What to Know Before You Go

For immigrants who are planning on moving to the US, the IRS will welcome you with open arms. But for wealthy individuals, this embrace can be “very expensive”. They say that prior planning prevents poor performance; and protecting your assets from US taxes before a move to the US could save you and your children millions.

Let’s consider this hypothetical example:
At age 55, Li Jie was worth $40 million, and ready for a major change. After setting up several successful businesses in China and the US, he also successfully sent 4 daughters through college in the United States. When they all married Americans, he knew it was finally time to make a permanent move. Before doing so, he must be prepared for US taxes.

US Taxes for Non-US Citizens

If you are not a US citizen and are not considered, for tax purposes, to be living in the US, you only have to pay taxes on certain US based assets. However, those US assets are taxed at 40% when you pass away, with only a small $60,000 exemption.

When you become a US citizen or hold a greencard:

  • Your estate and lifetime gift exemption increases dramatically, from $60,000 to $11.4 million. However, the exemption is set to reduce to about $6 million in 2026 for everyone.
  • On the downside, having a US greencard also subjects you to US income taxes on all your worldwide assets, even if you are not living in the US.

However, if you surrender your greencard, and are considered to be no longer living in the US, the IRS assumes that have left for tax reasons, and you may be subject to the exit, or expatriate tax. For expats with greater than $2mm in net worth, OR a 5-year average income tax liability of over $139k OR who have not filed IRS form 8854:

  • You will be taxed as if you liquidated all your assets when you left the country. The net gain (current market value less the purchase price) will be taxed as income earned. Also, deferred compensation (such as pension plans) will be hit with a 30% withholding rate.

That can be a painful tax to pay, and since you didn’t actually liquidate all your assets, you may not have access to the cash needed to pay the tax.

3 Steps You Can Take to Protect Your Wealth

Let’s get back to Mr. Li. Now that he wants to become a US citizen, he will have to commit to paying US taxes. However, while he is not YET a US citizen, there are 3 steps he can take to safeguard some of his assets before the IRS can reach them.

Step 1 – Give Money Away

Once he is a US citizen or domiciliary (permanent resident), even his gifts could be taxed. In that case, if his gifts are valued at more than $15k each year, those gifts will reduce his lifetime gift exemption. And that means more taxes for his estate. If he’s ever planning on giving assets away, it may make sense to do it prior to becoming a resident, so he can do it freely.

Not only do pre-immigration gifts remove assets from his estate, they will also liberate those assets from being subject to annual income taxes when he gets his greencard.

He may even be able to give assets to very trusted family members (such as parents, or siblings), who may send him money as needed after he is settled in the US.

Step 2 – Set up a Drop-off Trust

There is a safer method of giving his money away if he wants to ensure the funds are distributed when and to whom he would like. If he sets assets in an irrevocable trust prior to moving to the US (often referred to as a drop-off trust), he gets to remove it from his estate and avoid the estate and lifetime gift tax (transfer tax).

Grantors must take a few precautions with drop-off trusts in order to ensure the assets in them are fully excluded from their estate:

  • Grantors should not have an arrangement with the trustee to receive access to the funds, or any sort of regular distributions.
  • Grantors should not add assets that would be subject to US estate and gift taxes, or it could pollute the waters and make it more difficult to protect the otherwise tax-exempt funds.
  • If it is an off-shore trust, and the grantor becomes a US taxpayer within 5 years of transferring funds, the assets could be subject to US income taxes.
  • Likewise, if it as domestic (US) drop-off trust, neither the grantor nor their spouse may be trust beneficiaries, or the assets could be subject to US income taxes.

So grantors should expect to have no access to the funds, but may possibly be required to pay income taxes on them. For this reason, we need step 3 below.

Step 3- Obtain a Private Placement Life Insurance (PPLI) Policy within the Drop-Off Trust

Here is why:
Assets within a qualified life insurance policy will not be subject to US income taxes or estate taxes. Eliminating annual taxes will free the assets to grow at a greater rate than typical investments.

PPLI may offer even greater benefits than a typical insurance policy because it allows for a wider array of investment options, which means greater potential upside. PPLI policies can also have lower costs than a typical insurance policy (read more on PPLI here).

But here is the icing on the cake; when set up properly, insurance policy owners can receive loans from their insurance policies – tax free, and at minimal, if any, cost. So while a typical drop-off trust alone typically reduces liquidity, using the drop-off trust to fund a life insurance policy can allow the grantor (and not the IRS) to still have access to the funds.

Without PPLI, Mr. Li’s plan might have looked something like this:

  • First, determine how much he would need each year to maintain his cost of living in the US.
  • Then, he would also determine how much money he would need in order to pay income taxes on any assets within the drop off trust.
  • Only what remained after his needs and taxes would be used for the drop-off trust. This is because he has no guarantee he can have access to the funds again.

With PPLI, Mr. Li’s plan will instead look like this:

  • Since he will have access to the funds through loans or tax-free withdrawals, and he won’t ever have to pay taxes, so he can set aside more assets for the drop-off trust.
  • First, Mr. Li will fund the trust before the IRS considers him to be a resident.
  • Then, the trustee will use the assets to pay PPLI premiums. With careful planning, he can arrange for loans or withdrawals later.

In the end, he is both insuring his legacy and creating a tax-free way to access his funds after immigration.

If you would like to determine whether this kind pre-immigration plan would work for you, call us for a confidential conversation. We can identify solutions tailored just for you or your affluent clients. It’s our goal to make a measurable difference in your financial life.


Note: The statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with trusted advisers.

About Axia Global

J. Michael Roney, founder of Axia Global, has worked alongside the best financial and legal professionals in the field for decades. He has written a book on wealth preservation, and his calling is to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.