12.12.2020

Return To America? Creative Expatriation Strategy For Married Couples

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Nobody enjoys paying taxes.

Whether you are a US green card holder or a US citizen, the only way to formally cut ties with the US tax system is to expatriate.

Many desire to expatriate but understandably choose against doing so because they fear permanently leaving America.

But don’t be too quick to assume that expatriation is binary.

Married couples have an interesting expatriation strategy available to them that leaves the door open for a possible return to America.

Solution & Strategy Overview

There’s no legal requirement forcing both individuals in a marriage to expatriate.

There can be tremendous advantages to expatriating only one spouse within a marriage – particularly when one spouse is a high-income earner and/or when the couple has income producing assets outside the US.

If the expatriating spouse is a resident or citizen of a no-tax country, then income attributable to that person will be tax-free.

This is also true if the expatriating spouse is a citizen of a country with an income tax (such as Greece) but is a tax resident of a jurisdiction with no taxes on income or capital gains such as the Caymans, Bermuda, or the UAE, or has tax advantaged residency somewhere else.

Structuring non-US income so that it is attributable to the expatriated spouse will remove it from the US tax system – with the potential of it being entirely tax-free.

In addition to possibly achieving tax-free income, this expatriation strategy leaves a path back to life together in America because the spouse who remains a US citizen will always have the right to live in America.

Under US immigration law, there is a strong possibility that the expatriated spouse can eventually obtain a green card or residency visa and return to America if so desired.

Example

Suppose there is a man (a US citizen) and a wife (a green card holder).

Together, they own rental properties inside the US, cash, stocks, and foreign income producing assets.

Both have the legal right to live in a country with 0% taxes on income, capital gains, rents, royalties, etc.

They desire to reduce their overall tax burden.

This couple is well-suited for the one-spouse only expatriation strategy.

While there are many technical considerations that must be made regarding matters like the gift and estate tax rules, it’s possible to re-allocate the assets between the two.

All of the US assets will be assigned to the person remaining a US citizen.

The cash, stocks, and foreign income producing assets will be assigned to the expatriated spouse.

Here’s why.

US assets will be subject to US taxes regardless of whether they are owed by a US citizen, a green card holder, or a foreigner.

Generally, there’s no tax advantage gained by assigning them to the expatriated spouse. The spouse who remains a US citizen will pay all US taxes owed.

However, the same is not true for the other assets.

Cash, stocks (even US stocks), and foreign assets can all be structured to avoid the US tax system.

By assigning ownership of these assets to the expatriating spouse, so too will the income they produce – meaning, the income from these assets will be “foreign” and therefore not subject to US taxation.

Because the expatriating spouse is not subject to taxes in their home country, this income is tax-free.  

Added Bonus

There is another benefit to this strategy. Immediately after the expatriation ceremony, the expatriating spouse may form a trust that is tax free. 

If after five years the expatriated spouse were to become a US person again, the trust is deemed a “foreign, non-grantor” trust. 

What does that mean?

Under this designation, the settlor of a trust will only be liable for tax on distributions.

As a result, the US citizen will only be taxed when receiving a distribution from the trust. The expatriated spouse (the settlor) only pays tax on distributions from the trust. 

There is no tax due when the trust produces income.

Sound Interesting?

I’m helping a couple through the exact scenario in the example above.

As an expatriate myself, I know about the practical and emotional components of the expatriation process.

Schedule a consultation and let’s begin exploring your options and planning your expatriation.

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