In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by David Lesperance and Melvin Warshaw. David Lesperance is the Managing Partner of Lesperance & Associates, one of the world’s leading international tax and immigration advisors. Melvin Warshaw is a highly regarded, longtime US cross-border tax and private client attorney now in sole practice in the US. The conversation today focuses on immigration to the United States from a foreign country.
In this episode, you will learn:
- Common reasons for immigration to the United States.
- The process of immigrating to the US, including the types of visas available and how they differ in terms of eligibility and benefits.
- The process and requirements for obtaining permanent residency (Green Card) in the US.
- Common challenges and obstacles immigrants face during the process.
- How the US tax system applies to immigrants, and the tax implications for different types of visa holders.
- The potential tax pitfalls that immigrants should be aware of to avoid legal issues.
- And more!
Resources:
Episode 156 – The Tax Implications of Moving Abroad With David Lesperance and Melvin Warshaw | Melvinawarshaw.com | Contact Melvin: [email protected] | lesperanceassociates.com | Contact David: [email protected] | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today, I am joined by two guests, David Lesperance and Melvin Warshaw, who are actually returning for a second episode. You may recognize them from Agent of Wealth Episode 156 – The Tax Implications of Moving Abroad.
If you haven’t listened to that episode yet, here’s what you need to know:
David Lesperance is the Managing Partner of Lesperance & Associates, one of the world’s leading international tax and immigration advisors.
Melvin Warshaw is a highly regarded, longtime US cross-border tax and private client attorney now in sole practice in the US.
They have 75+ years of combined experience, making them an unparalleled resource for anyone dealing with the complex legal issues surrounding expatriation and U.S. tax.
Together, David and Melvin have successfully advised scores of U.S. and non-U.S. high and ultra-high-net-worth individuals and their families on a wide range of personal and business tax matters, especially in connection with cross-border income and estate tax planning and compliance in the U.S.
They also have co-authored many articles on their field that have been published by leading media outlets.
David and Melvin, welcome to the show.
David:
Thanks, Marc. It’s great to be back.
Melvin:
Thank you very much.
Marc:
I brought David and Melvin back onto the podcast, because in the first episode we recorded, we primarily focused on expatriation to a foreign country from the United States – the tax implications, the immigration issues, and so on. Today, we will focus on immigration to the United States from a foreign country.
David, what are some of the reasons people are moving to the US?
Common Immigration Reasons
David:
We’re seeing different local concerns in different regions of the world, just as some Americans are seeking second residences and/or citizenships in foreign countries – there are a variety of reasons.
What we really want to cover today is, if someone has decided on the United States, what’s the best immigration and tax strategy they can use?
Mel and I see all kinds of different groups of clients. For example, Israeli tech founders who found that Startup Nation isn’t what they thought it was going to be, so they want to relocate. They’ll naturally gravitate towards the technology center, which is the United States.
We’ll see Chinese clients. We might work with ultra high net worth business people who say they don’t want to be the next Jack Ma. Or it could be the tech founders who are starting their business in 2023, which is fundamentally different from what Jack Ma or Pony Ma did 20 years ago.
South Africans are seeing brownouts. There was a major strike in Cape Town a few weeks ago. There’s enormous unemployment, and as Reuters said earlier this week, that’s a ticking time bomb. They might want to come to the United States.
Or, perhaps it’s Mexicans that are worried about the election of AMLO.
We get calls from all kinds of different people, and many will go to the United States because it’s a well-known brand. They may have business here, or they’re attracted to the great education opportunities and employment opportunities… et cetera.
Marc:
So, what’s the process of immigrating to the US? Let’s use some of the examples you gave us. Let’s say an entrepreneur from Israel decides he wants to come to the US, or even someone from South Africa who wants better education opportunities for their kids. Would they follow two different processes?
The Process of Immigration to the US
David:
Sure. Remember, one of the things we emphasize in the last podcast was that both Mel and I are both fee-based advisors – we don’t take third party commissions. Unfortunately, a lot of the immigration to the United States is driven by commission advisors. So one of the things you’ll oftentimes hear about is called the EB-5 Visa, and that can be a long process. For example, it’s about 12 and a half years for residents coming from China, because there’s a country quota. But, it pays a very high commission, so there’s a lot of marketing around it. The EB-5 Visa is one of the tools in the toolbox, but there are a lot of other tools that we usually reach for sooner.
So, if we’re working with a tech founder from China or Israel, for example, we would do something very quickly and get them, such as intra corporate transfers that we don’t have to deal with H-1B caps. We can do E-1 or E-2 Visas, depending on what countries they’re coming from.
We can later convert that non-immigrant L-1 or E Visa to a green card. Unlike the EB-5, it’s cheaper, faster and better, but it doesn’t pay commissions. That’s why you don’t hear much about it.
