Swiss US Estate Questions

December 4, 2012 -- Swiss American Chamber of Commerce Conferrence

Stéphane Lagonico, LLM, TEP, partner Bonnard Lawson law firm

Chris Baker, ATT, EA, partner Westleton Drake LLP

2

Swiss US Estate QuestionsIntroduction

Scope of the problem?

Various fact patterns lead to various problems:

- A US Person dies in Switzerland? CASE 1

- A dual national Swiss-US dies in Switzerland? CASE 1

- A Swiss citizen dies with assets situated in the US? CASE 2

- A Swiss citizen dies in the US with assets situated in Switzerland? CASE 3

- A dual national Swiss– US domiciled in Switzerland dies with assets in a third country?

- Other factual patterns…

Initial questions?

- Single, married, family?

- Current with tax (and other compliance) obligations? In both countries?

- Matrimonial regime? Type of regime and law applicable?

- Law applicable to the estate?

- Estate taxes? Where? Who owes them? Other practical questions?2

3

Swiss US Estate Questions

Three cases:

CASE 1 : a (solely) US Person dies in Switzerland� Estate and tax rules

- matrimonial planning, estate planning?- choice of law?- taxes, forms, disclosures

CASE 2 : a Swiss citizen dies in Switzerland with some assets in the US�US situs rules

CASE 3 : a Swiss citizen dies in the US with assets in Switzer land�US domiciliary rules

4

Swiss US Estate Questions Case 1 If no will and no marital agreement : Swiss private international law

CASE 1 : a (solely) US Person dies in SwitzerlandSwiss private international law (PIL) • A foreigner dies while residing in CH without a will: Swiss inheritance law applies (90 PIL)• A married foreigner dies while residing in CH without a marital agreement?: Swiss marital law Applies (54 al.1 litt. b PIL) Two sets of Swiss rules if the U.S. decedent was married at time of death: matrimonial, then estate

1. Matrimonial : Swiss matrimonial law (Swiss Civil Code, art. 181-251)- Assets are divided between the estate and the spouse- Regime by default: Participation to acquired assets- Similar to US community property (AZ, CA, ID, LA,

NV, NM, TX, WA and WI)- Acquired assets vs. Own assets

2. Estate : Swiss inheritance law (Swiss Civil Code, art. 457-640)The Estate is divided among heirs (incl. spouse).

4

5

Swiss US Estate Questions Sharing of the estate

5

Portions when sharing the estate depend upon proximity of heirs, presence of spouse,will or no will

6

Swiss US Estate Questions Sharing of the estate

6

7

Swiss US Estate Questions Case 1 How to modify the estate rules, when planning / when inheriting

• Sign a marital agreement Change sharing rules of marital property: e.g. «separation of assets»

agreement

• Elect application of Swiss law and write a will sub mitted to Swiss law- Imposed formalities - Slight change of the portions otherwise allocated to the heirs, w/in limits of forced heirship rules

(surviving spouse and children)- Forced heirship: Spouse has min share of ½ of portion; child has min. share of ¾ of portion- Usufruct vs. Bare-ownership- Successoral agreements- Elect SCC 473 al.1

- Elect application of US law and write a will submit ted to US law- Possible if you are not dual Swiss US- No forced heirship

- What can an heir do? Renounce to inherit- 572 al 2 SCC: If will: profits to renouncer’s heirs; - 572 al 1 SCC: if no will: profits to the estate in which renunciation was made

7

8

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 1. Swiss tax rules

• No federal gift or estate tax. 26 cantonal tax laws on gift and estate tax:

• Vaud, Geneva: municipal estate tax computed as a % of the cantonal tax.

• True inheritance tax ( tax due on the share of the estate) and not on the estate itself

(except in the cantons of GR and SO)

• The tax is due by each heir (and not by the estate)Rate varies depending the degree of family relationship between the decedent and the heir:

• In all Swiss cantons, no estate tax between spouses• In most Swiss cantons (except VD and NE), there is no estate tax between parents and children.

• Tax base : All movable property and real estate located in Switzerland. Foreign real estate

is not subject to estate tax. Computed for purposes of tax rate.

