What to Consider if Your Child Will be Studying in the U.S.

Your child has received an acceptance letter to study at a university in the U.S., and is understandably excited about the opportunity. As with any opportunity, however, it is important to educate yourself as to the implications of having a child who resides and studies in the U.S., and consider certain steps to ensure that you are supporting your child in a way that does not trigger adverse tax consequences in the U.S.

Studying in the U.S.: Are There Tax Implications?

Many families worry about whether their child’s time spent studying in the U.S. will subject their child (or even them) to unnecessary U.S. taxation. Oftentimes, a bit of planning will help ensure that the child’s studies will not complicate the family’s overall tax planning and can help your family mitigate the potential U.S. estate and tax gift burden.

The U.S. generally exempts international students with a full-time course of study from being treated as U.S. tax resident during the first 5 years of their studies in the U.S. (with certain caveats). Therefore, international students who can utilize this exemption are generally taxed in the same manner as nonresidents of the U.S. for U.S. income tax purposes, whereby they are generally only taxed on their income which is treated as “sourced” within the U.S.

A Little Bit of Planning Goes a Long Way

While there are generally no tax implications when non-U.S. persons make gifts to a child studying in the U.S., when you are making a gift you should be careful not to transfer (or be deemed to transfer) assets which the IRS considers U.S. real property or U.S. tangible property. One common example of a potential “trap for the unwary” is where the parent directly purchases a condo or house for their child to live in while he or she is studying in the U.S., but titles the property in the name of the child. The IRS may view that transaction as a gift of the real estate by the parent (which could be a taxable gift in the U.S.), where a little planning could have restructured this gift in a way that would not have been taxable in the U.S. (e.g., a gift of cash to the child which the child could then use to purchase a suitable property in their own name).

Planning for a Child Who Continues to Stay in the U.S. After University

Often, international students may be offered employment in the U.S. as they pursue their careers after university. Likely, this means that the student will become a U.S. income tax resident, and may also possibly be treated as domiciled within the U.S. for U.S. estate tax purposes. A little bit of planning can help ensure that this exciting transition is handled efficiently for U.S. tax purposes. It is important for someone about to become a U.S. income tax resident to review with their advisors their beneficial interests in any non-U.S. companies or trusts, and engage in planning strategies which can ensure such interests are still held efficiently once the student becomes a U.S. income tax resident. Additionally, the student should work with their advisors to review any investment portfolios that they may have, to ensure that they are not holding investments which would no longer be efficient when held by a U.S. person (e.g., offshore mutual funds which would be treated as ‘passive foreign investment companies’ as held by U.S. persons).

If it is possible that a student will be staying in the U.S. for a longer term, you as the parent may wish to review and revise your estate plan so that your child’s ultimate inheritance will be transitioned efficiently for U.S. transfer tax purposes. Having assets pass in trust for the benefit of your U.S. child (rather than outright) could shelter the inheritance from being part of the child’s “taxable estate” in the U.S. when they pass away, helping to ensure that your family legacy supports your U.S. grandchildren and further descendants without exposure to the U.S. estate tax or U.S. generation-skipping transfer tax.