Marc:
Has the process of immigrating to the US changed over the years or is it trending in one specific way? Is it easier? Is it harder?
How the Process of Immigration to the US Has Changed
David:
Well, we’re looking at business people who have a different set of skills and different tools that we can use in the toolbox. Countries are trying to attract these golden geese, for lack of a better term.
In the United States, timing and process matters. And, as I said, in certain categories like the EB-5, there’s a country quota.
There are a number of different immigration strategies…
The first and most obvious is a green card. When people say, “I want to get a green card to the United States.” Now, if you’re going to school and you want to get a job, a green card may be the appropriate solution, but if you want to be able to come to the United States, but don’t necessarily want to expose your family wealth to the United States, an EB-5 is completely inappropriate because it results in a green card, which means that the moment that they get the green card, they’re going to be a US person for tax purposes.
We really need to understand what each family member’s goals are, and then we come up with a solution that meets each of those goals.
Marc:
What are some of the obstacles that you encounter with your clients?
David:
For this type of clientele, there are two kinds of issues.
One is extricating them from their current country. Are there exit taxes? What do they need to do to serve their residence? Can we use a tax treaty? Is there currency control?
For example, in India, China or South Africa, getting money out of the country is part of the job. Once we get an individual out of the foreign pot, we want to make sure that they don’t jump into the US tax fire as part of that process. I call this Fire Insurance – second residences, citizenships, and statuses in the United States or others. But it’s got to sync with the Fire Escape Plan, which we discussed in the last episode.
Second, too often Mel and I see a disconnect between the immigration and tax council. First off, an individual should make sure these professionals are fee-based, not commission driven. But also, they need to be working together on these strategies. The advisors need to be in sync.
Marc:
Now, segueing into tax application… How does the US tax system apply to immigrants? What are the implications of the different types of visas or immigration statuses?
How the US Tax System Applies to Immigrants
Melvin:
The initial question is, do you want to obtain a green card or is there perhaps another way for you to be present in the US, without a green card? The difficulty with a green card is if you are physically present in the US with your green card, you’re presumed to be a US domiciliary with similar US estate tax consequences. You also face the problem that if you hold the green card for more than seven years, you’ll experience difficulty in leaving the US. Contrast that with the situation of an Israeli tech entrepreneur who says, “I’ll come to the US, I’ll test out Silicon Valley. Get me an L-1 Visa.” Well, that individual can stay as long as they have the L-1 Visa without triggering the exit tax.
The exit tax in the US is only imposed on US citizens and long-term green card holders. So if the individual L-1 Visa holder is physically present in the US for the requisite amount of time each year, there’ll be an income tax resident. But if they decide to go back to Israel in the sixth year or the 10th year of an extended L-1 Visa, assuming it’s permissible, then they don’t face the exit tax.
That’s a pretty big consideration, and I think David would agree with me that in general, the best advice, but again this is an oversimplification, is if it’s possible, get an L-1 visa or another visa and defer obtaining a green card. Once you obtain a green card, the clock is going to start running.
David, any thoughts?
David:
Yeah, and that’s absolutely true. The other reason individuals may want to avoid being a long-term green card holder is to avoid triggering the Section 2801 inheritance tax issue.
We’ll oftentimes move multiple generations of a family, and we’ll do different things for different people. But one of the ultimate planning strategies that Mel puts together, and I make sure I don’t trip up, is relating to how does that gen one pass the wealth onto gen two, gen three, et cetera in a tax efficient way while also making sure that they’re not unduly subjecting that tax to unfavorable family law judgements?
Melvin:
David, let’s give an example. We’re working with a South African family where we anticipate that three generations of the family will move to the US. Or, perhaps the older generation might move to Bermuda, but the second and third generations want jobs and to live in the US. The reason that’s important is that, for example, if the second and third generations move to the United States and obtain green cards, or they stay long enough that they decide they want US citizenship, they will potentially be subject to US estate tax. So among the things that we would consider would be: How can generation one set up various ownership structures for businesses they left behind in South Africa that would give the second and third generation in the US access to the wealth, but not cause inclusion of that wealth in their US gross estates?
Because if they become a US citizen, like myself, there is a $13 million lifetime gift estate tax exemption. Then the second and third generation members of the family would have to take into account whether or not their spouses become US citizens, because there are limitations on how much money/property a person can transfer annually, and at death to a non-US citizen.
So maybe obtaining US citizenship for the second or third generation would be feasible. It would certainly make the US estate planning easier.
Let me say that this is a generalization, but there are usually two overarching issues that someone coming to the US would face. Number one: From an income tax point of view, what type of entity did you set up in your origin country? Is it a limited company? If no individual has personal liability, the US by default is going to treat that as a limited company.