• VD: 35 LMSD: half rate for persons who never worked in Switzerland. Not granted if benefits

a foreign treasury.

8

9

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 2.1 US tax rules

• US person : gross estate “ fair market value of worldwide assets at date of de ath”.

• Gross estate included• All assets wherever situated (2031, 2033 IRC)• The decedent’s position on separate assets (9 States)• All commonly held assets (2040 IRC)• All assets upon which decedent held GPA• Life insurance products (IRC 2042)• Annuities (2039 IRC)• QTIP (2044 IRC)• Certain gifts made by decedent within three years (2035 IRC)• Gifts with reversion rights (2036 IRC)• Revocable deeds (2038 IRC)• Contingent fees?• Bonuses ?• Remainder interests ?• Joint property? Depends on who provided ‘’consideration’’ to purchased property

10

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 2.2 US tax rules

• Unlimited marital exemption between US person spouses

• Limited amount inheritable by non US spouse. Deferral of estate tax possible with QDOT:• possible post mortem formation; executor must make irrevocable election (Form 709)• must have at least one US trustee; surviving spouse cannot be trustee.• trustee is US Bank /or guarantee for 65% if QDOT has less than 2’000’000 $ + 35% can be

real property outside the US or if QDOT has more than 2’000’000 $• distributions

• of principal: federal estate tax• of income: no estate tax

• Exemption/tax:

• Rate: 18% to 55%

2011 – 2012 2013

5’150’000 $ 1’000’000 $

35 % tax 55 % tax

11

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 2.3. US / Swiss tax rules

Stepped up rules :

- EGGTRA 2001: Repeal 2010, replacement by modified carry over basis for property acquired

from a decedent dying after Dec 31, 2009.

- Tax Relief Act 2010 : retroactive repeal

- Elective Carry-Over basis for decedent dying in 2010 (executor’s choice)

- Fair market value on the date of death (bequest, devise)

- Special rule for appreciated property acquired by a decedent as a gift within one year of death

if property passes from decedent to original donor or spouse (prevention of step-up in hands

of donnee in anticipation of his/her death).

- Spousal property basic increase : 3,000,000$. On qualified spousal property

(outright transfer property or QTIP)

- General basis increase of 1,300,000$. Special rules apply.

- No step up on certain assets (eg. GPA; pensions; shares of personal holdings, etc)

12

Swiss US Estate QuestionsCase 1 Swiss estate and gift taxes 3.1 US / Swiss tax rules

• US approach : tax credit.

• US taxes: computed on estate, then effectively levied foreign taxes are deducted.

• Foreign tax credit granted in US internal tax law yet only on foreign situs assets.

• CH – US Estate Tax Treaty 1951 :- « Old style » treaty pertains only to situs of assets.- Unified credit Iimited to 60’000$, case-law concessions on unified credit :

• ‘’specific exemption’’ to non residents (art III) can be replaced by unified tax credit• however only on prorated US situs assets/worldwide assets

- Art III : if limited and unlimited subjection clash. Double taxation not avoided,

except US exemption and non taxation of US real estate by Swiss cantons.- Art IV : if clash on unlimited subjection (two domiciles, or on nationality and one domicile):

• Unusual mechanisms of double tax credit.• Situs rules are used to attribute right to tax.

• Double taxation remains on : contractual rights, assets situated in a third country,…

• Treaty application to be required within 5 years.

13

Swiss US Estate QuestionsCase 1 Swiss estate and gift taxes 3.2 US / Swiss tax rules

Flaws of the Treaty for a US decedent in Switzerland:

• No coverage of gift tax

• No assignment of primary right of taxation (no domicile tiebreaker)

e.g. US citizen dies in Switzerland:• US estate tax on worldwide assets• Swiss inheritance tax on worldwide assets (except foreign real estate)

• No elimination of double taxation: reciprocal credit mechanismEx : 30’000’000 $ estate, with 15’000’000 General Electric share and 15’000’000 Novartis shares US tax 30’000’000 and grant credit for Swiss taxes on Swiss shares.

