• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Question about non US citizen being Trustee of a US Trust

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

empirex

Junior Member
California

Basically, my Mom's sister living in California passed away (she had no family in the US being UK born) leaving my Mom as Successor Trustee and Sole Beneficiary, so quite an easy set up overall. However, our Attorney has informed us that it is difficult for a non US citizen to act as a Trustee on a US Trust as there is something called a 'Foreign Trust Taxation' which apparently is quite expensive and something we want to avoid 'at all costs'. He has asked us if we have any friends/family in the US that can act as Trustee, which we don't, so the other alternative is to appoint a Non Attorney in California who can do the job but I believe they charge hundreds of dollars an hour to do this.

So its balancing losing control of the Trust to someone we don't even know or continuing with my Mom as Trustee and likely having to pay a lot more in Tax! Does anyone have any idea what sort of money we are talking about in terms of tax? Obviously without knowing the estates worth you cant tell me exactly but I mean more as a percentage of an average estate?

Any help or ideas we haven't thought of would be useful. Its very frustrating that a very straightforward Trust is going to be complicated just because we aren't US citizens!

Thanks
 


Just Blue

Senior Member
California

Basically, my Mom's sister living in California passed away (she had no family in the US being UK born) leaving my Mom as Successor Trustee and Sole Beneficiary, so quite an easy set up overall. However, our Attorney has informed us that it is difficult for a non US citizen to act as a Trustee on a US Trust as there is something called a 'Foreign Trust Taxation' which apparently is quite expensive and something we want to avoid 'at all costs'. He has asked us if we have any friends/family in the US that can act as Trustee, which we don't, so the other alternative is to appoint a Non Attorney in California who can do the job but I believe they charge hundreds of dollars an hour to do this.

So its balancing losing control of the Trust to someone we don't even know or continuing with my Mom as Trustee and likely having to pay a lot more in Tax! Does anyone have any idea what sort of money we are talking about in terms of tax? Obviously without knowing the estates worth you cant tell me exactly but I mean more as a percentage of an average estate?

Any help or ideas we haven't thought of would be useful. Its very frustrating that a very straightforward Trust is going to be complicated just because we aren't US citizens!

Thanks
What is the value of the trust?
 

justalayman

Senior Member
Foreign trust taxation involves trusts that are created outside of the US or US trusts controlled by a foreign entity in some way. Unless you are speaking of a trust established outside of the US, this would not be considered a foreign trust within the US, yet.

So, just for clarity sake;

The trustor (your aunt) was a resident of:

The trust was established in (country):

Your mother resides in (country):


What you want to avoid is converting the trust into a foreign trust. That is why you need a US resident to serve as trustee.

BUT depending what the terms of the trust are, it may already be too late to prevent it from becoming a foreign trust.

However, our Attorney has informed us that it is difficult for a non US citizen to a
would this be an attorney in the US or one in your homeland?
 

xylene

Senior Member
Your situation likely verges beyond the scope of this forum.

I would say if you don't like what a lawyer says, make sure you run it by a disinterested lawyer.

The same thing is true of prices for services, if you need to hire a trust administrator. Get some quotes.
 

Taxing Matters

Overtaxed Member
So its balancing losing control of the Trust to someone we don't even know or continuing with my Mom as Trustee and likely having to pay a lot more in Tax! Does anyone have any idea what sort of money we are talking about in terms of tax? Obviously without knowing the estates worth you cant tell me exactly but I mean more as a percentage of an average estate?

Thanks
You say your attorney said this was to be avoided “at all costs”. I'm curious as to that attorney’s experience and knowledge of U.S. federal tax law, especially as it relates to the international tax rules for trusts. Was this a U.S. probate attorney, a U.S. tax attorney, or a UK solicitor, or what?

U.S. tax law defines all trusts as foreign trusts unless both the following conditions are met:
• A court within the United States is able to exercise primary supervision over the administration of the trust, and
• One or more U.S. persons have the authority to control all substantial decisions of the trust.​

The U.S. has two concerns with trusts in the international context. The first is abuse of the U.S. tax system by U.S. persons using foreign trusts to evade tax. The second is making sure that foreign persons pay the taxes they owe on their share of U.S. income from a trust (whether foreign or domestic). The biggest problems that come up here are (1) extra reporting requirements than exist for domestic trusts with only U.S. persons as grantors/beneficiaries and (2) withholding requirements for income to foreign beneficiaries. Withholding is a way to ensure tax is paid by having the trust send to the Internal Revenue Service (IRS) tax payments on behalf of the foreign person, deducting that from the distribution the foreign person receives from the trust. It is basically a pre-payment of at least part of the tax the foreign person would owe on the trust income. But the whether the trust is foreign or domestic does not change how the trust or beneficiaries are actually taxed. It simply impacts reporting requirements and withholding requirements. For this reason your attorney’s comment makes me think that perhaps he or she is not all that well versed on the details of how trusts are taxed in the U.S. when foreign persons are involved and may be assuming something that isn’t actually true. Yes, the extra reporting and withholding can be a pain and it's important to get it it right to avoid penalties, but it may be that the extra costs for that would not exceed the extra costs of paying some U.S. attorney or U.S. other person to act as trustee for the trust. A lot would depend on how much work the person would have to do with the trust and how long you expect the trust to be around.

