Foreigners Coming to United States to Establish Trusts

G. Warren Whitaker (Partner, Day, Berry & Howard LLP) has recently posted his article entitled The U.S. May be a Good Trust Jurisdiction for Foreign Persons on SSRN.

Here is the abstract of his article:

At one time non-U.S. persons would rarely consider creating atrust  that was subject to the jurisdiction and governed by the substantive law of one of the fifty United States. The definition of what constituted a U.S. trust for income tax purposes was vague and amorphous, and US trusts are subject to U.S. income tax on their worldwide income, while non-U.S. trusts are taxed only on their U.S. source income.  However, recent changes in U.S. tax law have made it possible to create a trust with a U.S. trustee that is subject to U.S. court supervision and governed by the laws of a U.S. state, and still achieve all the tax advantages of a foreign trust. In addition, certain states have enacted substantive trust laws that are attractive for anyone who wants to create a trust, including non-U.S. persons.

Among the recent changes in the tax law that permit foreigners to use U.S. trusts are:

1. The revised definition of "United States Trust" enacted by Congress in 1996 creates a two-pronged bright line test, and only trusts that meet both tests are considered to be U.S. trusts. The tests make it possible to create a trust under US law that nonetheless qualifies as a foreign trust.

2. Several U.S. states now permit a Settlor to contribute assets to an irrevocable trust and remain a permissible beneficiary of the trust in the discretion of an independent trustee, and the trust assets will be protected from creditors whose claims arise after the trust is created, and thus also potentially excluded from U.S. estate tax at the Settlor's death.

3. The rules regarding grantor trusts with non-U.S. grantors were also significantly amended in 1996.

4. Certain countries have lists of jurisdictions that are considered to be tax havens. The U.S. is not on any of these lists.

5. Income tax treaties between the United States and certain other countries provide benefits to non-U.S. persons residing in these treaty countries who create and fund U.S. domestic trusts.

6. The income taxes of the United States on passive income have been dramatically reduced in recent years in order to avoid taxation in their home country.

The substantive advantages that make U.S. trusts attractive to foreigners include:

1. No Rule Against Perpetuities in some states.

2. Investment Advisor with sole responsibility for investment management.

3. Distribution Advisor

4. Protection From Forced Heirship

5. Private Trust Companies