Commentary - 21 January 2022

A Brief Look at Foreign Grantor Trusts and the Opportunities for US Beneficiaries

Many wealthy families will have family members living in various countries around the world. Some move for lifestyle reasons (culture, security, taxation), but most often, children and grandchildren move overseas for their education. For some, the move is temporary and they return to their home country after a relatively short period away, while for others the move becomes more permanent.

Brian Balleine

Business Development Director

It is not unusual for family members to move to the United States, often for education, and after time acquire citizenship or permanent residency (a Green Card). We are often asked by families whether there is any planning that they should consider for their US family members.

Very often the solution is for the non-US parent(s) or other non-US family member(s) referred to as the “Grantor” or “Grantors” to set up a foreign grantor trust (FGT) for the US residents they wish to benefit, “the US beneficiaries”.  

To be classified as a FGT the trust will in most cases be fully revocable by the Grantor. Occasionally, where an irrevocable trust is needed, the trust document must be drafted in such a way to ensure that only the Grantor (or the Grantor’s spouse) can benefit during the Grantor’s lifetime. In nearly every case that we see, the trust is drafted so that it is fully revocable by the Grantor. This is critical as a trust with one or other of these features means that the non-US Grantor is treated as being the owner of the FGT assets for US tax purposes, notwithstanding the fact that the trust includes US beneficiaries. Provided the trust assets do not produce US source income, there should not be US Federal income tax to pay, nor any US reporting requirements. As the Grantor is treated as the owner of the FGT for US tax purposes, trust distributions are not taxable to the US beneficiaries and must only be reported to the IRS by the US beneficiary. 

It’s worth noting that a FGT has some important advantages over a Will. Where assets are located in different countries, there will often be a formal and burdensome probate process in each of those countries. This, however, can be avoided where the assets are held by the FGT.  Wills can be subject to challenge by heirs (due to forced heirship laws and challenges to the capacity of the Testator) leading to significant delays and costs. These challenges tend to be less likely when the assets are held in trust. Another key advantage the FGT has over a Will is that the FGT may allow the assets to remain in a trust and allow for further income and transfer tax opportunities for heirs who are US persons.

Until relatively recently, a typical FGT structure often comprised a fully revocable trust wholly-owning a non-US company. In turn this non-US company held the various investments. Due to changes in US tax law, there may be some adverse US tax consequences on the death of the Grantor(s). To avoid this outcome, careful thought needs to be given on the corporate structure that needs to sit under the trust. Alternatively, the trustees may decide to avoid holding US situs assets (which includes the stock in a US corporation). 

While the establishment of a FGT is a well-trodden path for families that have US family members, the structuring has become more complicated, so it is important that families take independent and competent US tax advice, before setting up the FGT, to ensure that the planning that they wish to achieve is met.

 

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