McDermott Will & Schulte, a global law firm

Chris Nason and Arianne R. Plasencia discussed the international mobility of individuals and assets, including second passports, foreign residency, and the legal and tax implications of offshore structures.

Key takeaways:

1. US tax residency rules: US citizens and income tax residents are subject to taxation on worldwide income and extensive reporting obligations which include various anti-deferral regimes. Residency can be established through a green card or by meeting the substantial presence test (a weighted 183-day formula), though certain visa categories such as F-1, J-1, and diplomatic visas where days in the United States are excluded. For transfer tax purposes, US citizens are subject to estate, gift, and generation-skipping transfer taxes on worldwide assets, while resident aliens are subject to these taxes on worldwide assets only if domiciled in the US. Non-domiciliaries are taxed solely on US-situs property, with possession of a green card weighing in favor of domicile but not determinative.
2. Anti-deferral regimes and cross-border complexity: Several regimes impose tax on foreign income even without distributions. Controlled Foreign Corporations (CFCs) require US shareholders owning at least 10% of stock in a corporation that is more than 50% US-owned to include Subpart F and Net CFC-Tested Income (NCTI), resulting in potential “phantom income.” Passive Foreign Investment Companies (PFICs) trigger punitive tax and interest charges on excess distributions and gains unless a Qualified Electing Fund (QEF) or mark-to-market election is made. Distributions from foreign non-grantor trusts to US beneficiaries can also trigger throwback tax and interest charges, emphasizing the importance of proactive trust planning.
3. Extensive reporting obligations: FATCA and related disclosure rules require reporting of foreign accounts, entities, and trusts through forms such as FBAR, 3520, 5471, and 8938. Failure to file these forms can result in significant penalties (often $10,000 per form per year or higher), underscoring the importance of comprehensive compliance processes.
4. Expatriation considerations: US citizens green card holders who relinquish status may be classified as covered expatriates and subject to an exit tax on worldwide assets. Recipients of gifts or bequests from covered expatriates pay a special tax. The decision to renounce citizenship is irrevocable and carries substantial implications for future US entry.

Audrey Scott and Sree Arimilli, President of Arimilli Consulting, Inc., shared their perspectives on balancing outsourced and in-house functions and finding the right mix at each stage of growth.

Key takeaways:

1. Strategic balance between insourcing and outsourcing: Effective family office design requires deliberate decisions about which capabilities should be developed internally and which should remain with external partners. The most successful offices grow with purpose, focusing on core needs rather than expanding headcount or bureaucracy. While formal processes can provide consistency, they should not overshadow the value of agile, informal decision-making that reflects the family’s priorities and culture.
2. Alignment and engagement are foundational: Strong alignment among family members, executives, and advisors is essential to avoiding tension and inefficiency. Before making key hires, stakeholders should clearly define the family office’s mission, culture, values, and scope of work. Open communication and structured engagement ensure that leadership decisions are consistent with the family’s long-term objectives and that trust is built from the outset.
3. Culture, governance, and accountability drive stability: Toxic dynamics can arise when personalities or power structures dominate the organization. Family offices can mitigate these risks by hiring leaders skilled at managing complex interpersonal relationships and by establishing clear governance frameworks that provide checks and balances. Ongoing executive coaching, periodic third-party reviews, and performance benchmarking help sustain a healthy culture and reinforce accountability across the organization.

Parisa M. Griess and Julie Miraglia Kwon highlighted key developments in IRS enforcement, pressing audit issues, best practices for managing contests and appeals, and updated procedures for seeking relief or rulings.

Key takeaways:

1. IRS staffing reductions are reshaping audit dynamics: Significant cuts to IRS personnel – estimated at roughly 25% – have especially impacted revenue agents who historically handled examinations of ultra-high-net-worth taxpayers. The reduced workforce has led to slower audit timelines and increased reliance on practitioners to frame issues and explain legal positions. Proactive preparation, including maintaining an audit-ready file, allows practitioners to control the narrative and streamline interactions with overextended examiners.
2. Enforcement priorities remain aggressive despite resource constraints: Even amid staffing reductions, the IRS continues to pursue robust enforcement actions. For example, the IRS Large Business and International (LB&I) Division has continued its targeted compliance campaigns. These initiatives, bolstered by agent feedback and artificial intelligence-driven analytics, focus on easily verifiable issues and documentation gaps that can yield sizeable adjustments. Practitioners should monitor LB&I’s publicly available compliance campaigns and other hot issues to anticipate areas of heightened scrutiny and prepare accordingly.
3. The economic substance doctrine is regaining momentum: Recent case law, including Patel v. Commissioner, has strengthened the application of the codified economic substance doctrine under IRC §7701(o). The provision’s 40% strict liability penalty makes it one of the IRS’s most powerful enforcement tools. Practitioners should maintain careful privilege discipline and ensure that transactions are well-supported and documented.
4. Heightened IRS scrutiny of grantor retained annuity trusts (GRATs): GRATs remain a major enforcement focus, particularly those funded with intrafamily notes. In Estate of Elcan, the IRS successfully challenged the legitimacy of such notes, resulting in substantial tax exposure. Current guidance instructs agents not to settle certain GRAT cases at the exam level, signaling a more rigid enforcement posture. Inconsistent administration or weak documentation can now present significant risk, underscoring the need for rigorous compliance and defensible note terms.