CH tax 30’000’000 and grant credit for US taxes on US shares.BUT : both countries would tax shares of Deutsche Telekom and no credit.

• No marital exemption (even limited) for bequest to non US spouse

14

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 4.1a US forms

• Consular Report of Death of an American Abroad – Form DS 2060

• IRS Transfer Certificate 5173- DS 2060- Signed affidavit with worldwide assets at time of death and any gift after 1976- Decedent’s last will and testament. In English, with notarized copy.- US Estate Tax Return- Copy of local taxes filed

• US Estate Tax Return: IRS Form 706:- Must be filed within 9 months of death- Threshold : 2012 : estate exceeds 5,150,000$. 2013 : 1,000,000$- Estate becomes a taxpayer, subject to income tax, capital gains tax, etc.

15

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 4.1b US forms

• Income tax rules for year of death• Tax return• Deductions, itemized exemptions• Medical expenses• Income after death – Form 1041• Refund claimable • Estate tax returns• Filing status for spouse for year of death

– 500’000 $ credit useable for sale of home within 2 years of death– Step up in basis of inherited assets

16

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 4.2 US forms

Evaluation methods

• Value of assets in estate, not value of assets received by heirs.

• If shares of a company are split, no minority discount applicable (unlike for gift tax –

Rev. Rul. 93-12)

• Listed : - average price on day of death (average lowest/highest price)- average price on day before / after death if holiday- discount for large numbers

• Unlisted shares : market value, to be accounted for• nature of the activity• current economical circumstances• perspective for the future• profitability• capacity to pay dividends• goodwill• past transactions on stock• similar companies’ valuations

17

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 4.3 US forms

• Real estate :• Market conditions and recent transactions on comparable properties• Capitalized rents• Replacement values

• Periodic income

• Family business

• Prior gifts, below market loans

Deductions• QDOT• QTIP• QFOB• Charitable

18

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 4.4 US forms

• Generation skipping transfer tax• 1986 GST• targets ‘’skips’’• on top of estate tax• Year / tax rates :

• US person who receives large gift (or bequest) from non resident alien must report it

on Form 3520 if aggregate value exceeds 100’000 $ per year.

2010 0%

2011 – 2012 5’000’000 exemption then 35%

2013 1’000’000 exemption then 55%

19

Swiss US Estate Questions Case 1 Swiss estate and gift taxes: 5. Disclosures

• Executor finds out that decedent was not compliant• OVDP 2012• ‘’Mini-program’’• No silent disclosure

• Statutory executorships• Obligations imposed to report or/and pay tax per non US persons who die owning US situs assets

• CH/US estate tax Treaty should be revised• FATCA to provide large quantities of information• Exchange of information (DTT art 26 )

20

Swiss US Estate Questions Case 2 Estate and gift taxes: 2.1 US tax rules

CASE 2 -- a Swiss citizen dies in Switzerland with s ome assets in the US Composition of the gross estate : US situs rules for estate tax

• Real property (land, building, fixtures, improvements) located in the US.

• Tangible personal property (cash, currency in any denomination) physically located in the US.

• Intangible personal property• Bank, brokerage and fiduciary accounts (funds held by US banks or other financial institutions if used in

conjunction with a trade or business);• funds held in a US brokerage account;• deposits with domestic branches of foreign banks;• NOT:

- saving accounts, checking accounts, certificates of deposit issued by a US bank If not used in conjunction with a US trade or business;

- funds held in a US bank custody account;- funds deposited in a foreign branch of a US bank;

• shares issued by a US corporation;• value of any life insurance policy issued by a US licensed insurance company and owned by the decedent;• value of any annuity issued by a US insurance company

• Areas of uncertainty : foreign partnerships; foreign corporations which « checked the box » to elect treatment

as partnerships; US LLC owning foreign assets

21

Swiss US Estate Questions Case 2 Estate and gift taxes: 2.2 US tax rules

• NRA assume they may subtract amount of mortgage from US situated property!

