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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
What happens to my Foreign Grantor Trust after I die?
When the grantor of a Foreign Grantor Trust (FGT) dies, the trust generally becomes irrevocable. Depending on the language of the trust agreement, the trust either becomes a U.S. irrevocable trust or a foreign irrevocable trust, as determined by the Control Test and Court Test (described in length in the previous chapter).
As the grantor is no longer alive, the trust typically becomes a non-grantor trust and becomes its own taxable entity for U.S. income tax purposes. Assets held by the FGT are generally only taxable for U.S. estate tax purposes to the extent that trust assets possess U.S. situs.
For Wealth Creators with U.S.-person beneficiaries, it is extremely important to note that these two types of trusts fall under vastly different U.S. income tax regimes. Clients should seek competent U.S. tax counsel in determining the most favorable form of taxation and have the FGT trust agreement drafted accordingly. Both the drafting attorney and the tax attorney should review and sign off on the final version of the trust agreement. This can ensure that the trust agreement is optimized for the client’s specific needs, the trust jurisdiction’s state laws, and U.S. tax consequences.
Generally speaking, it is advisable that Wealth Creators with U.S. beneficiaries consider language that would effectively convert a FGT into a U.S. irrevocable trust, rather than a foreign irrevocable trust, upon the grantor’s death. Typically, if this is the grantor’s intent, the trust agreement would incorporate language that would allow it to fulfill the Control Test and Court Test immediately upon the grantor’s death.
Even if the trust does not immediately fulfill both the Control Test and the Court Test, thereby becoming a U.S. trust, it generally has one year to fulfill both and “cure” itself of foreign trust status. Thus, the trust would be treated as a U.S. trust from the day the grantor deceases, thereby relieving the trust of foreign trust status for U.S. tax purposes for the period between the grantor’s death and the time it fulfills both the Control and Court Tests in accordance with Regs. Sec. 301.7701-7(d)(2).
After converting the trust to a U.S. irrevocable trust, all trust income is generally taxed on a current basis, which could avoid any “throwback” taxes that may arise for trusts treated as foreign trusts.
As the grantor is no longer alive, the trust typically becomes a non-grantor trust and becomes its own taxable entity for U.S. income tax purposes. Assets held by the FGT are generally only taxable for U.S. estate tax purposes to the extent that trust assets possess U.S. situs.
For Wealth Creators with U.S.-person beneficiaries, it is extremely important to note that these two types of trusts fall under vastly different U.S. income tax regimes. Clients should seek competent U.S. tax counsel in determining the most favorable form of taxation and have the FGT trust agreement drafted accordingly. Both the drafting attorney and the tax attorney should review and sign off on the final version of the trust agreement. This can ensure that the trust agreement is optimized for the client’s specific needs, the trust jurisdiction’s state laws, and U.S. tax consequences.
Generally speaking, it is advisable that Wealth Creators with U.S. beneficiaries consider language that would effectively convert a FGT into a U.S. irrevocable trust, rather than a foreign irrevocable trust, upon the grantor’s death. Typically, if this is the grantor’s intent, the trust agreement would incorporate language that would allow it to fulfill the Control Test and Court Test immediately upon the grantor’s death.
Even if the trust does not immediately fulfill both the Control Test and the Court Test, thereby becoming a U.S. trust, it generally has one year to fulfill both and “cure” itself of foreign trust status. Thus, the trust would be treated as a U.S. trust from the day the grantor deceases, thereby relieving the trust of foreign trust status for U.S. tax purposes for the period between the grantor’s death and the time it fulfills both the Control and Court Tests in accordance with Regs. Sec. 301.7701-7(d)(2).
After converting the trust to a U.S. irrevocable trust, all trust income is generally taxed on a current basis, which could avoid any “throwback” taxes that may arise for trusts treated as foreign trusts.
