US Trusts for US and non-US clients
Contributed by US Trust Advisory Services LLC
10 July, 2019
Our recommendations for the establishment of US Trusts will depend on whether the Settlor (or Grantor) of the trust is a US person or not. For tax purposes, a US person means an individual who is a US citizen or a permanently resident alien (known colloquially as a "Green Card" holder).
A US person could also mean a US corporation although it is not possible for a US corporation to establish a Grantor trust under the Internal Revenue Services ("IRS") Code. So, if a corporation is the Settlor of a Trust then the Trust is considered to be a non-Grantor trust, which has a different tax treatment to a Grantor Trust. (A trust will also become non-Grantor if the individual Grantor dies without leaving a surviving spouse who is also a US person).
A US trust is a Grantor trust if the trust is revocable or the grantor is the sole beneficiary (during his lifetime), if the trust is irrevocable, and he/she exercises certain controls over trust assets as indicated in Section 671 through 679 of the IRS Code.
US Domestic Trusts
For clients who are US persons, we will be recommending the establishment of US domestic trusts, as there can be adverse tax consequences for US persons who establish foreign trusts. The only exception to this rule is when a US person is more concerned with asset protection issues, than tax, as US courts are known to be creditor friendly. In such cases, we will assist the client to establish a foreign trust in a jurisdiction with strong creditor protection provisions such as Belize, Nevis, the Bahamas, the Cook Islands and a couple of others. However, we will not assist US persons who are seeking to use those jurisdictions for tax avoidance purposes. All foreign trusts that we establish must comply with US tax reporting requirements.
Where a US client establishes a foreign trust, for asset protection purpose, then we will be enlisting the assistance of the client's CPA to ensure that US reporting complies with all current tax rules.
We also recommend the establishment of US domestic trusts where a US person owns financial assets in a non-US jurisdiction. This is to avoid probate or a probate equivalent (if the assets are in an non-common law jurisdiction such as Switzerland) as the clients assets could be frozen on decease until a judicial proceeding has occurred to transfer those assets to the client's heirs which could be a cumbersome, lengthy and expensive procedure.
US Hybrid Trusts
Most of our clients are going to be non-US persons and, subject to a review of their personal circumstances, we will usually recommend that they form US Hybrid Trusts, because they are treated as foreign trusts, for US tax reporting, and a foreign trust will usually only have reporting requirements if a US person is the Settlor.
The term Hybrid Trust refers to the fact that there is also usually a foreign protector or advisor, who has certain control powers, which are separate to the control powers exercised by the US Trustee. Under the IRS Code a trust is automatically a foreign trust when a controlling person is not subject to US court supervision and/or the trust is not fully controlled by US persons.
The advantage of the Hybrid Trust is that there could be no direct reporting to the IRS even if the financial assets of the trust fund are managed within the US. It should be noted, however, that investment gains are subject to withholding taxes, meaning that this is not an entirely tax- free solution. Nevertheless, there is the added benefit that there is likely to be no CRS or FATCA reporting, in such circumstances, as a US financial institution is not currently subject to CRS reporting and FATCA rules apply to foreign bank/investment accounts and not to bank/investment accounts that are held with US broker/dealers, banks and other financial institutions.
Nevertheless, we do not recommend that US trusts are established, for the sole purpose of CRS avoidance, because US Trusts have many advantages in comparison with international trusts whose trust laws are usually based on the UK Trustee Act of 1925, as amended. Thus, a US Trust should be established to meet the Settlor's estate and wealth planning needs and not for CRS minimization alone.
US Hybrid Trusts are of particular benefit to foreign grantors who wish to establish a trust, which may benefit US beneficiaries, as there is the possibility that such beneficiaries can receive tax-free distributions during the Grantor's lifetime. These trusts are called foreign grantor trusts ("FGTs") and, at the time that the Grantor dies, then it is usually beneficial to domesticate the trust and that is simply accomplished, with US Hybrid Trusts, by having the foreign controlling person retire and that automatically converts the Trust into a US domestic trust. This compares favorably with establishing a non-US trust as an FGT which may require a redomicile of the trust (a somewhat complicated process and especially if the Grantor has died suddenly) or a "pour over" of assets into a US trust where the trustee is unknown to the Grantor's beneficiaries, (as the long-term relationship was with the non-US Trust's trustee).
