Hey, as many of you know, there is the famous issue with US estate taxes in case one dies holding US based assets.
I want to prepare for a situation where I am getting sick and want to avoid running into these issues for my dependants. I can then of course sell public stocks, but I also have some illiquid exposures to US based companies (startups) that are potentially hard for me (or anyone) to liquidate.
Has anybody researched the option to transfer ownership of assets like those to a Swiss entity (AG) to avoid triggering the estate tax from a US perspective? I am aware that I would then potentially create local Swiss taxes (dividends etc), but that’s not the main issue here.
I am looking for some pointers on dos and don’ts, for example whether I need to do something specific in the US to avoid being taxed there, and whether anything needs to be considered in terms of local setup (governance, who is the shareholder etc). Also, whether one company is enough, or whether I need two companies (US, Switzerlands, …).
I don’t know about the US, but I think you underestimate the different taxes that you would create in Switzerland. What will happen is that your company will pay taxes on capital gains on those investments. You mentionned taxes on dividends from your new swiss company to yourself and your heirs. Not only you will be taxed a second time on the dividends your company received, but you will also be taxed a second time on those capital gains. What’s more, there is a risk to pay tax on capital gains that were made BEFORE you transfered your shares to your swiss company (art. 20a, al.1, let. b LIFD/DBG).
The famous issue with the US estate tax is very often misrepresented. Since Switzerland has a treaty, the relevant limit is not the often-mentioned CHF 60k, but rather something above CHF 10 million. If you have less than CHF 10 million in assets, your heirs are not affected (except for the paperwork).
With regards to your idea: Not only is holding investments through an entity a bad idea in Switzerland due to Switzerland’s taxation (search the forum, this has been discussed before), but also it likely would not help. Your estate would then simply include this entity instead of the assets, but this doesn’t change anything regarding the valuation. Also, you want to have a high share of US based assets, to get the highest possible exemption, so making your assets somehow Swiss based is counterproductive.
The Poor Swiss wrote a good article about it, and here is the treaty itself.
It looks like the 10m rule might be reduced in the coming years, so at some point some of us might be hit by this
Maybe I misunderstand, but if you say the Swiss entity won’t help because it simply will be added to the valuation – the whole point is that from an IRS/US perspective, nobody has deceased (the entity is held by shareholders, and even if one dies, the other(s) continue to hold the entity). But maybe I am missing a crucial point here, this is exactly why I was asking
To be clear: I assume you hold assets, and I understood you would transfer them to an entity that you fully own. If you die, these assets/the entity will be part of your inheritance.
If your idea is to transfer the assets to an entity that is owned by someone else but you (or something similar), then this looks indeed different. But isn’t that just simply giving you money away prior to your death (which obviously works to avoid estate taxation issues).
Good point. What I had in mind is that I would incorporate a holding entity that would be owned by me and my wife 50% each. In case I died I assumed that from a US perspective, it wouldn’t trigger US estate taxes since these assets are held by a company, not individuals (and the company would continue to operate as holding company). And on a personal level, I would have sold all liquid assets before my death, so ideally I own zero US assets on a personal level at that point.
Honestly if you’re worried about that just do like all our EU friend and use ucits ETFs. You’ll get slightly higher ter and 15% extra withholding on us sourced dividends, but if makes you sleep better at night I bet it’s cheaper than a complicated tax avoidance instrument (they usually aren’t cheap).
I’m not true expert on the topic, but I’ll give it a shot.
This can be done, but please be aware that the holding privilege in Switzerland ended in 2020. Before 2020, you could accumulate in the holding and were only taxed when cashing out (if I remember correctly, I would have to check again and I’m not a financial advisor).
You would have to create a GmbH or AG, which would be owned 50% by you and 50% by your wife. The GmbH or AG needs to have a business description, e.g. what the company does. You can have a company which doesn’t have employees (a so called Sitzgesellschaft). Please note that Sitzgesellschaft is more expensive when opening a bank account (e.g. they will charge you more per year than a traditional operational company).
The problem I see here is the transfer of those assets. Your newly created company would have to buy those assets from you as a private person. I don’t think you can just move them to the new company. Again, not a financial advisor here. You might have to check with a financial advisor (Treuhänder).
Also: how do you value those illiquid assets?
Plus all the things which were mentioned by @REandSTOCK and @1742 already mentioned: you will have to pay capital gains for the assets per year, plus paying your personal tax rate for dividends which are paid out. Additionally, the company shares are counted towards your private wealth (which should also be the case when the shares are owned by you as a private person).
Another thing to consider: depending on how many dividends you receive, the estimated worth of your new Swiss company shares are also going to increase, which again triggers an increase in the Ertragswertverfahren.
Plus setting up the company, having bank accounts, having to do annual accounting for the tax office - it’s just adding up. Depending on how much your startup shares are worth, it might be ok or not ok for you to spend 3-5k per year just to avoid the US estate tax.
PS: you didn’t mention if you are a US-Citizen or not. I assume you aren’t.
These are all great points, thanks so much. I really need to do a cost/benefit analysis.
The good thing is that this is just a precautionary thought at this point for the case I’d be getting seriously ill. Over time, more and more of these assets will get liquid, so the problem gets smaller over time.
And worst case I just pay the relative share of the taxes, since the exemptions are still quite high (but probably will be lowered).
Thanks for all the comments!
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