If you would like to start a foreign trust, you may wonder if it will be able to operate in the United States. The short answer is yes, many foreign trusts do operate in the United States. They are, however, treated differently than U.S. trusts for tax purposes.
Foreign trusts often have non-U.S. citizen trustees or were formed under the laws of another country. These trusts may hold property in the United States, in other countries, or both. Whether they pay U.S. income taxes every year depends on the type of trust.
Taxation of a foreign trust depends on whether the trust is a “grantor” or “non-grantor” trust. In a grantor trust, the trust creator retains some control over trust assets; in a non-grantor trust, the creator has no control anymore. The grantor pays taxes on income of a foreign grantor trust, not the trust itself or its beneficiaries. Beneficiaries pay taxes on income of a foreign non-grantor trust, except if the trust keeps income with a U.S. source. In that case, the non-grantor trust pays the taxes.
One of the key reasons that trusts are considered “foreign” is because they are governed by a different country’s laws, and United States courts may not have the authority to supervise how they are run. Keep in mind, however, that if the trust holds any property located in the United States or if the trustee is a U.S. citizen, a United States court could have jurisdiction over the trust.
Further, when foreign trusts operate in the United States, trustees and beneficiaries may have different rights than they would for a U.S. trust. In some other countries, trustees are not subject to as strict of fiduciary duties towards beneficiaries as they are in the U.S. In addition, beneficiaries may have very different rights to obtain information about the trust’s operation, management, and distributions.
Foreign trusts may offer asset protection advantages if they operate in the United States. For example, creditors in another country may have trouble accessing property or other assets stored in the U.S. The same is true for U.S. creditors trying to access property in another country. You should speak to a lawyer about the tradeoffs of using a foreign trust for this purpose. In general, people looking to start foreign trusts should get legal advice about the tax, estate planning, and practical consequences of operating these trusts in the United States.
Planning your estate? 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.