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Warning: Don't Read If You Have A Weak Stomach

By Tim Berry, JD - Email Editor

Date : September 17, 2009

I read a case today that really got my blood boiling.

A married couple fled Uganda in 1972 with only “a few items of personal property”. It seems that when Idi Amin came to power, he forced all Ugandans of Asian descent to leave, and the government proceeded to seize all their assets.

The couple resettled in Belgium and lived there until the husband passed away in 2002. Evidently the couple did good for themselves, as when the husband passed away he had acquired 250,000 shares, $11,790,000 worth, of Citigroup stock.

I gotta tell you, when I hear stories like this--people leave a country with nothing and go on to do good if not great things with their lives--I am inspired and feel pride. Think about it: People kicked out of their home country merely because they are the “wrong” race, who go on to accumulate millions in assets. Typically I think what a great American story, or these people deserve a medal or some other form of special recognition.

However, I can’t really do that in this case. You see, the couple involved were not, and never were U.S. citizens; in fact they weren’t even residents of the U.S. The entire reason I am writing this and why my blood is boiling is that our, the U.S.’s, wonderful tax laws effectively expropriated these “poor” people’s assets just as their former homeland did.

How?

Why?

The U.S. estate tax code has a very interesting provision:

“Shares of stock owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation.”

Remember the eleven million of Citigroup stock? That was stock issued by a domestic corporation. Since the stock was issued by a domestic corporation, our millionaire nonresidents who are not citizens have to pay taxes on the U.S. stock they have accumulated.

Wow!

Basically the U.S. has the right to tax anyone in the world who owns shares of U.S. corporations. Think that one through; let it percolate down to your senses of justice and fair play. The U.S. says it has the right to tax non U.S. citizens, non U.S. residents, if those people were stupid enough to purchase U.S. securities. Nothing like biting the hands of the investors that feed us.

Before I start with some cold, hard numbers of this case, you might want to run and get a bucket.

Remember the value of the stock when our nonresident not a citizen of the United States died? He had 250,000 shares of Citigroup valued at $11,000,000 when he died. This court decision was filed on September 14, 2009. Citigroup closed at $4.52 a share on the 14th. It appears the estate paid an initial $2,070,000.01 and the court awarded the IRS an additional $2,070,000.01 (I’m not joking about the one cent) plus a late filing penalty of 25 percent. Those of you who are engineers, whip out your handy dandy calculators. How much is that portfolio worth today? About a million dollars. Summing it up, the estate will have to pay over $4,000,000 and penalties for a stock portfolio worth only $1,000,000 today.

Ok, enough of my righteous indignation. What can you, your relatives, or anyone you know do to alleviate the problem? Don’t hold stock in your personal name.

The rules are pretty much the same for a “nonresident not a citizen of the United States” as they are for a U.S. citizen. Don’t own your assets in your personal name; own them via an entity like a trust. Trusts don’t die. If they don’t die, they don’t owe estate taxes. Just that one simple step would have saved this guy a few million dollars in estate taxes.

Let’s go further with this simple concept. There is a very old quote/truism, “The power to tax is the power to destroy”. Our government has the right to tax our wealth. In effect it has the power to destroy our wealth, our achievements, our success as well. Last year I sat down with an individual who had to pay the IRS over $100,000,000 to settle his Father’s estate tax debt.

$100 million.

Please give me some rational explanation of why someone should have to write a $100,000,000 check to the government? Yes, I know all the philosophical arguments about this country had the infrastructure to help him build his company, and the military to protect his company etc. . . but at a cost of $100,000,000?

The power to tax is the power to destroy.

Consider this an impassioned plea to take control of your family’s financial situation. Too many of us idly sit back and think, “I really need to do something” and yet 2 days later have been caught up in the vortex of life and don’t take action. As this case shows, the tax code is very unforgiving if you don’t engage in any planning, and yet at the same time, the tax code can be very lenient if you just take some simple steps.

If you would like to discuss the use of trust for you, your family, or even as a marketing tool for your business, give us a call we would love to talk with you about it. Please contact us at info@trustmakers.com

By Tim Berry, JD
TrustMakers.com

 

 

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