If it is a limited company, and let’s say the person moving to the US controls the company, but it’s a foreign company to the US, you need to be concerned with at least a couple of the anti-deferral tax regimes in the US.
The first and the one that’s most likely to apply would be our controlled foreign corporation rules. If you control more than 50% of a private company in any other country and you’re now a US income tax resident, you’re going to have a phantom forced income at the shareholder level of a portion of the income of the foreign company. Since 2017, the portion of the income that is subject to current US income tax regardless of distributions of earnings and dividends is not only the foreign passive investment income of the company, but also a significant portion of the active income under the guilty rules.
Therefore, these individuals have an incentive to do some type of income tax planning.
Perhaps the easiest and most readily available is to file an election, but this election has to be filed before they become a US income tax resident to treat the foreign company as a disregarded entity or if there’s two owners, as a partnership. So if for example, I have a South African limited company and I’m going to move to the US and I own more than 50% of the stock, I’ve got to be concerned that I, let’s pretend I own 100% of the stock. If I move to the US, I could have 100% US income tax on virtually all the current income from the South African company, even though I never declare a dividend and bring it physically to the US.
So that’s a big problem. And the other problem is that many of these individuals will invest in foreign mutual funds, non-US mutual funds. Non-US private equity investments are typically made from foreign corporations, and invariably those entities satisfy the definition of a passive foreign investment company or PFIC. The problem with PFICs is, no matter how large your ownership percentage in the foreign corporation, you’re tagged with some fairly unfavorable anti-deferral tax regimes. But if you can be properly advised, maybe you can file a check the box election to disregard the entity as a partnership, though it is not always possible.
There are some other elections that ameliorate some of the very harsh anti-deferral tax regimes.
The third anti-deferral tax regime in addition to CFC and PFIC is the throwback tax. The throwback tax applies to individuals that have foreign trusts, typically foreign non-grant to a trust that make distributions to US citizens and US residents. So we have these three anti-deferral tax regimes that all have to be navigated from an income tax point of view.
From an estate tax point of view, the major concern of the client coming to the US from South Africa or Israel would be: What happens if they die in the US and the US imposes its US estate tax? If they’re a domiciliary of the US and living there with a green card, the US is going to impose its US estate tax on their worldwide assets. That means that they’re going to have to pay US estate tax on the fair market value of their shares in the foreign company.
In order to prevent that, I will regularly recommend that the client consider setting up a drop-off trust before moving to the US. The concept of a drop-off trust is if the individual transfers their shares in the foreign company to the irrevocable US – say a Nevada directed trust – then if the client dies while in the US, there’ll be no US estate tax because the shares in the foreign company will be owned by the Nevada irrevocable trust. That’s the big picture of how we can help people really ameliorate these complex rules.
Marc:
Is there any difference to the estate implications if the asset overseas was acquired before or after they came to the US?
Melvin:
Generally, no. If the individual’s a US domiciliary, they are going to be taxed on worldwide assets the date they make the gift or the date they die. On the other hand, if the individual says, “I’m only coming to the US for a year and a half, I’m keeping my home in South Africa. I’ve made absolutely no commitment to permanently move to the United States.” I would likely take the position that such individual has no intent to remain permanently in the US, as there’s always an intent to remove themselves and go back to South Africa. So in that case, such individual would be treated as a non-citizen, non-domiciliary. And the problem there is to the extent they own US real estate or US jewelry or artwork in the US, the US estate tax exemption for such non-citizen, non-domiciliaries is only $60,000. So they’ve got to be careful.
That’s one of the reasons that in planning for acquisitions of residences, it’s often recommended that the individual set up either a foreign company or perhaps an irrevocable trust and then put cash into it and have that entity buy the residence in the United States. There are some difficulties in using a foreign corporation because you could run into the US making the argument of a constructive dividend to the extent the individual used the residence while in the US. So maybe a trust is better, probably has to be a US trust because we have a rule that if a foreign trust allows a US resident beneficiary or US citizen beneficiary to use the trust property, this phantom income to the beneficiary
Marc:
You’re talking about the individuals who have these assets. But what about someone who inherits a foreign asset? What’s their implication?
Melvin:
Well, let’s look at an example. Let’s say an individual goes to Stanford, falls in love with Silicon Valley and raises his family there, but his parents still live in China. The best advice here would be for the parents in China to set up a two-phase trust. The first phase would be what’s called the foreign grantor trust. During that phase, while the matriarch or patriarch is alive, it would be revocable, therefore the parent has complete control over the trust. Then when the parent dies, the trust would convert and automatically become an irrevocable trust of death, but it’ll be a US trust. It’ll be irrevocable, and therefore there’d be no estate tax inclusion for the children or grandchildren so that you create a dynasty trust in effect during phase two, after the matriarch or patriarch has died.
