專業叢書
U.S. Trust and Estate Planning 美國信託規劃實務（英文部分）
Chapter 2 U.S. Irrevocable Dynasty Trusts
Why do Grantors select directed trusts when passing down their wealth?
Many irrevocable Dynasty Trusts are structured as directed trusts, especially those settled by Asian Wealth Creators. In the U.S., the Trustees have historically held many of the key management powers within Dynasty Trusts, including the power to allocate the trust’s investments and the power to determine the trust’s distributions. Over time, however, many Wealth Creators realized that they would rather have trusted and named fiduciaries make those decisions, rather than Trustees that may or may not have similar values aligned with their beliefs. Furthermore, when Trustees must make investment or distribution decisions on behalf of trusts, the potential legal liabilities of Trustees are noticeably increased, which leads to higher maintenance fees usually pegged as a percentage of total assets under administration.
While Wealth Creators who set up trusts in the U.S. typically seek to transfer their assets to their descendants or family members, trusts in Asia are often settled with the sole intent of directing assets towards investments. Many Asia-based financial advisors at large financial institutions sell trusts as a way to market their investment products. In the vast majority of these trusts, the trustee holds a tremendous amount of power over the trust and the trust agreement is almost always drafted to benefit the trustee or its affiliate, which frequently earns revenue as a percentage of assets held. Furthermore, financial advisors typically have little to no room for modifications in the trust agreement’s templated language, reducing the clients’ ability to tailor the contract to their needs.
In contrast to their Asian counterparts, U.S. trusts are typically drafted by qualified attorneys for the sole benefit of the clients themselves. While this process requires a separate legal fee (billed either as a flat fee or an hourly fee), as attorneys do not earn revenue based on assets managed like an investment manager does, the trust agreement is tailored to the client’s specific needs. This usually means that the Wealth Creators have more say as to who will hold the powers to invest and distribute the trust’s assets.
As such, U.S. trusts may suit the needs of these Wealth Creators more. In U.S. directed trusts, the Grantor gets to appoint fiduciaries that can control substantially all operations of the trust, often leaving trustees with purely administrative functions such as keeping track of the trust’s paperwork and signing off on the trust’s tax forms. As the trustee’s control over the trust is minimized, the trustee’s liability is also minimized, leading to lower fees (often a flat annual fee, rather than a fee based on a percentage of assets).
Relevant Considerations
A trust is generally established for the benefit of its Beneficiaries. The trust’s Grantor appoints a Trustee to manage the administration of trust assets. Typically, at the time the trust is formed, the Grantor appoints relevant fiduciaries and assigns various powers to each fiduciary.
This structure allows the Grantor’s descendants and / or other named Beneficiaries to benefit from trust distributions (as determined by the Distribution Advisor), without the trust assets being directly includible in the Beneficiaries’ personal assets. When structured properly, creditors of trust Beneficiaries are not able to enforce their claims against the assets held in a trust.
A Dynasty Trust may be structured as a Grantor Trust or Non-Grantor Trust for U.S. income tax purposes. A trust is generally considered a “Grantor Trust” if the Grantor is liable for paying income taxes on the trust’s income. A trust is considered a “Non-Grantor trust" if the trust’s Grantor is not liable for income taxes attributable to the trust’s income.
Under the U.S. Federal Income Tax regime, a U.S. trust is generally treated as a U.S. income tax resident. The IRC clearly defines a U.S. trusts for U.S. income tax purposes under IRC §§ 7701(a)(30)(E) and (31)(B), effected in 1996. A trust is a U.S. trust when both of the following conditions are satisfied. A trust is considered a foreign trust if either of the two following conditions are not satisfied.
Thus, by definition, a U.S. trust is a trust governed by U.S. courts and has a U.S. person controller. Furthermore, a foreign trust, by definition, is a trust that does not fulfill either the Court Test or the Control Test and thus, cannot be considered a U.S. trust. To establish a U.S. trust, the Court and Control Tests are often satisfied by trust agreements that:
When these conditions are met, a trust is considered to be a U.S. trust and governed by both U.S. Federal laws and State laws (usually in the state the trust is established). For U.S. taxpayers, a U.S. trust is frequently preferable to a Foreign Trust, especially as it relates to income tax purposes (with a limited exceptions for certain Foreign Trusts settled by non-U.S. persons). In trust agreements where the Trust Protector holds substantially all relevant powers, the Trust Protector must be a U.S. person (or U.S. corporation) for the trust to be a U.S. trust.
In accordance with Treasury Reg. 301-7701-7(d)(2), if a U.S. Trustee is replaced by a foreign Trustee, the trust is allotted 12 months to replace the Foreign Trustee with a U.S. Trustee to maintain U.S. trust status. If the change is not made within the 12 months specified, the trust will be treated as a Foreign Trust from the date the Trustee changes.
