When is a trust classified as a US Trust versus a Non-US trust?
There are many different considerations that come into play regarding trusts, depending on the type of trust you own and the tax status of the individuals who settle the trust and retain an ongoing benefit from the trust. As such, it is often important to review some of the basic rules associated with what makes a trust a US trust as opposed to a non-US ‘foreign’ trust.
A US trust is one that satisfies two tests:
- Court Test – a court within the US has primary rights to administer the trust.
- Control Tests – at least one ‘US person’ has the ability to control all substantial decisions related to the trust. A US person would be defined as a US citizen, green card holder, or resident alien under the substantial presence test.
If a trust does not pass one of the two tests noted above, then it is generally considered to be a non-US ‘foreign’ trust.
In addition to understanding whether a trust qualifies as a US trust, it is also important to determine whether the trust is considered a grantor or non-grantor trust. In general, if the person who settles the trust is alive and retains some sort of interest or trust power, then a trust will be considered a grantor trust. Generally grantor trusts are taxed at the individual level whereas non-grantor trusts are taxed at the trust level (except to the extent that income and gains are distributed to a beneficiary in the year the income is earned). This difference in taxation can result in varying rates of tax and have broad implications for US individuals who either settle or benefit from a trust.
Depending on the structure of the trust and the tax status of the trustees, beneficiaries and settlors, planning becomes important around the types of assets held within the trust. If individuals are looking to invest the trust assets in any way, it is beneficial to take advice and ensure that the investment strategy is tax-efficient in the jurisdictions that apply to the individual. For US connected individuals, one wants to make sure that any underlying assets held within the trust don’t fall foul of the Passive Foreign Investment Company (PFIC) or Controlled Foreign Company (CFC) rules.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.