US SURROGACY AND THE ACCIDENTAL AMERICAN: WHAT UK INTENDED PARENTS NEED TO KNOW ABOUT US TAX
BY JENNY JUDD & NATALIE SUTHERLAND
With surrogacy increasing in popularity for couples who wish to start a family, many UK intended parents are choosing to embark on their surrogacy journey in the US.
There are many benefits to choosing the US. In many states, such as California, commercial surrogacy is legal and has a codified legal framework, meaning that intended parents are assured of their legal status throughout the process, which gives peace of mind. In the UK, as our surrogacy law is based on an altruistic system, much is based on trust and things can and do go wrong.
However, even though the UK intended parents’ names will be on the US birth certificate, giving them full legal parental rights in the US, UK law does not recognise this. The law in the UK will always consider the surrogate mother as the legal mother and the UK intended parents will have no legal parental rights in respect of this child born in the US when they return to the UK, until such time as they apply for and are granted a Parental Order.
It is always important to take specialist surrogacy advice in the UK before embarking on an international surrogacy journey to ensure that the intended parents meet the eligibility criteria enabling them to apply for a Parental Order when they return to the UK.
Once the decision has been made to undertake the surrogacy journey in the US, there are a few things to consider which are perhaps often overlooked.
US/UK DUAL CITIZENSHIP
The child, having been born in the US, will be a US citizen and has the right to a US passport. Once the Parental Order is obtained, they will also become a UK citizen and will be able to apply for a UK passport. This dual US/UK citizenship can bring about some wonderful benefits, such as easy access to both countries for both pleasure and work. However, being a dual citizen can also have significant tax implications and there are many dual citizens that do not realise they have tax obligations both in the UK and the US. The term often used is ‘Accidental American’ as they only have a relatively tenuous connection with the country.
SO, WHY IS THIS IMPORTANT? TAX!
The US has a rather unique and far reaching tax system, which potentially brings about many considerations from a legal, financial planning and tax perspective during the child’s lifetime. It is important for UK intended parents to have these in mind when considering the US as their jurisdiction of choice for surrogacy and throughout the child’s life.
THE IMPORTANT TAX CONSIDERATIONS
It is often an afterthought, but tax can override many of the decisions US citizens will make. Something that is perfectly normal and tax efficient for a UK person to do, can throw up complications later down the line for a UK/US dual citizen and wipe out any gains.
For example, if a person holds assets as a UK citizen only, it is likely the investment will be made up of several funds. However, later, when the child holds these investments in their own name, funds need to be avoided. In the US these are classed as Passive Foreign Investment Companies (PFICs) and they are particularly tax punitive from a US perspective. HMRC have similar rules, the Offshore Fund Regime, so care should be taken if considering offshore funds as these often cause a high level of UK taxation.
Even some of the simple things we might take for granted in the UK, such as principal private residence relief, which applies when selling your main home, is viewed differently on the other side of the pond. When selling a main residence in the UK this may be taxed by the US, which is something that a US surrogate born dual UK/US citizen will need to have in mind when they are an adult.
Succession or legacy planning will also require further consideration as, if the child is a trustee (later in life), or a beneficiary of a trust, there will be both US and UK taxation to consider.
As there is the requirement for ongoing US and UK tax filing for a dual citizen, care therefore needs to be taken when selecting investments. Structuring assets for the child will require additional organisation and planning to ensure that the complexities in terms of how assets are organised and held are not tax punitive for them, especially when they reach an age/income level where they need to start filing their US return.
Now, this might all sound like a bit of a minefield and if it is this complicated, will the child even want to retain their US Citizenship later in life? That is a very personal decision and the pros and cons need to be weighed up. Having said that, if the correct advice is taken from specialist professionals who adopt a dual US/UK thought process, the financial plan can operate completely successfully both now and into the future.
A FINANCIAL PLANNING STRATEGY FOR THE FAMILY
As a UK intended parent looking at undertaking a surrogacy journey in the US, there will be other financial aspects to consider. The upfront costs of surrogacy are a big financial commitment which can typically range from between $100,000 – $160,000; but it does not end there.
This is a life changing event for the intended parents, and it is important to reassess and reorganise the family’s wealth plan with a new baby in mind. Priorities will have changed and there will be a whole new set of objectives and goals for the child’s future needs, in addition to the parents’ own goals for their lifestyle, career, property and retirement plans.
It is helpful to look ahead and consider what capital may be required for certain key events; such as school fees planning, university/college fees and a fund to help him or her with their first home. The earlier these are considered, the more solid the financial plan will be to ensure these objectives can be achieved and the most appropriate and tax efficient investments can be established. This should be completely tailored to the family’s unique circumstances, and the parents’ own financial goals should be mapped out on the timeline alongside those for the US/UK dual citizen child. The more thought that goes into this the more likely all goals will be achieved.
It is also important to review any Will (or create one) to establish who the guardians for the child would be should the worst happen. Life cover should also be reviewed, and a legacy/succession plan put in place.
If the correct advice is taken there should be no need to compromise any of the goals and aspirations for the family as a whole and assets will then be structured correctly for the child’s future.
The message quite simply is that where there is a US aspect to a family – seek advice from specialists. Specialists who understand the complexities whilst helping the family to create an effective plan to achieve their goals.