International Families: Planning Considerations for US Beneficiaries of Your Foreign Trusts
By Steven L. Cantor, Cantor & Webb P.A.
The mobility of wealthy international families often results in a family member moving to the United States while being a beneficiary of a foreign trust or a US family member becoming a beneficiary of a foreign trust settled by a non-US relative. Numerous pitfalls to proper planning can be avoided by those advising the settlor, trustee or beneficiary.
Timely United States Tax Advice
Often those involved do not seek proper US tax advice until it is too late. In a perfect world, both the settlor and the trustee would obtain independent US tax advice prior to creating the trust if it is known in advance that at least one US person will be a beneficiary of the trust. If it is not known in advance, ideally both the settlor and trustee would obtain independent US tax advice once a US person becomes a beneficiary of the trust. It may even be appropriate for the beneficiary to obtain independent US tax advice as well. While the amount of attorneys' fees incurred to obtain such advice is worthwhile compared to the US tax savings that can be achieved, often such advice is not timely obtained due to the costs involved and the reluctance of the settlor and/or beneficiaries to agree to the expense.
Many trust practitioners draft trusts with specific dispositive provisions requiring mandatory distributions (i.e., when the beneficiaries attain a certain age) and do not take into account potential changes in residence, citizenship or domicile of the beneficiaries. This may result in unfavorable tax and non-tax consequences. Accordingly, provisions of the trust instrument should be made flexible to deal with contingencies and unforeseen events.
United States Person With Powers Over The Trust
Many trusts provide an individual with various powers over the trust as a protector or otherwise. If a US person is a beneficiary of a trust and has a power to remove and replace the trustee of the trust without any restrictions as to the reason for the removal or as to who can serve as the new trustee, the power may be treated as a general power of appointment over the trust with adverse tax consequences (particularly if the trustee can make discretionary distributions). Providing for any power over a trust should be carefully considered to determine if there are any tax consequences concerning the power if its holder is or will be a US person.
Maintaining Foreign Entities
Many trusts hold title to financial assets indirectly through a wholly-owned foreign company. Doing so triggers various US tax issues, particularly if the foreign company becomes treated as a passive foreign investment company or controlled foreign corporation.
Purported Gift From Foreign Company
A purported gift is any transfer of property made by a foreign company to a person who is not shareholder, except a transfer for fair market value. With certain exceptions, if a US person receives a purported gift directly or indirectly from a foreign company (as opposed to a distribution directly from the trust which owns the foreign company), the purported gift must be included in the US person's gross income. Trustees should avoid making purported gifts from a foreign company to any US person.
If the foreign company has retained earnings when the trust becomes a nongrantor trust (i.e., upon the death of the settlor), then part or all of the retained earnings may be subject to US income tax when they are distributed from the foreign company to the trust. To avoid this result, the foreign company should regularly declare and pay dividends to the trust. The trust should regularly thereafter re-contribute to the foreign company any funds not needed by the trust and thus minimise or eliminate the amount of its retained earnings.
Recognise GainsInternational Families: Planning Considerations for US Beneficiaries of Your Foreign Trusts
Upon the death of the settlor, the trust would receive a "step-up" in its adjusted basis (historic cost) in the foreign company shares but not to its underlying assets. If the assets of the foreign company have appreciated in value during the lifetime of the settlor, part or all of the appreciation may be subject to US income tax after the settlor's death. In order to minimise or eliminate income tax, from time to time during the lifetime of the settlor the foreign company should "step-up" its adjusted basis in its assets by selling its appreciated assets then reinvesting the sale proceeds. If the same assets are repurchased immediately after the sale, they should not be repurchased on the same day they were sold. Before selling any assets, the foreign company should consider the domestic and foreign tax and non-tax costs and other issues associated with selling assets and purchasing new assets.
Utilizing A Disregarded Entity
If a foreign revocable trust directly or indirectly owns assets which are not considered "situated within the US", it may be prudent for the trust to hold title to those assets through an entity which is disregarded for US tax purposes (such as a single member domestic LLC or a foreign company that has validly "checked-the-box" to be treated as a disregarded entity) instead of through a foreign corporation. If, at the time of the death of the settlor, the trust holds title to assets which are not "situated within the US" through a disregarded entity, then the adjusted basis of the assets of such disregarded entity would be "stepped-up" and the disregarded entity would never have any retained earnings (for US tax purposes). It is therefore not necessary to regularly recognize gains and regularly pay dividends. Those assets would not be subject to any US estate tax by reason of the death of the settlor. Certain exceptions may apply, however, such as if the trust was not properly funded.
The foregoing is just a small sampling of the vast number of applicable planning opportunities to deal with complex issues when a US person is involved with a foreign trust.
Steven L. Cantor, Managing Partner
Cantor & Webb P.A. Attorneys at Law, Miami, Florida, USA
With over 30 years of experience Steven L. Cantor, founder and managing partner of Cantor & Webb P.A. handles a variety of complex foreign trusts with U.S. assets and/or beneficiaries, tax and estate planning for multinational families, pre-residency planning, and structuring on foreign investment in United States real property.
Cantor & Webb P.A. is a Miami, Florida based law firm focused on the representation of high net worth international private clients and family offices in the areas of international tax and estate planning, tax compliance, wealth preservation and commercial matters. The firm has established a legal concierge oriented practice which caters to the unique needs of their international private clients, servicing clientele predominantly from Latin America, the Caribbean and Europe.