What Is the Difference Between U.S. and Foreign Trusts?

If you are interested in setting up a trust as part of your estate planning, you may wonder about the difference between a U.S. and a foreign trust. Foreign trusts are usually similar in structure to United States trusts, but the people involved in the trust and the property held in it have some key differences.

What Is a Trust?

Whether called U.S. or foreign by name, trusts have a few things in common. Trusts involve the relationship between a trustee and beneficiaries. The trustee manages and legally owns the trust property for the benefit of beneficiaries, who have the beneficial interest in the trust property. A trust creator or “settlor” creates the relationship and contributes property to the trust. (See IRS Treas. Reg. § 301.7701-4.)

When examining whether a foreign relationship or entity is a trust, the IRS looks at who holds property and why. Entities that exist to conduct business activities, not merely to hold onto assets, are usually not trusts for U.S. tax law purposes.

What Is a Foreign Trust?

All trusts are considered foreign by the IRS unless they meet two tests: the court test and the control test. The court test requires that a court in the United States has the ability to exercise “primary supervision over the administration of the trust”. (Treas. Reg. §301.7701-7.) The control test requires that one or more United States people have the authority to control “all substantial decisions of the trust”. No one else can have the power to veto any of the substantial decisions. (Treas. Reg. §301.7701-7.)

Again, any trust that does not meet these two tests is called a foreign trust. Many foreign trusts have non-U.S. citizens as trustees. If a trust has one U.S. citizen trustee and one non-U.S. citizen trustee, it is probably a foreign trust too.

What Is a U.S. Trust?

For IRS purposes, United States trusts meet both the court test and the control test. In addition, California and other states may have specific rules governing which trusts are considered to be in-state. These trusts are treated differently than foreign trusts for taxation.

Planning your estate and interested in trusts? 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.