Cross-Border Property Mastery: Leveraging LPs for Optimal Tax Savings and Control

Remember when you were a kid and you had a special toy. Instead of keeping it in your room, you decide to keep it at your friend’s house across the street or somewhere hidden in your house. Why? Well, maybe it’s safer there because you have little siblings at home who might have played with it and broken it. Or perhaps your friend’s parents have rules that made sharing and playing with the toy more fun and easy.

As grown ups, we don’t really change this behavior and these motivations. We all sometimes move have “special toys” (e.g. money and properties) in other places in the world because of better rules, safety, to keep them away from problems, or because we enjoy those other locations. In this blog, I’ll discuss smart ways we can use limited partnerships (or similar entities), to maintain control, have some protection, and plan for our own incapacity or death that could make access over that property problematic.

From a US perspective, partnerships are often helpful entities because they are pass-through entities for federal tax purposes. This means there is no entity level tax. In some foreign countries, the same pass-through treatment exists, making the partnership efficient from a tax perspective in many cases. Of course, you have to consult with legal and tax counsel in the foreign country. But, often there is an entity of choice that will work for these purposes in the foreign country.

Property in other states is far easier, since each state recognizes and uses partnership entities.

Layering in limited liability features in the structure can, depending on the circumstances, bring additional benefits. Limited partnership are partnership with interests granted liability protection and a general partner with no liability protection. If using a limited partnership, then, it is common to make the general partner another limited liability entity, such as a corporation or limited liability company. Limited liability companies and limited liability partnership/limited liability limited partnership exist of course. But, because some foreign countries do not view LLCs, LLPs, or LLLPs as pass-through entities, they may not always be the most efficient choice.

While the uses of partnership for tying property together across borders and adding limited liability protection are innumerable, here are a few to consider.

Traditional Real Estate Holding: This is the most common use. An investor from Country A wants to invest in real estate in Country B. By setting up an LP in either country (or another favorable jurisdiction), the investor can acquire the real estate within the LP structure. If Country B gives the investor pass-through treatment, then income and expenses from the property could be reported on their Country A tax return without additional levels of taxation. In addition, if the investor must pay tax in Country B, offsetting foreign tax credits would often be available in Country A. Moreover, when structured appropriately, the LP may offer protection against creditors, and any profits generated might be subject to a more favorable tax regime.

Intellectual Property (IP) Licensing: This is a less commonly thought of use case, but it can be effective. Imagine an inventor in Country A with valuable IP. The IP could be contributed to an LP and the LP could then license the IP to investors. If the investors are in a foreign country that recognizes the LP as a pass-through entity, then no additional entity level taxes would arise from the LP layer. If the other country has a tax treaty with Country A, then lower withholding taxes on royalty payments might exist, plus offsetting foreign tax credits would ordinarily be available in Country A.

Art & Collectibles: High-net-worth individuals often hold valuable art, collectibles, or antiques. They can use LPs in jurisdictions with favorable tax laws for such assets to hold these items. This can not only lead to reduced taxes upon sale or inheritance but also can offer privacy, as the public record might not show the individual as the direct owner. Often, the tax in the cross hairs is property or use taxes in one state that are higher than those taxes in another state. Converting the items into LP interests means the LP interests can change jurisdictions easily for property tax planning.

Yacht or Aircraft Registration: Less commonly thought of, but an LP can be set up to hold assets like yachts or private jets. There are jurisdictions known for favorable terms for such registrations (like the Isle of Man for aircraft or the Cayman Islands for yachts). By registering these assets under an LP in such a jurisdiction, the owner can benefit from reduced taxes, potential anonymity, and sometimes more lenient regulatory compliance. In addition, registration in some jurisdiction may require an entity in that jurisdiction, but creating a foreign corporation, for example, may not be a tax efficient option for a US owner.

Succession Planning and Asset Protection for Private Residences or Vacation Homes: Imagine an individual from Country A who has a private residence or vacation home in Country B. This property might not be for development or commercial use but holds sentimental and significant financial value. The owner may also have concerns about what will happen to this property upon their incapacity or eventual passing.

To address these concerns, the owner can set up an LP, often with a trust as the limited partner and the owner of the general partner.

Here are the benefits of this approach:

  • Estate Planning: Upon the owner’s death, the property does not need to go through probate in Country B (which might have a lengthy, costly, and public process). Instead, the trust dictates the property’s fate, ensuring a smooth transition to beneficiaries.
  • Incapacity Planning: Should the owner become incapacitated, the structure can maintain control over the property without the need for court proceedings, ensuring continuity without the need for legal battles or interventions.
  • Tax Efficiencies: By holding the property in an LP, assuming both jurisdictions treat the LP as a pass-through entity, the property might be shielded from potential estate taxes or inheritance taxes in either Country A or Country B, and the income tax attributes of the property would not be subject to entity level taxation. This depends on the specific tax laws and treaties involved.
  • Asset Protection: Properly structures, the LP can provide limited liability protections for the owner, shielding the LP property from the claims of the owner’s creditors
  • Privacy: In many jurisdictions, the identify of the limited partners of an LP are private, meaning the equity holder’s identities may not be made public. With CTA this will become less available for any LP that is created in a US state, but foreign LPs would not be subject to CTA if the LP is not registered in the US. The LP layer then can

As is probably clear from this discussion, limited partnerships can have broad uses to protect and make the most of our valuable assets. Just as we’d think carefully about where to keep our favorite treasures, we should consider the benefits of different places and strategies for our bigger financial decisions. Limited partnerships are one of many tools in the toolbox, but their versatility reminds us of the importance of thinking outside the box. So, as you ponder your future plans, remember to harness the power of creativity.

Of course, every plan should only be undertaking after getting appropriate advice from a professional in all relevant jurisdictions.

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