• only if debt is ‘’non-recourse’’. Else: full amount, unencumbered, must be reported

• Mortgage can be claimed on a prorated basis (as per ratio US assets / total assets)

• Planning?• Caution • Gift US situs assets vs. awaiting estate• Use « non-recourse » debt• Use of non-transparent entity from US perspective… / transparent from Swiss… ? • Foreign collective investment (non transparent) vehicle ?• Trust ?

• Caution : • two sets of tax rules (Swiss, US) • various taxes : income tax, capital gains tax, estate tax

22

Swiss US Estate Questions CASE 2 selected topics

GIFT

• Ex : solely CH father residing in CH gives his solely Swiss daughter attending school in CA (USA) $15,000

by transferring cash from his CA bank account to her CA bank account : taxable gift of US property

• Specific exemption for gift of US intangibles made by NRA to NRA (but not under estate tax)

• A US citizen can give to a non Citizen spouse 139’000$ per year (2012) + 13’000$.

ESTATE

• Flaws of CH-US Treaty for Swiss decedent owning US situs assets : Treaty does not impose limitation on

right of US to tax US situs assets. Yet it allows for a prorated exemption.

Ex :Net estate: 30’000’000 $, US stock: 3’000’000 $

% of exemption allowed: 10%

2013 exemption: 1’000’000 $, prorated: 100’000 $

Remaining: 2’900’000 $ taxed at 55%: 1’590’000 $

No Treaty relief if the Swiss canton taxes that US situs asset too.

23

Swiss US Estate Questions CASE 3

CASE 3 -- A Swiss citizen dies in the US with some as sets in Switzerland

• Residence (reminder – do not apply here) Day counting under subst. pres. Test;

Green card under perm. res. Test

• US domiciliary rules :• physical presence• intention (‘’with no definitive present intention of later removing there from’’)• facts and circumstances

• Green card?• length of US residence• statements of intent (in visa applications, tax returns, wills, etc)• permanent home / size?• business ties?• family, social, civic, religions ties• funeral arrangements• driver’s license

• illegal immigrant!

• See case 2 for Treaty application

24

Swiss US Estate Questions FBAR, FATCA -- 1

- FBAR Reporting (Foreign Financial Assets) : A United States person is required to disclose any financial interest in,

or signature or other authority over, a foreign bank account, securities account, or other financial account

(31 CFR Reg. § 1010.350). Information is reported on Form TD F90-22.1 (commonly referred to as FBAR)

FBAR due if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the

calendar year.

- FATCA Reporting of Specified Foreign Financial Assets

Form 8938 : Under the Foreign Account Tax Compliance Act (FATCA), an individual is required to disclose his or her interest in a specified foreign financial asset during the tax year if the aggregate value of all the assets exceeds an applicable threshold amount (Code Sec. 6038D).The information is reported on Form 8938 and attached to the individual ‘s tax returns for the year.

- FFI : FATCA Reporting and Withholding Obligations for Foreign Financial Institutions (FFIs)

required to report certain information about financial accounts held by U.S. taxpayers or by foreign entities in which

U.S taxpayers hold substantial ownership interests (Code Sec. 1471 (b))

An FFI is a foreign entity that accepts deposits in the ordinary course of a banking business, holds financial assets

for the account of others as a substantial part of its business, or is engaged primarily in investing (Code Sec.

1471(d))

25

Swiss US Estate Questions FBAR, FATCA -- 2

A FFI meets the FATCA reporting requirements by entering into an agreement with the IRS:

• identify U.S. accounts it maintains and to comply with due diligence

• report certain information to the IRS regarding the U.S. accounts; and

deduct and withhold tax on any payment of U.S. source income by the FFI to a non-participating FFI or U.S.

account holder who is unwilling to provide the required information.

