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  • Writer's pictureJay Judas

Creating a U.S. Taxable Estate by Accident: The EB-5 Visa Investment Program

In 2018, 9,602 EB-5 Visas were granted with over 48% of the recipients coming from Mainland China and over 80% coming from Asia. The next largest jurisdiction was Vietnam, with recipients receiving just over 7% of the visas.

Why is the EB-5 Visa Program so attractive to the Chinese and what are the personal financial pitfalls to be considered?

More than a third of rich Chinese surveyed “are currently considering” emigrating to another country, according to a report from the Hurun Research Institute, a China-based wealth research firm, and Visas Consulting Group, an immigration advisory firm. They surveyed 224 Chinese people with an average wealth of $4.5 million. The most common destinations are the U.S. and Canada, which have stable currencies, access to strong financial markets and a high quality of healthcare and school. Personal safety is also a factor in choosing where to emigrate.

In addition, the implementation of the Common Reporting Standard will mean that offshore wealth held by Chinese will become transparent to their government. Tracking and reporting mechanisms are already functioning this year, and this will certainly lead to worldwide taxation as well as the enforcement of an estate tax. The concern is that the scope and level of taxation is uncertain, motivating the wealth to seek residency elsewhere.

In the spirit of inviting immigrants to its shores as long as they are productive members of society and not a drain on resources, the U.S., in 1992, created a pilot version of the EB-5 Visa Program. If a foreign person wished to be fast-tracked to receiving a U.S. Green Card, he or she could make an investment into a new commercial enterprise which creates at least 10 full-time jobs. This investment can consist of either $1 million or $500,000 into a “targeted employment area” (TEA).

A TEA is usually a depressed urban area or a rural community. Due to the lower investment requirement, nearly all EB-5 visa investments in 2018 were made into TEAs.

Golden Ticket

The EB-5 visa would seem to be the golden ticket for wealthy mainland Chinese seeking the security of the U.S. Once these EB-5 visa recipients become U.S. persons for tax purposes, their global wealth is now subject to U.S. taxation. Worldwide taxation on investment gains will likely seem trivial in comparison to the U.S. estate tax, which can halve the wealth for the next generation.

Unfortunately, EB-5 visa investment vendors fail to mention the adverse tax consequences of permanent U.S. residence. If not addressed through prior planning, U.S. taxation can be a shock to someone whose past tax planning simply consisted of keeping money offshore outside of China.

Once a permanent resident, planning options are narrowed to those available to others in the U.S., and most likely include a standard life insurance solution purchased in an irrevocable life trust.

Plan Ahead!

A better solution would be to not create a U.S. taxable estate in the first place.

The U.S. government allows for a foreign person to gift unlimited amounts into the U.S. This is a shrewd allowance by the Treasury Department because once that money is in the U.S., it typically becomes part of the recipient’s estate and the U.S. knows it will eventually receive its share.

Prior to a foreigner planning to move to the U.S., they should consider moving their wealth into a U.S. trust that keeps this wealth outside of their U.S. taxable estate. The next step would be to purchase a life insurance policy inside of the trust to create tax-free death benefit and to defer taxation on investment growth inside of the trust.

As an example, let’s say that mainland Chinese resident Wei Chan is planning to apply to the EB-5 Visa Program and currently has $50 million with a bank in Hong Kong that he does not need to access for his day-to-day expenses.

Prior to becoming a U.S. person for tax purposes, Wei gifts all $50 million to a U.S. irrevocable insurance trust. Inside of the trust, the money is used to purchase a variable private placement Frozen Cash Value (FCV) life insurance policy with an additional amount of death benefit risk of $2.5 million (or 5 per cent).

Unlike a typical life insurance contract, an FCV policy allows for a very small amount of death benefit risk – typically just 5 per cent – for the policy proceeds to be U.S. tax compliant and to be received tax-free. This allows for a great deal of wealth to be transferred outside of an estate while still preserving access to the basis of the policy (premium paid), if needed. Within the policy, the $50 million can be invested in a wide range of investment choices selected by the client’s independent money manager.

Wei’s planning has accomplished a number of goals. First, he has moved the $50 million outside of his future U.S. taxable estate. Inside of the irrevocable insurance trust, the cash value remains “frozen” at $50 million and all investment gains are treated tax-free. The value of those gains are added to the amount of death benefit with no additional insurance costs.

This private placement life insurance policy is compliant under U.S. tax law with the death proceeds being tax-free. In addition, the $50 million basis can be accessed within the trust tax-free and loaned to Wei by the trustee.

While there are minor nuances to this planning not discussed here, the result is that a combination of prior planning and a structured life insurance solution can save an EB-5 visa recipient from losing half of their wealth to taxation. More EB-5 applicants need to understand that the true price of an EB-5 visa can be a lot more than the program investment.

An earlier version of this article appeared in Wealth Briefing on April 21, 2016.

Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at


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