A recent survey conducted by China Merchants Bank indicates that approximately 60% of China's "high-net-worth individuals"—those with investable assets of 10 million RMB or more—are either considering investment immigration to the United States or are nearing the completion of their U.S. immigration procedures.
Despite this, many people still feel apprehensive about U.S. global taxation laws. Many clients consulting on U.S. EB-5 investment immigration are also concerned about the significant tax burden they may face once they obtain a U.S. Green Card. In fact, clients need not worry; with the right methods, reasonable tax avoidance is entirely achievable!
So, how should we transfer assets after immigrating to the United States to achieve reasonable tax avoidance?
Regarding asset transfers, U.S. tax law has different regulations for three types of individuals: U.S. citizens, Green Card holders, and non-resident aliens. In terms of taxation, the U.S. system is "person-centered." As long as you are a U.S. citizen or a permanent resident, you cannot escape taxation regardless of where your assets are located—whether in China, the United States, or anywhere else in the world. Even for non-resident aliens, if they have assets in the United States, "Uncle Sam" will first determine if the individual is considered a formal resident of the U.S. Once the answer is "yes," these individuals must also pay taxes on asset transfers exceeding the exemption threshold. "Uncle Sam's" approach is quite rigorous; the wealth you have worked hard to accumulate in China over a lifetime may not only be impossible to pass on entirely to your descendants due to holding a Green Card, but you may also end up paying tribute to "Uncle Sam." This cannot be blamed entirely on "Uncle Sam's" dominance; applying for a Green Card and becoming a U.S. citizen is a personal choice, and once you choose the United States, you must pay taxes according to U.S. tax law.
Which global and U.S. asset transfers by foreigners are subject to U.S. estate and gift taxes, and how do Americans reasonably plan and transfer their assets when facing property issues?
Reasonably utilize the annual gift tax exemption
According to tax law, in 2015, each person could gift up to $14,000 USD to any individual annually, and any asset gift below this amount is not subject to gift tax. If a couple has two minor children, the couple can gift $28,000 USD to each child per year, totaling $56,000 USD for both children without incurring taxes.
Calculated this way, over 10 years, the assets transferred from parents to children can reach $560,000 USD, which is not a small amount. If this money is invested, both the investment income and the principal belong to the child's assets, and at this point, the earnings legitimately fall into the child's pocket without the need to pay gift tax.
Reasonably utilize gift tax
In the United States, gift tax is paid by the giver, not the recipient. If parents do not hold U.S. citizenship or a Green Card, their remittances are not subject to gift tax. However, there are specific regulations for receiving overseas funds; if the amount exceeds $100,000 USD, it must be reported via Form 3520, but reporting does not mean you have to pay tax. The reporting system is designed to help the IRS keep records and understand the source of your funds.
Unlimited Marital Deduction Principle
U.S. tax law stipulates that asset transfers between spouses are not subject to the annual gift tax exemption (provided both spouses are U.S. citizens), because U.S. law defines a married couple as a single economic unit, and there are no restrictions on transferring assets between them. This unlimited marital deduction is a preferential policy for U.S. citizens; because permanent residents are essentially still foreigners, "Uncle Sam" treats them differently. If both spouses hold Green Cards and are permanent residents, they can travel in and out of the U.S. freely, but they do not enjoy the unlimited marital deduction. If one spouse passes away, even if they leave all assets to the surviving spouse, the spouse must pay estate tax before they can inherit the assets, rather than waiting until the estate is passed on to descendants.
U.S. tax law is very unfavorable for non-U.S. citizens inheriting the estate of a U.S. citizen. In a marital relationship, there are two scenarios that lead to different outcomes for inheritance, depending on whether it is a U.S. citizen leaving the estate or inheriting it. For example, if the husband is a U.S. citizen and the wife immigrated from mainland China and only holds a Green Card, the wife does not enjoy the unlimited marital deduction if the husband passes away. The wife from the mainland can inherit the estate left by her husband, but the prerequisite is that after deducting the estate tax exemption, she must pay the estate tax immediately; otherwise, "Uncle Sam" will not allow this Green Card holder to inherit any assets.
Purchase life insurance
Purchasing insurance for yourself, your spouse, or your children ultimately aims to ensure that assets can be passed on smoothly. For example, many people may not leave more than one million dollars to their children in their lifetime; if they purchase a life insurance policy with a one-million-dollar death benefit, this is equivalent to leaving a million dollars in cash to their children. Furthermore, life insurance death benefits are generally not subject to income tax or estate tax.
As Chinese investors plan their assets, many have realized the benefits of offshore insurance.
Establish a family trust
There are various types of trusts, which can be basically divided into two categories: revocable and irrevocable. The former commonly includes Living Trusts and Pension Trusts, etc.; the latter includes life insurance trusts, dynasty trusts, etc.
There are two things to understand about trusts: First, a revocable trust has little tax-saving function and no asset protection effect. The reason is simple: it can be revoked at any time.
Second, what truly serves the purpose of estate planning is an irrevocable trust. However, the existing or future assets (such as life insurance) placed into it legally no longer belong to you; you have no control over them, and even less beneficiary interest. If you are truly worried about being sued and fear that creditors might target your assets in the future, you should set up an irrevocable trust, put assets you do not need into it, and designate your children as beneficiaries. Doing this has two major benefits: first, the assets are transferred at today's value, and future appreciation will not be counted as part of your estate, thus avoiding estate tax. Second, because the assets no longer belong to you, if you are sued, others cannot reach the assets within the trust.
A client once set up an irrevocable trust several years ago and placed some of his assets into it, with his daughters as beneficiaries. Later, he was sentenced to prison, and his companies, properties, and bank accounts were confiscated, but the assets under the trust remained safe and sound, ensuring his children's future living expenses.
Finally, U.S. tax experts suggest that when investors look for or participate in asset planning, they should make choices based on their family's characteristics and personal preferences. Maintaining the initiative in asset planning is the best way to ensure the continuation of wealth.