Please feel free to contact us for further information on US Hybrid Trusts.
Benefits of US Trusts
US Trusts can offer the following benefits:
- US trusts laws are often more cutting edge and more commercially focused than common law international trusts mainly because there is no "sham" trust doctrine;
- That means that Settlor directives to the trustee do not invalidate a US Trust and it is even possible to establish "Settlor Directed" trusts, in certain US states, where the US Trustee is obligated to follow the directions of the Settlor so long as those directions are entirely legal;
- Most US states have very long perpetuity periods if they exist at all;
- Several US states also have asset protection provisions that provide a statute of limitations for creditors to attack the gifting of assets to the trust;
- Some US states also provide for the establishment of non-charitable purpose trusts, which are currently only available, from an international perspective, in "offshore" common law jurisdictions;
- A US Hybrid trust with a foreign grantor and no US source income may have no US reporting requirements;
- Non-grantor beneficiaries may also have no tax reporting requirements, even if US persons, until they receive a distribution from the trust fund;
- The USA is an OECD country and is not viewed as an offshore tax haven;
- There is currently no FATCA or CRS reporting requirement for US trustees or US financial institutions for clients who hold US situs accounts.
US Trusts can also hold foreign assets, although it should be noted that such assets would normally be held through one or more foreign corporate entities rather than by a US Trustee directly. It should be also be noted, therefore, that if the corporate entity has a foreign bank account then there will still be CRS reporting, for that entity, even if not for the trust wholly.
Preferred US states
Although we have been referring to US Trusts there is really no such thing as a US Trust, as each trust will usually be governed by the trust laws of the state where the trustee is located or a where a corporate trustee is licensed to be a trustee. All corporate trustees are licensed by state banking commissions although it is often possible to form unlicensed private trustee companies ("PTCs") subject to strict rules and capitalization requirements that would not apply to PTCs in international jurisdictions. An exception to this capitalization requirement is the state of Wyoming where it is possible to establish unregulated and non-registered PTCs at comparatively low cost.
It should also be noted that state trust laws of various vary widely although there has been an attempt to provide conformity by having states adopting the Uniform Trust Code ("UTC") but many states have resisted signing up to the UTC including the states that have the kind of "cutting edge" laws that international clients will appreciate.
Three of these states are South Dakota, Wyoming and Delaware which will be our preferred jurisdictions for international clients. We also be offering Florida trusts because UTAS principals have close connections to the state of Florida and also because Florida real estate is a very popular acquisition for non-US persons. (A possible ownership solution is a Florida LLC owning the real estate with a Florida trustee acting as sole member of the LLC). However, it should be noted that Florida has adopted the UTC and it can be difficult to find Florida corporate trustees who are interested to hold non-financial assets.
Foreign persons who wish to acquire US real estate without a trust or other asset holding structure should be aware that the US estate tax exemption for foreign persons (and non-resident Green Card holders) is only $60,000 and estate taxes apply to all US situs assets including US securities. A foreign person who wishes to sell or transfer the real estate owned will also be subject to higher capital gains taxes than if the property was held in the name of a US corporate entity or US trust.
Subject to client demand, we will also be establishing trusts in Nevada, Alaska and New Hampshire as they also have user friendly trust laws. In addition, New Hampshire now has private foundation laws, which should be of interest to international clients.
Should you have any questions concerning US trusts or the tax implications of using them, for wealth planning purposes, then please do not hesitate to contact us for advice, as initial enquiries are responded to on a no fee basis.
We can also address CRS and FATCA questions as one member of our team is a CRS and FATCA expert.
Finally, we should advise that UTAS can deliver legal and tax advice relating to US corporations and trusts at much lower rates than US law firms and our services include trust deed drafting.
Please review our website for further information and our US contact number, for telephone enquiries, is +1-954-442-7861.
We look forward to hearing from you soon.
Ed Rogers TEP
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