Romance is a spontaneous, glorious happening, but as a foreign national, immigration into, and taxation within another country (in our composite case, the United States) requires pre-border crossing planning, too. The two thought processes are diametrically opposed to each other — with the euphoria of the first overwhelming the practicality of the second.

Our two prior romance articles generated numerous inquiries from readers, and regrettably, only served to confirm what has been known for many years by me and peer professional groups: the confusion, complexity and lack of planning continues unabated. And no wonder. You, the ordinary person resident in Bermuda have enough trouble understanding our own tax structures. How are you now expected to figure out one of the most complex tax structures on the planet?

The initial misunderstandings focus around these areas:

• How the timing of what cross border actions can classify the foreign individual as a US tax resident or a lawful permanent resident in the US;

• How these actions interact and clash with US immigration law;

• What are the tax responsibilities of a US tax resident;

• And, what can the foreign national do prior to immigration to plan tax efficiently for the big move.

Remember the mantra: what we in Bermuda consider to be local — wages, commissions, dividends, capital gains, profits, bank accounts, investments, mutual fund accounts, life insurance, pensions, companies, partnerships, estates, trusts, and related items — are all classified as foreign structures by the United States.

Pre-immigration planning for the foreign national means that his/her currently-owned foreign intangible assets (and possibly tangible ones, too) may possibly be revised, liquidated, or restructured. Exceptions can occur, such as keeping a family home, or not being able to liquidate a pension fund due to age-defined long lock-up periods.

1. Cost-basis and capital-gains, or losses, are significant components of a sale. The US does not grant a “landed” or current value to assets that you have owned long-term upon immigration. For example, your grandmother left you her family residence 30 years ago, currently rented, with an appraised estate value at that time of $160,000. Today’s local market selling value is $1.16 million. You decide to wait until you settle in the US before selling the property. Thus, your capital gain on the property under US tax law is $1 million, due to this low cost basis, and will be subject to US taxation under current individual income tax rules. The same concepts may be applicable to shares of local companies and other intangibles. Selling the property prior to immigration eliminates this issue.

2. Consider managing income due and assets owned. Collect all income and distributions due, such as from your foreign company, accounts receivable, deferred compensation packages, stock options, if you are so lucky, etc. Sell assets such as foreign mutual funds, hedge funds that will be subject to onerous passive foreign investment company regulations and higher income tax thresholds, especially if held in holding companies — this explanation way beyond the scope of this article. Restructure corporate ownership to avoid US-controlled foreign corporation regulations or consider selling the company. Consider if healthily possible, purchasing US tax compliance life insurance, instead of non-US tax compliant foreign insurance. Assets that you must keep, understand how they can possibly be managed for tax efficiency.

3. Estate restructuring. Consider making gifts to beneficiaries now. Convey or sell property to family members or on open market. Sophisticated planning for foreign trusts absolutely will need consultation with an internationally experienced US estate attorney. Conveying assets into or settling a foreign trust has a potentially five-year look back rule of US income tax issues, as will your change in resident status affecting the foreign trust in your current role of protector, beneficiary, or possible trust mortgage guarantor and related items. US tax law that regulates foreign trusts is complex, full of adverse consequences, penalties, and monotonous compliance reporting.

These are only some suggested planning ideas to consider, while consulting tax professionals, when you are still a foreign national. Thus, the timing of your immigration decision is critical. Triggering the substantial presence test** (and the lapse rule) by overstaying in the US, or obtaining a US green card means that restructuring your foreign affairs without US tax consequences may not be possible.

So, you know the often repeated advice.

Plan first.

Review all of your assets line-by-line for potential US tax issues while working with experienced US tax professionals: CPAs and tax attorneys to restructure your assets for the best possible outcome. Take real caution — this is not an area for the do-it-yourselfers.

When your planning is done, you know where you stand. Then, cross the pond borders to your new life.

Disclaimer: caution and warning — the information in this article is not personal advice. The information provided is a general overview of the issues encompassed within pre-immigration planning to another country. Certain details and references have been deliberately omitted. You cannot and should not rely upon this information for your personal Brexit (Bermuda island exit) cross-border financial plan.

In another future series — TBD, we will focus on the responsibilities of a Bermuda resident who is also a US citizen living abroad most of his/her life. One of the common mistaken assumptions is that US citizens living abroad is that they should “not trip the 120-day stay (US substantial presence test) in the US in order to not pay any US taxes.”

Incorrect.

In these discussions, the substantial presence and the green card test applies to foreign nationals.

A US citizen has no such restrictions on when he/she can cross borders to the US for residency, as well as being free to leave any time he/she wants because US citizens have always been, no matter where they live, subject to tax on their worldwide income from wherever and whatever source it is derived.

** Introduction to Residency Under US Tax Law https://www.irs.gov/Individuals/International-Taxpayers/Introduction-to-Residency-Under-U.S.-Tax-Law

This is the final section on pre-immigration planning before our Bermuda resident’s blessed romantic life comes to fulfilment in another country.

Part 1 featured February 6, ‘Watch out for cross-border tax traps’, http://www.royalgazette.com/article/20160206/COLUMN07/160209781

Part 2 featured February 13, ‘Meticulous planning is wise before a US tax move’, http://www.royalgazette.com/article/20160213/COLUMN07/160219863

Martha Harris Myron CPA PFS JSM: Masters of Law: International Taxation and Financial Services, appointed to the Professional Tax Advisory Council, American Citizens Abroad. https://americansabroad.org/, principal: The Pondstraddler Life™ Consultancy providing cross border financial planning for Bermuda residents, their multinational families with international connections. Contact: martha@pondstraddler.com