High net worth families are often spread all over the world and trustees have had to adapt to multiple jurisdictions to serve them. The United States tax system presents some unique problems for non-US trusts that have US resident beneficiaries.
The international trust
The traditional notion of a wholly domestic trust where all the principal players (settlor, protector, beneficiaries) are based in one country has all but disappeared. For the younger generation of beneficiaries in particular, education and career opportunities are no longer limited to the country of their birth and a move abroad is almost a certainty.
For trustees, meeting their duty of care equally for all beneficiaries, no matter which country they live in, can be challenging to say the least. Every country has its own legal system, some of which do not even recognise trusts and, of course, every country has its own system of taxation. As a result, arrangements which favour a beneficiary resident in one country may be to the detriment of a beneficiary in another.
There are rarely structures that work for all beneficiaries of an international trust so managing such conflicts is a common task for trustees. Even where efficient structures can be created, the ground rules will change as beneficiaries settle in different countries over time.
The US problem
The United States presents its own unique problems when it comes to the taxation of non-US trusts and their beneficiaries - the current US system taxes residents on their worldwide income with no exceptions whatsoever. Furthermore, as all trustees will be aware, the US is now receiving information on all distributions to US resident beneficiaries through the Foreign Account and Tax Compliance Act (FATCA) initiative, so there is no hiding place.
US resident beneficiaries are subject to US tax on distributions they receive whilst resident, even if the trust income and gains accrued prior to their move to the US. In addition, the US tax system imposes an interest charge (the ‘throwback tax’) if the distributions includes income or gains which accrued in an earlier year. A beneficiary can sometimes end up paying more than 50% tax on the distribution (this is just the federal tax, if they are resident in a US state there could well be state taxes to pay also).
Trustees can minimise this risk by providing the beneficiary with a statement detailing the contents of the distribution for US tax purposes. Such statements are not necessarily easy to prepare, in some cases they require a complete restatement of the trust accounts since inception, applying US tax principles.
It is not only US resident beneficiaries that can be a headache for trustees. A settlor who moves to the US can, in some circumstances, ‘import’ the trust to the US under the ‘grantor trust’ rules. If this happens the trustee will suddenly find themselves with an obligation to file an annual foreign trust tax return with the Internal Revenue Service.
What should trustees do?
A beneficiary moving to the US is not necessarily all bad. If it is possible to identify such moves well in advance, this should enable the trustees to take pre-emptive action to protect the beneficiary from the more punitive US tax provisions. In some circumstances, with careful planning, it is possible to achieve a better tax result for the beneficiary in the US than in their ‘home’ country.
Before taking action the trustee should ask the beneficiary:
- How long will he or she live in the US? Permanently?
- Will they apply for a Green Card or a temporary visa?
- Do they think they will have children whilst in the US? (It is important to remember that children born in the US are always US citizens and subject to US tax.)
- Will trust funds be needed whilst they are in the US?
As well as these factors, trustees must, of course, consider the needs and plans of any other and the type of assets held by the trust.
How can BDO help?
BDO’s US tax advisory team, based in London, have a wealth of experience advising non-US trustees on their US resident beneficiaries. We can assist trustees and beneficiaries by:
- Advising on restructuring trust assets and holding company structures to mitigate the beneficiary’s exposure to US tax
- Advising on distribution strategies to mitigate the beneficiary’s exposure to US tax
- Preparing US tax compliant distribution statements for trustees
- Preparation of foreign grantor trust returns for trusts with US resident settlors
- Preparation of US tax returns and associated reports for US beneficiaries
- Advising on trustees’ obligations under FATCA.
Our advice always takes into account the tax position of other beneficiaries in other countries and, where necessary, we draw on the expertise of our extensive international network.
Your next steps
Personal tax for US residents may change significantly in the next year or two and this could have a significant impact on trusts with US beneficiaries. For help and advice on coping with US beneficiaries, please get in touch with Mark Walters or Andrew Harrison.