Under the estate planning umbrella, trusts are a central tool used in preserving long-term wealth, but not all trusts are treated the same under U.S. law. While on the whole, trusts are designed to protect assets and ensure wealth is distributed according to the grantor’s wishes, the rules are complex and come with many considerations, especially for foreign nationals with U.S. heirs.
Here’s what global families need to know about Foreign Grantor Trusts (FGTs) and U.S. Trusts, specifically how they differ when it comes to wealth succession planning across borders.
What is a U.S. Trust?
A U.S. trust or a domestic trust is generally created under U.S. law and is commonly used in domestic estate planning to manage and transfer wealth to beneficiaries.
Common types of U.S. trusts include revocable trusts, irrevocable trusts, asset protection trusts, and special needs trusts. These trusts are commonly used by U.S. citizens and are subject to U.S. income tax on its earnings, which may vary depending on how the trust is structured.
What is a Foreign Grantor Trust?
A Foreign Grantor Trust is a trust established by a non-U.S. person and treated as owned by the foreign grantor for U.S. tax purposes.
This means that while the grantor is alive, income generated by the trust is generally attributed to the foreign grantor rather than the beneficiaries (so no U.S. reporting is required on income or gains), and any gift distributions to U.S. family members are also tax-free.
Foreign Grantor Trusts are commonly used when:
- Foreign parents have children living in the United States
- International families want to transfer wealth to U.S. heirs
- Foreign assets need to remain outside the U.S. estate tax system
Key Structural and Tax Differences
The most important differences between Foreign Grantor Trusts and U.S. trusts typically involve tax treatment, ownership, and reporting obligations.
When it comes to taxation, U.S. trusts are generally subject to U.S. income tax. Conversely, because Foreign Grantor Trust income is typically attributed to the foreign grantor during their lifetime, no annual U.S. tax or reporting on income or gains is required.
In terms of ownership, U.S. trusts are usually established by U.S. citizens or residents. Foreign Grantor Trusts are created by non-U.S. individuals.
Choosing the Right Structure for International Families
Foreign nationals must carefully consider their options when it comes to wealth preservation across generations. Before building out your legacy, speak with a qualified estate planning attorney who has experience coordinating trust structures for global clients.
At Horizon Private Wealth Law, our estate planning services ensure your wishes are carried out in line with your intentions. Get in touch with us today to start creating your custom estate plan that reflects and preserves your priorities.
