Choosing a trustee for your trust when you are not a resident of California requires you to consider all sorts of residency and tax issues. As the name implies, you place a lot of trust in your trustee to manage the trust well. Your trustee will need to act in the beneficiaries’ best interest, pay bills, make investments, and file taxes. The trustee’s location and residency could make a big difference in the future of the trust. If you are a non-resident, set up your trustee for success by finding someone who is ready to take on the job.
Domestic or Foreign Trust?
First, your choice of trustee may depend on whether you want your trust to be based in the United States or based in another country. United States taxation of trusts varies depending on whether your trust is considered “domestic” or “foreign”. If your sole trustee is a U.S. citizen living full-time in the United States, then under U.S. tax law your trust could be a domestic trust. If your trustee lives in and is a citizen of another country, then your trust could be a foreign trust. To determine whether a trust is foreign or domestic, U.S. lawyers also look at whether U.S. or another country’s courts primarily supervise the administration of the trust.
If your trustee moves to another country and becomes a resident, your trust could change from a domestic to a foreign trust for purposes of federal taxes. Further, if a non-resident can overrule or veto the U.S. trustee’s decisions, a purportedly domestic trust could actually be a foreign one. As you can see, your trustee’s location and citizenship may affect taxes due by the trust.
Residency of Trustee and Beneficiaries
California has different tax rules for trusts than federal law, and California’s laws also could affect your choice of trustee. In California, how a trust is taxed depends on whether the trustee is a California resident, whether the beneficiaries are residents, and the source of the trust’s income. If a trustee lives in or moves to another country, the tax status of the trust could suddenly change. Other states have different tax rules for trusts.
While paying taxes is only one task of trustees, expensive tax bills and complicated tax returns can cause unnecessary expense and hassle for the trustee. It could also lead to long-term losses to the beneficiaries, who could receive less money from the trust due to tax bills.
When choosing a trustee, consider practical issues relating to the trustee’s location. Does your chosen trustee plan to move out of the United States in a few years? Will your trust hold lots of property in another country? You may want your trustee to be geographically close to the property held by the trust so that he or she can watch over it. Also, you may want to choose someone with whom your family can stay in close contact and visit in person.
Starting a trust as a non-California resident? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.