• if a FFI fails a U.S. withholding agent must deduct and withhold a tax equal to 30 percent on any withholdable

payment made to the FFI after December 31, 2013 (Code Sec. 14(a))

� a withholdable payment includes any payment of U.S.-source (FDAP) income

� also includes gross proceeds from the sale of any property after December 31, 2014, that can produce

interest or dividends that are U.S.-source FDAP income (Code Sec. 1473 (1))

� items of income effectively connected with a U.S. trade or business are not withholdable payments

• a U.S. withholding agent for this purpose includes any person in whatever capacity having the control,

receipt, custody, disposal, or payment of any withholdable payment (Code Secv. 1473 (4))

� a U.S. withholding agent that fails to withhold is liable for the tax, including penalties (Code Sec. 1474)

26

Swiss US Estate Questions FBAR, FATCA -- 3

Participating Foreign Financial Institution (FFI)• meets its reporting requirements by entering into an agreement with the IRS • agrees to identify U.S. accounts it maintains and due diligence (Code Sec. 1471 (b))• withhold 30 percent from any withholdable payment made after December 31, 2013, passed-throughto a recalcitrant account holder or non-participating FFI

• due diligence- depends on whether the account is new or preexisting and whether the account is owned by an individual or entity

- accounts with a balance or value than $50,000 but less than $1 million are only subject to electronic review with a balance that exceeds $1 million are subject to review of electronic and non-electronic files including an inquiry of the actual knowledge of any relationship manager associated with theaccount (Prop. Reg. § 1.1471-4))

- a participating FFI is required to report to the IRS on an annual basis the name, address,and taxpayer identification number (TIN) of each holder of a U.S. account which is a U.S. person

- in the case of any account holder which is a U.S.-owned foreign entity, the participating FFI must report the name, address, and TIN of each substantial U.S. owner of such entity (Code Sec. 1471 c)),account number, the year-end account balance or value in U.S. dollars and the gross amount and character of dividends, interest, or other income paid credited to the account

27

Swiss US Estate Questions FBAR, FATCA -- 4

FATCA Reporting and withholding Obligations for Non -Financial Foreign Entities (NFFE)

• if a non-financial foreign entity (NFFE) is the beneficial owner of a withholdable payment made to the NFFE after December 31, 2013, NFFE is required to report certain information to the withholding agent (Code Sec. 1472 (b))

• reporting requirement is satisfied if NFFE reports : name, address, and taxpayer identificationnumber (TIN) of each substantial U.S. owner or of it certifies that it does not have any substantial U.S. owners.

• if NFFE or other payee fails to meet the reporting requirement, then the withholding agent must deduct and withhold a tax of 30 percent from the withholdable payment

• a substantial U.S. owner is : - for a corporation: a U.S. person owning (in)directly > 10% of corporate stock (vote or value) - for a partnership: a U.S. person owning (in)directly > 10 % of capital or profits interests of

partnership- for a trust: a U.S. person treated as owner of any portion of trust under the grantor trust rules and any U.S. person holding > 10% of the beneficial interests (Code Sec. 1473 (2))

28

Swiss US Estate Questions

Thank you for your attention

* * *Information contained in this presentation does not represent tax advice.

Any person or entity eager to address any issue should consult with a tax professional.

IRS CIRCULAR 230 NOTICE:

To ensure compliance with requirements imposed by the U.S. Treasury Department regulations,

we inform you that any U.S. federal tax advice contained in this communication

(including any attachments)is not intended or written to be used, and cannot be used for the purpose

of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or

recommending to another party any transaction or matter addressed within.

29

Swiss US Estate Questions Contact Information

Stéphane LagonicoBonnard Lawson International law firm

Avocat - Attorney-at-Law

Partner, TEP

LLM (Brussels)

LAUSANNE 8, RUE DU GRAND-CHÊNE | CP 5463 | 1002 LAUSANNE | SWITZERLAND T +41 (0)21 348 11 88 F +41 (0)21 348 11 89

GENEVA 11, RUE DU GÉNÉRAL-DUFOUR | 1204 GENÈVE | SWITZERLAND T +41 (0)22 322 25 00 F +41 (0)22 322 25 15

SHANGHAI – PARIS – DUBAI – LUXEMBURG

sl@ilf.ch www.ilf.ch

Chris BakerWestleton Drake

9 Devonshire Square

London EC2M 4YF

Tel: +44 (0)20 3170 8497

Mob: +44 (0)7809 707847

chris.baker@westletondrake.com www.westletondrake.co m

Westleton Drake LLP registered in England & Wales under number OC345492