estate. The result: a U.S. estate tax deficiency of roughly $2.07 million.

The case underscores several critical risk points for cross-border couples and owners of U.S. situs assets:

The Cross-Border Couple In A Global World

In today’s environment, many couples and families are global. One spouse may be a U.S. citizen or resident, while the other is not; assets may be held across multiple jurisdictions through trusts, corporations, or partnerships. The Charania case and Royal’s foreign trust discussion represent two sides of the same coin. Whether through trusts or direct ownership of U.S. assets, once U.S. persons or U.S. situs assets enter the picture, the U.S. tax net follows.

Here are key implications for global families and their advisors:

1. Identify the U.S. person exposure in the clan.
If one spouse or family member is a U.S. citizen or resident, their worldwide income and assets fall under U.S. rules. Even a “foreign” trust can create major U.S. compliance issues if U.S. persons are beneficiaries or trustees. Similarly, in estate planning, if a spouse or heir is a U.S. person, marital property questions, U.S. situs assets, and reporting requirements must be carefully reviewed.

2. Locate the U.S. situs asset exposure.
Even for non-U.S. persons, U.S. estate tax applies to U.S. situs assets including U.S. corporation stock, ETFs, real property (even if held through an LLC), or tangible assets physically located in the United States. Many global families wrongly assume that living abroad shields them from U.S. tax exposure. But the presence of U.S. shares, real estate, or other property can still trigger U.S. estate or gift tax.

3. Check matrimonial property regimes early.
As Charania demonstrates, the classification of property (community versus separate) and the governing law of the marriage can be decisive. Tax professionals must work together with local counsel to understand the marital regime of the relevant foreign country or countries. Moves between jurisdictions can alter the applicable regime unless a formal marital property agreement or declaration is made. For U.S. estate and gift tax purposes, clearly documenting the chosen regime is critical.

4. Align structure, governance, and reporting.
Structure alone is not enough. U.S. tax reporting and filing as well as governance must all be in alignment. This applies equally to trusts, corporations, and direct holdings of U.S. situs assets. If U.S. persons are involved, U.S. tax reporting, including Forms 3520, 3520-A, 5471, 8938 and FBARs, must be considered alongside estate and gift tax exposure.

5. Integrate cross-border planning into the overall wealth strategy.
Global families cannot treat U.S. exposure as an afterthought. Proactive planning must take into account U.S. tax rules, U.S. person status, residence and domicile, marital property regimes, and U.S. situs assets. Documentation, review, and updates to reflect life changes (marriage, relocation, inheritance, or asset acquisition) are essential.

Cross-Border Conclusions

We are living in an interconnected world. Couples reside across borders, own assets in multiple countries, and use complex structures involving trusts, foundations or corporations. The U.S. tax system reaches further than many realize. Identifying U.S. person exposure, pinpointing U.S. situs assets, and documenting matrimonial property rights are now essential parts of global estate planning.

In a nutshell, the global couple, often with multiple nationalities and holding assets in various jurisdictions must analyze their planning through two key lenses: “who” (U.S. person) and “what/where” (U.S. asset).

For wealth advisors, estate planners, and cross-border families, the message is clear: avoid blind spots. When U.S. persons or U.S. assets are in the mix, the stakes are real. Cross-border tax planning today can prevent tomorrow’s million-dollar penalty or multi-million-dollar estate tax.

Stay on top of tax matters around the globe.

Reach me at vljeker@us-taxes.org

Visit my U.S. tax blog www.us-tax.org

NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE

This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.