For most, a family owned business is a tremendous source of pride as well as financial stability. However, without tax planning, a family business can become a liability.

Although this statement is true for all Bermudians, for this article, we wish to focus on the business owner who is a dual national of Bermuda and the United States.

The facts

Dual citizen of USA and Bermuda ("Dual Citizen") married to an individual who does not possess Bermudian status and is also not a US citizen ("NRA/Non Bermuda Spouse"). Spouses wish to be in business together. Dual citizen to be compliant with Bermuda ownership rules is 60 percent owner of the business, with NRA/Non Bermuda Spouse taking 40 percent.

Note: It is important to note that the issues described below are relevant if the spouse described above is Bermudian.

Transfer of shares in business by dual citizen of USA and Bermuda to spouse who is not a US citizen.

While Bermuda offers an unlimited deduction on estate stamp duty for property that passes to a spouse an equivalent mechanism is not available from the US for dual citizens of the United States and Bermuda who predecease their non US citizen spouse.

This is an important planning issue as US citizens are subject to United States estate and gift tax on assets located in Bermuda, the United States and the rest of the world. In all cases, estate and business planning that considers only the Bermuda aspect of the US/Bermuda cross border fact pattern falls short. In the most benign situation, ignoring the US aspects can be an annoyance. Unfortunately in the worst case, it can be devastating, both financially and emotionally, to the family.

In 2009, the top estate tax rate applied by the United States is 45 percent. It is important to note, however, that under the current law, the rate will increase after 2010 to the earlier rate of 55 percent.

In addition, generally speaking, the United States provides for a lifetime gift tax exemption of $1 million, with gifts over this amount being taxed at the maximum rate of 45 percent. It is important to note that annual gifts to a non US citizen spouse are capped at $133,000 in 2009.

Other Common Issues Other planning issues that arise include:

• The business will be considered a controlled foreign corporation under US rules; US income tax return for Dual Citizen will have additional information return filing requirements.

l A dividend paid by the business to Dual Citizen must be reported on his/her US federal income tax return for the year in which it was received.

l If the dividend (or any other cash amount received or owned by the Dual Citizen) received by Dual Citizen is deposited into an account owned jointly with NRA/Non Bermuda Spouse, a gift for US tax and reporting purposes may be deemed to have taken place.

l If Dual Citizen chooses to settle a Bermuda trust to hold assets including shares in the business, the trust will be considered a Foreign Grantor Trust for US tax purposes and all trust income will "flow through" to Dual Citizen and be required to be reported on his/her US federal income tax return.

Where is the Good News?

Tough times are good times to trim estates. With business valuations possibly coming in lower when compared to a year or two ago, depressed real estate values, record low interest rates and higher US tax rates on the horizon, financial and estate planning reviews should be taking place over the next 12 weeks to affect 2009 tax returns.

After December 31, business structure and transfer issues will be locked in for reporting purposes.

Patterson Partners Ltd. provides cross-border tax, estate and investment planning services to dual citizens of the USA and Bermuda, their families and businesses. For more information, visit www.patterson-partners.com or contact Jennifer A. Patterson, CFP®(US), CIMA®, TEP via email at info@patterson-partners.com or phone 296-3528. Asgill Post Ltd. provides assistance with Business Valuation, Financial Strategy and the Purchase and Sale of Companies. For comments or queries, contact Kumi Bradshaw MBA, CBA, BVAL via email at kumi@asgillpost.com or phone at 295-3301.