Mumbai: Complex Indian regulations and US’ death tax are lurking fears many affluent families are beginning to harbour as their US stock investments soar to new highs.
They are exploring ways to shield successors from a crippling 40% US inheritance tax above $60,000. Some are seeking permission to form offshore trusts or buy insurance wrappers to cover the tax.
Desperate to overcome rules, some are treading grey areas in law. Resident Indians cannot gift US stocks bought under the liberalised remittance scheme (LRS) to NRI kids.
Also, opinions differ whether they can gift the cash from stock sale and encashment of stock options and restricted stock units (RSUs) to NRI relatives.
Second, after their death, successors, irrespective of where they are, can own the stocks only after paying inheritance tax.
"There are no easy solutions. Some may violate the Foreign Exchange Management Act (FEMA). Gifts are allowed only to resident relatives as defined under the Companies Act.
It may mean divesting 90% of the owner's net worth in many cases — only to shift the inheritance tax burden,” said Rutvik Sanghvi, partner at Rashmin Sanghvi & Associates which specialises in international tax and FEMA.
Solutions like ring fencing through foreign 'insurance', or settlement in a trust would require prior permission under FEMA.
The severity is missed as transfers may escape scrutiny now, but on exit, the sale proceeds have to be remitted back to India, and the bank can block the funds then due to the initial FEMA violation, he said.
There’s, however, no limit on overseas securities a resident can gift to resident relatives. A simpler solution in avoiding inheritance tax would be a person gifting US stocks during their lifetime to children before the latter leave to study or settle in the US and become NRIs.
However, this rarely happens as patriarchs are reluctant to lose control over wealth.
Moin Ladha, partner at law firm Khaitan & Co, said the rich are considering approaching RBI for restructurings to migrate holdings into institutional or trust-like structures rather than leaving assets in individual ownership, as well as for substantial overseas life insurance products to offset potential inheritance tax liabilities.
“The challenge is that cross-border wealth, immigration planning and exchange control compliance cannot be addressed in silos. Any such structure, particularly where funds are being moved for immigration-linked investments, must be FEMA compliant. The real risk lies in reactive, last-minute
structuring,” said Ladh.
Chasing the September 30 grandfathering deadline for US EB-5 visa, some are selling foreign stocks, RSUs, and options to bankroll NRI kids applying for the investor immigrant program.
But there’s no regulatory clarity whether they can gift the proceeds directly. Under LRS idle money must be brought back or reinvested within 6 months.
Even though stock sale amount would be invested in EB-5 business assets, the investment would be in the kid’s name. LRS permits gifts to NRI relatives, but a kosher, though costlier, transaction would be bringing back funds to India and resending through family members.
Some tread an absolute grey zone: deposit funds in kids' Indian bank accounts that are wrongly retained even after the kids become NRIs; then, convert the resident account into a nonresident ordinary (NRO) account to let kids move up to $1 mn to fund the $850,000 EB-5.
While a resident can remit a maximum $250,000 a year under LRS, NRIs can pull out $1mn from NRO accounts. Keeping an NRI’s local bank account active is a sharp practice. But banks often turn a blind eye.
“However, gifting overseas securities by Indian relatives to a resident EB-5 applicant may warrant consideration, especially given the lack of clarity around consolidating remittances for EB-5 purposes when there is only one principal applicant in the process,” said Harshal Bhuta, partner at the CA
firm PB Bhuta & Co.
Source Name : Economic Times