A non-citizen can form a trust in California but will need significant legal advice on the tax consequences. Both California and the United States have some special laws for taxing trusts. The amount of tax could vary widely depending on who the trustee is, and several other factors.
First, tax treatment for federal purposes depends on whether the trust is a “domestic trust” or a “foreign trust”. The United States Internal Revenue Service (IRS) taxes each type of trust differently. Figuring out whether a trust is domestic or foreign is very complicated. For instance, the IRS may look at factors such as:
- Where the trustees are residents
- Where assets held by the trust are located
- If a trustee who is a foreign resident can control decisions about the trust
- Whether the trust is a grantor trust or non-grantor trust (a legal determination)
- Whether there is language in the trust document stating where the trust will be administered
- Where the trust is in fact administered.
Trusts can even switch from foreign to domestic, or domestic to foreign, if the trustee changes or if the trust acquires property located outside the United States. Some trusts may have to pay taxes both in the United States and in the country in which the property is located.
California has even more rules about taxing trusts. The state tax authority looks at (1) whether the trust crosses borders (by holding foreign property or having a foreign trustee), and (2) whether the trustees and non-contingent beneficiaries are California residents. If a trustee or beneficiaries are California residents, the trust must pay (often expensive) California taxes. It does not matter if the trust holds property in California or not.
For non-citizens trying to set up simple trusts in California, perhaps to benefit local relatives, all this tax information could confuse and overwhelm. Unfortunately, every year people find out at tax time that their trusts owe thousands of dollars in extra taxes because of a simple change related to the trust, such as a new trustee. When all you want to do is provide support to relatives, a large tax bill could frustrate your plans. To set your trust up for success, seek out an estate planning attorney with experience in international tax issues to prepare the trust.
Are you a non-U.S. citizen setting up a California trust? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.