Publications
U.S. Trust and Estate Planning 美國信託規劃實務（英文部分）
Chapter 3 U.S. Revocable Dynasty Trusts
Is Foreign Grantor Trust status relevant to me if I previously settled a non-U.S. (offshore) trust?
While we generally recommend that clients stray away from establishing offshore trusts (defined herein as trusts settled outside of the U.S.), particularly if they have U.S. descendants, Wealth Creators who previously established offshore trusts should familiarize themselves with Foreign Grantor Trust (FGT) rules. Offshore trusts include trusts settled in the British Virgin Islands (BVI), Cayman Islands, Bahamas, Bermuda, Switzerland, Cook Islands, Jersey, Nevis, or any other non-U.S. jurisdiction.
When a U.S. person is a beneficiary of a foreign trust, the tax consequences are generally quite punitive (often involving “throwback” taxes for distributions of undistributed net income (“UNI”). Oftentimes, when offshore trusts are established, the tax consequences of future distributions are not adequately analyzed by the recommending party (frequently non-U.S. financial advisors and bankers at non-U.S. financial institutions).
Offshore trusts are also frequently established prior to the grantor either having U.S. person beneficiaries or prior to the grantor disclosing their U.S. person beneficiaries. Wealth Creators should be extremely wary of this, as non-U.S. financial institutions tend to downplay the tax impact of trusts with U.S. beneficiaries or, in certain cases, choose to outright ignore the fact that the trust has U.S. persons.
Offshore trust companies typically retain many powers rather than stipulating that the family itself would control the trust. Sometimes, offshore trust agreements may also stipulate that the trustee would not be able to be removed barring certain exceptions. While this allows these trust companies to improve client retention, the Wealth Creator’s family oftentimes lacks powers necessary to govern the trust.
Furthermore, the drafting of these trust agreements often leads to the Wealth Creator directing the offshore trustee to manage investments and distributions using Letters of Wish. While the Wealth Creator may feel like he or she is in charge of all functions of the trust, the trust could be deemed a sham trust if any lawsuit were to arise, leading to the trust’s asset protection powers to be severely eroded.
In sharp contrast, Foreign Grantor Trusts established in the U.S. generally have explicitly defined powers for the trust’s fiduciaries (trust protector, investment direction advisor, and distribution advisor), which allows the family to both stay in control of trust assets and swap out trustees if necessary. In addition, since the roles and responsibilities are generally set forth clearly in the trust agreement, it is extremely unlikely that the trust could be deemed a sham trust by outside creditors.
For Wealth Creators that had the foresight to adequately review and / or modify their offshore trusts, they often have them structured as Foreign Grantor Trusts (under certain circumstances, offshore trusts may qualify as FGTs as well). When doing so, Wealth Creators should undoubtedly seek U.S. tax advice from competent counsel.
Wealth Creators with offshore trusts should take steps to mitigate the risk of their trusts being deemed sham trusts by clearly delineating the powers assigned to each of the trust’s fiduciaries in the trust agreement. If this cannot be done, the Wealth Creator should consider establishing a new trust and decanting (transferring) assets from the old trust to the new trust.
When a U.S. person is a beneficiary of a foreign trust, the tax consequences are generally quite punitive (often involving “throwback” taxes for distributions of undistributed net income (“UNI”). Oftentimes, when offshore trusts are established, the tax consequences of future distributions are not adequately analyzed by the recommending party (frequently non-U.S. financial advisors and bankers at non-U.S. financial institutions).
Offshore trusts are also frequently established prior to the grantor either having U.S. person beneficiaries or prior to the grantor disclosing their U.S. person beneficiaries. Wealth Creators should be extremely wary of this, as non-U.S. financial institutions tend to downplay the tax impact of trusts with U.S. beneficiaries or, in certain cases, choose to outright ignore the fact that the trust has U.S. persons.
Offshore trust companies typically retain many powers rather than stipulating that the family itself would control the trust. Sometimes, offshore trust agreements may also stipulate that the trustee would not be able to be removed barring certain exceptions. While this allows these trust companies to improve client retention, the Wealth Creator’s family oftentimes lacks powers necessary to govern the trust.
Furthermore, the drafting of these trust agreements often leads to the Wealth Creator directing the offshore trustee to manage investments and distributions using Letters of Wish. While the Wealth Creator may feel like he or she is in charge of all functions of the trust, the trust could be deemed a sham trust if any lawsuit were to arise, leading to the trust’s asset protection powers to be severely eroded.
In sharp contrast, Foreign Grantor Trusts established in the U.S. generally have explicitly defined powers for the trust’s fiduciaries (trust protector, investment direction advisor, and distribution advisor), which allows the family to both stay in control of trust assets and swap out trustees if necessary. In addition, since the roles and responsibilities are generally set forth clearly in the trust agreement, it is extremely unlikely that the trust could be deemed a sham trust by outside creditors.
For Wealth Creators that had the foresight to adequately review and / or modify their offshore trusts, they often have them structured as Foreign Grantor Trusts (under certain circumstances, offshore trusts may qualify as FGTs as well). When doing so, Wealth Creators should undoubtedly seek U.S. tax advice from competent counsel.
Wealth Creators with offshore trusts should take steps to mitigate the risk of their trusts being deemed sham trusts by clearly delineating the powers assigned to each of the trust’s fiduciaries in the trust agreement. If this cannot be done, the Wealth Creator should consider establishing a new trust and decanting (transferring) assets from the old trust to the new trust.