While Wealth Creators who set up trusts in the U.S. typically seek to transfer their assets to their descendants or family members, trusts in Asia are often settled with the sole intent of directing assets towards investments. Many Asia-based financial advisors at large financial institutions sell trusts as a way to market their investment products. In the vast majority of these trusts, the trustee holds a tremendous amount of power over the trust and the trust agreement is almost always drafted to benefit the trustee or its affiliate, which frequently earns revenue as a percentage of assets held. Furthermore, financial advisors typically have little to no room for modifications in the trust agreement’s templated language, reducing the clients’ ability to tailor the contract to their needs.
In contrast to their Asian counterparts, U.S. trusts are typically drafted by qualified attorneys for the sole benefit of the clients themselves. While this process requires a separate legal fee (billed either as a flat fee or an hourly fee), as attorneys do not earn revenue based on assets managed like an investment manager does, the trust agreement is tailored to the client’s specific needs. This usually means that the Wealth Creators have more say as to who will hold the powers to invest and distribute the trust’s assets.
As such, U.S. trusts may suit the needs of these Wealth Creators more. In U.S. directed trusts, the Grantor gets to appoint fiduciaries that can control substantially all operations of the trust, often leaving trustees with purely administrative functions such as keeping track of the trust’s paperwork and signing off on the trust’s tax forms. As the trustee’s control over the trust is minimized, the trustee’s liability is also minimized, leading to lower fees (often a flat annual fee, rather than a fee based on a percentage of assets).
Relevant Considerations
A trust is generally established for the benefit of its Beneficiaries. The trust’s Grantor appoints a Trustee to manage the administration of trust assets. Typically, at the time the trust is formed, the Grantor appoints relevant fiduciaries and assigns various powers to each fiduciary.
This structure allows the Grantor’s descendants and / or other named Beneficiaries to benefit from trust distributions (as determined by the Distribution Advisor), without the trust assets being directly includible in the Beneficiaries’ personal assets. When structured properly, creditors of trust Beneficiaries are not able to enforce their claims against the assets held in a trust.
A Dynasty Trust may be structured as a Grantor Trust or Non-Grantor Trust for U.S. income tax purposes. A trust is generally considered a “Grantor Trust” if the Grantor is liable for paying income taxes on the trust’s income. A trust is considered a “Non-Grantor trust" if the trust’s Grantor is not liable for income taxes attributable to the trust’s income.
Under the U.S. Federal Income Tax regime, a U.S. trust is generally treated as a U.S. income tax resident. The IRC clearly defines a U.S. trusts for U.S. income tax purposes under IRC §§ 7701(a)(30)(E) and (31)(B), effected in 1996. A trust is a U.S. trust when both of the following conditions are satisfied. A trust is considered a foreign trust if either of the two following conditions are not satisfied.
1. A court within the U.S. is able to exercise primary supervision over the administration of the trust (commonly referred to as the “Court Test”) AND
2. One or more U.S. persons have the authority to control all substantial decisions of the trust (commonly referred to as the “Control Test”).
Thus, by definition, a U.S. trust is a trust governed by U.S. courts and has a U.S. person controller. Furthermore, a foreign trust, by definition, is a trust that does not fulfill either the Court Test or the Control Test and thus, cannot be considered a U.S. trust. To establish a U.S. trust, the Court and Control Tests are often satisfied by trust agreements that:
1. state explicitly that a U.S. court has jurisdiction;
2. have one or more U.S.-based Trustee, whom together, have substantial control over the administration of the trust; and
3. have one or more U.S. persons or U.S.-based corporations (generally U.S. LLCs or C-Corporations) control all substantial decisions.
When these conditions are met, a trust is considered to be a U.S. trust and governed by both U.S. Federal laws and State laws (usually in the state the trust is established). For U.S. taxpayers, a U.S. trust is frequently preferable to a Foreign Trust, especially as it relates to income tax purposes (with a limited exceptions for certain Foreign Trusts settled by non-U.S. persons). In trust agreements where the Trust Protector holds substantially all relevant powers, the Trust Protector must be a U.S. person (or U.S. corporation) for the trust to be a U.S. trust.
In accordance with Treasury Reg. 301-7701-7(d)(2), if a U.S. Trustee is replaced by a foreign Trustee, the trust is allotted 12 months to replace the Foreign Trustee with a U.S. Trustee to maintain U.S. trust status. If the change is not made within the 12 months specified, the trust will be treated as a Foreign Trust from the date the Trustee changes.
