How US non-residents may use a foreign grantor trust to achieve asset protection and tax efficiency
Diksha Bhatt
by Diksha Bhatt
Political and economic uncertainty throughout Latin America and the world is driving the migration of business and investment assets to safety. The United States is a top destination due to its favourable business and investment environment, and its exceptionally strong legal system that ensures the protection of business and investment assets. The use of a foreign grantor trust is one option available to US non-residents who seek to place their assets under the protective umbrella of the US legal system. In addition to asset protection, this type of trust can be used effectively to pass on wealth to the next generation of family members in the US or abroad.
Understanding foreign grantor trusts
A foreign grantor trust is created outside of the US by one or more non-US persons (“grantors”) who contribute the target business or investment assets to the trust for the benefit of beneficiaries. The beneficiaries can be either foreign or US persons. Unlike an irrevocable trust, in which the grantor must give up control over the trust assets, the grantor in a revocable trust retains the power to change the conditions of the trust, or grantor trust provisions, in any way, including the revocation or termination of the grantor trust.
The second key feature of the revocable trust is that the formation document (i.e. the trust deed) provides that a US court exercises primary supervision over the administration of the trust. This feature effectively places all assets contributed to the trust under the protection of US laws, both in a domestic and international context.
US income taxation of a foreign grantor trust
For US tax purposes, the trust is treated as a fully transparent entity due to the fact that the foreign grantor retains control over the assets and income of the trust. This means that trust income is taxed at the level of the grantor rather than at the level of the trust or its beneficiaries. The grantor’s tax liability on trust income will depend on their country of tax residency.
Grantors who are not US tax residents should be exempt from US income tax with respect to the trust’s non-US source income. They should also be exempt from US tax with respect to the trust’s US source capital gains (other than those related to the disposition of US real property). In addition, US beneficiaries, if any, should be exempt from US tax on any distributions received from the trust.
However, the grantor will be subject to US tax to the extent the trust generates US-source business income or other US taxable income. If the grantor lives in a low-tax jurisdiction or a jurisdiction that does not tax overseas income that arises within a trust, a foreign grantor trust can be highly tax efficient.
Benefits of using foreign grantor trusts
Asset protection
Assets held in a foreign trust should be protected from the grantor's creditors and legal claims in their home country. This is particularly beneficial for business owners and wealthy individuals seeking refuge from politically or economically unstable regions.
US estate tax avoidance
Another key benefit foreign persons gain by utilising a foreign grantor trust is the ability to avoid US estate tax with respect to foreign assets held by the trust. Under US law, the estates of non-US domiciled individuals are subject to estate taxes on their US-situs assets.
Flexibility
Depending on the country in which the trust is established, the trust can invest in a wide range of assets, including real estate, securities, and other financial instruments, without being subject to the same regulatory constraints as US established trusts.
Choice of jurisdiction
Selecting the appropriate jurisdiction is critical to the success of a foreign grantor trust. Relevant considerations include the jurisdiction’s legal environment, political and economic stability, and the presence of favourable asset protection and privacy laws.
Conclusion
Foreign grantor trusts provide a powerful tool for foreign persons seeking to protect their assets and minimise estate taxes.
Mowery & Schoenfeld is an accounting, advisory, and IT firm in Chicago with offices in Miami and Manilia, Philippines. With 20 partners and 160 employees, we are dedicated to values of People, Clients, Growth, & Adaptability. Our growing international practice is focused on LATAM and multinational advisory.
GGI member firm Mowery & Schoenfeld, LLCLincolnshire, Illinois, USAT: +1 847 247 8959
Auditing & Accounting, Tax
Diksha has over eight years of experience in public accounting in the US and India, and has worked in international tax services with other regional CPA firms. She holds her Bachelor of Commerce in Financial Accounting and Auditing from India. Diksha is a Chartered Accountant in India and a Certified Public Accounting in the US. Contact Diksha.
