“Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn't as hard as you might think.” - Suze Orman
With two jurisdictions’ tax rules to consider, tax efficiency is a prime concern for Americans investing when living abroad. Investing through a limited company or trust can, in certain circumstances, be advantageous. As with most sophisticated tax saving strategies though, the devil is very much in the details of your circumstances and goals. What assets are you investing in? Which country are you investing in? When, or whom, do you want to receive income from your investments?
In this article, you’ll learn about:
• When expats might invest through a trust
• When expats might invest through a limited company
• Where should expats register a trust or LLC?
• Taking income from a trust or LLC
When expats might invest through a trust
Investing through a trust can be advantageous in two potential ways: tax efficiency, and retaining control of assets that you want to benefit someone else.
The two most common scenarios when you might invest through a trust are either to reduce estate taxes as part of your estate planning, or to retain control of assets that you want to gift for the benefit of others during your lifetime.
Trusts all have three legal parties, the grantor, or person setting up the trust, the trustees, who manage the trust, and the beneficiaries, who benefit from it. The grantor can also be a trustee.
There are also two types of trusts: revocable, or irrevocable. Irrevocable trusts are normally used for estate planning purposes, as once set up, it is hard to amend them. A revocable trust on the other hand could be used to gift assets to grandchildren while retaining control of how the assets, or the income generated by the assets, can be used during your lifetime.
So an irrevocable trust might be used to leave assets to your heirs while reducing estate taxes, if certain conditions are met, because the assets are already deemed to be outside of your estate once gifted to the trust (although gift taxes may apply at the time you set up the trust). Trusts also avoid the probate process, also because assets gifted to a trust aren’t considered part of your estate any more.
When expats might invest through a limited company
Similarly, there are some scenarios when investing through either a US LLC or an equivalent limited company in another country can be beneficial.
The most common scenario is when investing in real estate such as rental properties, as investing through a limited company structure limits the owner’s liability in the event of a lawsuit by a tenant. A lawsuit is much less common when investing in other types of assets such as stocks though, reducing the benefit of investing in an LLC.
There can also be tax benefits to investing in a limited company, but the devil is very much in the detail, as while corporate tax rates may be lower than personal tax rates, a US LLC is considered a pass-through entity anyway (so company income is taxed as personal income), and in any case you will always be taxed again when you take money out of the company.
Though if for example you are planning to just reinvest the company income in the company until you sell it, rather than ever take money out of the company, it may make sense.
Where should expats register a trust or LLC?
If, after consulting with your expat financial advisor, you conclude that it does benefit you to invest through a trust or an LLC, you’ll also have to consider whether to register the trust or LLC in the US or in your country of residence.
It will depend on your long term plans among other factors, such as where you see yourself living in the future, where the beneficiaries of the trust will be, where the assets you’re looking to invest in are, and also the relative tax advantages and disadvantages of registering in the US or abroad.
A foreign-registered LLC isn’t automatically considered a pass-through entity, so unless you elect for it to be, it will trigger additional US reporting requirements (as will all foreign registered trusts).
Where your investment vehicle is registered may also impact what countries and assets you can invest in.
The best strategy is to always consult your expat financial advisor when considering where to register an investment company or trust.
Taking income from a trust or LLC
The income from investments in an LLC may be liable to corporation tax, depending on whether the LLC is considered a pass through entity or not. Then, when you take distributions, you will have to pay either income or dividend taxes.
In the case of a trust, income tax will just be due on distributions paid to the beneficiaries.
As American citizens living abroad have to file US taxes as well as taxes in the country where they live (depending on the tax rules of that country), there is a risk of double taxation when receiving income from a trust or LLC, however you can normally claim tax credits to offset this, meaning you’ll end up just paying the higher tax rate of the two countries.
In this article, we’ve outlined some of the different scenarios and considerations relevant when considering whether to invest through a trust or LLC, however everyone’s situation is different, and it’s imperative that you seek advice from your expat financial advisor to explore whether it makes sense within your overall financial plan and goals.
If you have any questions, don't hesitate to contact us.
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