David:
Marc, one of the things to remember as we go through this is that most immigrants, even sophisticated immigrants to the United States, isolate and silo their immigration advisors and tax advisors. The immigration advisors and tax advisors really are operating in completely different tracks, not knowing what the other side is doing, and it can result in a failure to take advantage of opportunities.
One thing we’re seeing a lot of is some people come to the US, get a green card for a number of years, and then go back to their home country (or some other country). And so if an immigration advisor is sitting there saying, “Well, your resident alien card expired so you’re not a green card holder.” And then they go and talk to their accountant and say, “I’m not a green card holder anymore.” The accountant will say, “Oh, you’re not a US person for tax purposes anymore.”
They will be completely unaware of the expatriation rules, completely unaware that the IRS still considers them a US person – same with the INIS – and so on. Because resident alien cards are issued for 10 years, oftentimes we’ll have people who inadvertently failed to file completely out, which triggers all kinds of ramifications with immigration and tax. Likewise, there are tax lawyers who are unaware of the different opportunities available to the client with regards to immigration strategies that would be much more tax efficient than what the salespeople promote.
Melvin:
Let me share with you an example. Earlier this year, I was asked to get involved with a client from Scotland who wanted to give up his green card after about 25-30 years. He had a successful business in the United States, married a US citizen, and they had a child living in England. At the first meeting in 2023, I asked the client to provide me with various documents, and lo and behold I uncover form I-407 from November 2021. As David knows, that’s a problem because…
David:
That’s a relinquishment of green card status.
Melvin:
Yes. The client explained to me that as he was making a trip back to the US from Scotland – which he did frequently – he flew through Dublin and encountered a US border patrol person. That person said something like, “Look, I don’t think you’ve been in the US for a long time, and if you want to get on that plane, you need to sign this form.” My client had no idea what he was signing, but it was a relinquishment of permanent legal status in the US. That triggered full inclusion of his seven figure IRA in income, the exit tax… and we now have a compliance problem because he’s late in filing form 8854 expatriation statement with the US government, so we have to go through some remediation. It’s a big deal. It’s a problem.
David:
Yeah, I can tell you that I worked as a Canadian officer, similar to American Border Patrol officer. In some places like Dublin and Toronto, you actually clear US customs and immigration in the foreign country and then you arrive at a domestic terminal as opposed to flying in and arriving at an international terminal. So if that was me and Marc, you walked up with a passport, I’d say, “Oh, you have a green card here, but your resident alien card expired.” I, as an immigration officer, have a choice that I’ll present to you. We can spend the next 20 minutes writing up all kinds of paperwork reporting you, and then you’ll go through an administrative process that will probably result in you losing your green card.
Or, you could sign this piece of paper stating that you are voluntarily relinquishing your green card. Once you do, you can go to your meeting, wedding, reunion… whatever you’re doing. Of course, humans being humans and not necessarily understanding, will sign the paper.
We’ve had a number of these cases, and there’s a vast amount of misconception. If this client had been talking to Mel beforehand… Mel, put a dollar figure on what you would’ve saved him.
Melvin:
His exit tax is going to be close to a million dollars. But the bigger problem is he has a US citizen wife and daughter, so he’ll be a covered expatriate for life. He’s probably worth about $7-8 million dollars. How is he going to get his assets to his US citizen wife and daughter without them having US inheritance tax?
US inheritance tax starts at 40% over $17,000 and there’s no lifetime gift estate tax exemption. This is a big problem.
So, I’m 90 minutes into the first meeting and the client says, “By the way, I have two adult sons from a prior marriage who have never lived in the US.” I said, “Well, when the time comes, we may need to consider utilizing them as part of your estate plan.” They could certainly make gifts, as long as it’s not a step transaction and they’re not intermediaries under the US tax definition. So they play an important role in the inheritance for this client’s US family.
Marc:
Yeah, that makes sense.
David and Melvin, that’s all of the questions I have for you today. Thank you for joining me for another episode of The Agent of Wealth Podcast, it was a pleasure speaking with you both.
For those of you that haven’t already listened to the episode, we will include a link to the first recording David, Melvin and I did in the show notes.
Otherwise, how best can the listeners get in touch with you both?
David:
You can find me on LinkedIn as David Lesperance or on my website.
Melvin:
Individuals who wish to reach me can go to my website, melvinawarshaw.com.
David:
On both of our websites, you’ll find lots of the articles – some we’ve written together, some separately. There are great resources for people listening to really dig into.
Marc:
Great, we will link to all of the resources in the show notes. Thanks again, David and Melvin. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
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