(You may already know it, but in case you don’t the IRS is the U.S. equilvalent of the UK HMRC, or what was once known as Inland Revenue.)
 

HRZ

Senior Member
I am not so sure the operative word is taxes but control---but its a big red flag to sort out --and get right. .

The specific issue as this layman understands it is "control : by a foreign trustee --not subject to US jurisdiction --and apparently a US based " Co trustee" sometimes fill the requirements of FEDERAL law..and requirements of state law for trusts domiciled in that state are yet adding another state specific can of worms --and what works in DE may not work in CA . ( I have no doubt there are offices which exist to open mail and be there --for a fee --and meet compliance issues ---while most practical elements of management and investment take place elsewhere and the ability to move trustees remains liberal )

As another asked...how big of a trust ?

No clue if this trust became permanently a foreign trust due to inadvertent trigger of foreign control ---I'd not go there if a cure can be put in place .

My guess is Mom's sister created a trust domiciled in CA but facts matter .

PS CA has some very aggressive taxes too!
 

HRZ

Senior Member
I think: unless at least one trustee ismin CA, CA wants taxes withheld. If it's a CA trust. PLUS CA taxes any income sourced to CA ...and I don't know how broad a net that means .

TRust tax reporting is a pain ...but even Turbo Tax has some products that make the Federal reports possible f you pay attention to details....But state reporting remains a pain..at least in my state of PA
 

empirex

Junior Member
Thanks for your replies, I will try and answer the questions you have all asked.

My Auntie (The trustor) resided in CA, this is where the trust was set up. Incidentally, she never became a US Citizen, just a resident. I don't know if that makes any difference to anything though. My Mom resides here in the UK.

We don't know an exact value but given the estimated value of the property and bank accounts, we think the estate is valued at between 500-700k.

Our Attorney is a Probate Attorney in CA working for quite a large law firm so I am hopeful that they know what they are doing. He seems to be concerned at avoiding this foreign trust tax situation to save us money.

A couple more questions I had if anyone can help;

I do have a friend living here in Europe who is a US citizen, and is infact from CA, and I wondered if he could act as our trustee or would it be an issue given that he isn't currently living in the US?

Also, the terms of the trust clearly state that the property should go to my Mom so I assume that all we need the Trustee/Attorney do is change the ownership/deeds to my Mom? The Attorney was talking about the US based trustee selling the house on our behalf but maybe my Mom decides to keep the property or sell it further down the line, so the trustee cant sell the house without my Mom's consent?

I think what I am ideally trying to work out is that if it much cheaper and quicker for us to appoint someone in the US then we will do that, but if the foreign tax situation (albeit complicated) doesn't end up costing us a significant amount then we might as well continue with my Mom as the trustee.

Thanks.
 

HRZ

Senior Member
I would be real nervous about using a trustee not subject to jurisdiction of CA ...something does not add up well.
 

justalayman

Senior Member
I would be real nervous about using a trustee not subject to jurisdiction of CA ...something does not add up well.
I believe they MUST reside within the US (for it to remain a US trust) and I believe one of the reasons is so they are subject to US jurisdiction.
 

HRZ

Senior Member
CA law if it's a CA trust requIres at least one trustee who is a resident of CA , Federal law says anywhere in US .

99 % of time nobody may care where the trustee actually spends most time ..but as to real,estate matters...some title searchers do check details ...so for title word it best be RIGHT

The practical,answer to your other question may be trustee can do anything the trust empowers him or her to do that is not a violation of some law or public policy where the trust is domociled ....

TRiggerijg a bunch of reporting requirements is not the big problem...paying two levels of professionals hefty fees to get it right year after year ... well go figure ..

BTW what's going on with home ...is that a prudent investment ? CA is one of the most tenant friendly states around if trust gets a lousy tenant ...big bills to,follow .
 

Taxing Matters

Overtaxed Member
So a US citizen living in Europe would be no good? That would still be considered a foreign trust?
I disagree with the other responses that say that this person would not help to make the trust domestic. If the trustee is a U.S. citizen and the trust itself is subject to the jurisdiction of a U.S. court (and here it would be as the trust was established in CA and the trust property is located there) then for federal tax purposes it will be regarded as a domestic trust even if the U.S. citizen trustee lives in Europe.

The attorney you consulted is a probate attorney and is not likely also a tax attorney familiar with the U.S. taxation of foreign persons and trusts, so I’m skeptical here as to the depth of his/her knowledge of the subject. Ask him/her exactly what he/she thinks would be the adverse tax consequences if this trust is regarded as a foreign trust. Then post that here and I can give you feedback ontaht. I think you will find it is not as dire as the attorney thinks it is. At the moment we would have a foreign trust with all foreign beneficiaries which owns U.S. real estate. The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) will tax the sale of that real estate the same as if it was sold by a U.S. person but require the buyer to withhold 10% of the gross proceeds to remit to the IRS to ensure the foreign person pays the tax owed on the sale. The trust and foreign beneficiaries would need to file tax returns with the IRS for the sale. There may be some other reporting obligations, too. But as I see it, there is no significant difference in u.S. federal tax to be paid whether the trust is considered foreign or domestic when the asset owned is real estate and all the beneficiaries are not U.S. persons.

California tax law largely tracks federal tax law regarding that actual tax treatment, though some reporting requirements may differ. So I do not expect California tax to be different here, either.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top