US Trusts

Our recommendations, for the establishment of US Trusts, will depend on whether the Grantor of the trust is a US person or not. In that respect, a US person means an individual who is a US citizen or permanently resident alien know 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 a surviving spouse who is also a US person).

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 case, 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.

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 Grantor.

Therefore, a non-US Grantor, who establishes a foreign trust, should have no US reporting requirements even if there are US beneficiaries of the foreign trust.

The term Hybrid Trust refers to the fact that there is 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.

The advantage of the Hybrid Trust is that there should 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 so this should not be considered to be an entirely tax free solution. Nevertheless, there is the added benefit that there may also be no CRS or FATCA reporting, in such circumstances, as a US financial institution is not currently subject to CRS reporting. (FATCA reporting relates to non-US accounts).

However, we do not recommend that US trusts are established, for the sole purpose of CRS avoidance, as 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. So a US Trust should be established to meet the Grantor’s estate and wealth planning needs and not for CRS minimization alone.

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 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 asset to the trust;
  • Some US states also provide for the establishment of non-charitable purpose trusts, which are only available in “offshore” common law jurisdictions currently.
  • 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 not viewed as an offshore tax haven;
  • There is currently no FATCA or CRS reporting requirement for US trustees or US financial institutions.

US Trusts can also hold foreign assets but such assets would normally be held through one or more foreign corporate entities rather than by a US Trustee directly. It should therefore be noted 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, with a US corporate Trustee, will usually be governed by the trust laws of the state where the 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 certain rules and capitalization requirements that might not apply to PTCs in international jurisdictions.

It should be noted that the trust laws of various states 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.

Two of those states are South Dakota and Delaware which are currently our preferred jurisdictions for international clients. Although, we recommend Wyoming and Nevada to international clients who want a PTC trustee. Alaska is another state that we can recommend, to international clients, for its beneficial trust laws. A further advantage is that none of these states impose state taxes, on trust fund income, and we find trustees to be very welcoming, in general, to foreign clients.

We offer Florida trusts, too, as 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 preferred ownership solution is a Florida LLC owning the real estate with a Florida trustee acting as sole member of the LLC). It should be noted that Florida also has no state taxes but it has adopted the UTC.