The offspring who come on student visas may well decide to stay for a job and a life in the U.S. So naturally, their parents want to get out in front of complex income, gift and estate-tax rules that--combined with immigration concerns--could pose a real challenge.
Rebecca B. Hall, an adviser in Washington, D.C., said clients often find her after they have been burned by a lack of advice on U.S. taxes. Some run up tax liabilities needlessly through financial professionals who aren't up to speed on the rules, she said.
U.S. income, gift and estate rules apply differently, Ms. Hall noted, depending on whether a person is here on a student visa or has a green card.
Those on student visas generally aren't required to pay federal taxes--but the situation changes once they obtain a green card. Income-tax rules run on a separate track from gift and estate-tax rules for nonresidents, and it's possible for a nonresident to be subject to one tax but not the other. A green card can trigger both taxes.
Also, a foreigner such as a parent who stays in the country for a certain number of days can become subject to U.S. taxes. The IRS looks at how much time someone has spent here. If the total days, using a special formula, equal 183 days, the person is over the threshold.
"It's a very complex situation," said Ms. Hall, managing director at RBH Global Wealth Partners, a private wealth advisory practice of Ameriprise Financial Inc.AMP -0.56% (AMP) with $180 million under management.
The number of international students at U.S. colleges and universities rose 6% to a record high of 764,495 in the 2011-12 academic year, according to the Institute of International Education. Chinese families sent the most kids, accounting for 25% of foreign students, followed by India, South Korea, Saudi Arabia and Canada. The number of Saudi students doubled during that period.
Once a child decides to stay, foreign parents are often shocked to learn the U.S. can collect taxes on their worldwide assets, according to Philip F. Postlewaite, director of the tax program at Northwestern University School of Law in Chicago. A student from, say, Saudi Arabia, could quickly go from having a fortune at home that the U.S. can't tax, to a resident who must pay U.S. tax on it, he said.
Sometimes, financial advice for these families is more straightforward--such as providing insight on how to arrange bank accounts to fund the small necessities of student life. Increasingly, it involves advanced estate-planning techniques. An adviser may suggest, for example, that a Chinese couple back home have an attorney draft a trust to hold an apartment they bought for their child attending a U.S. college.
Indeed, some families set up trusts before a child even comes over, planning for the possibility that their grandchildren may be born on U.S. soil.
"We call that pre-immigration planning," said Edward J. Mooney, a wealth strategist at BNY Mellon Wealth Management, who has seen numerous cases in which a student comes to the U.S. to attend an Ivy League school and decides to stay awhile after graduation, or even settle down here.
A foreign family with a child in this kind of situation needs to sort through gift and estate-tax issues. Among the questions they may face: Whether to establish a trust in the U.S. or offshore.
Suzanne L. Shier, director of wealth planning and tax strategy for personal financial services at Northern Trust in Chicago, said her group gets a growing number of questions from foreign families whose children are studying or have settled down in the U.S.
Estate-tax issues can turn out to be a huge concern for foreign families whose kids do stay in the U.S.
For example, one man who contacted Ms. Hall of RBH Global Wealth Partners was chagrined to discover that his family owed over $1 million in U.S. estate taxes on his father's $3 million portfolio. The father had not lived in the U.S, but his broker had put him into various investments that triggered the estate tax.
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