Tax-Free Distributions for Non-U.S. Individuals

What is a Foreign Grantor Trust?

A “foreign grantor trust” is a trust with features that allow for a special and unique tax status within U.S. tax law, presenting several advantages for foreign grantors (commonly called settlors in other jurisdictions). The trust is a “foreign” taxpayer, but the trust is still governed by Nevada law. When a foreign grantor trust is established by a non-U.S. person, this means that both the trust and its trustees are not subject to U.S. taxation on non-U.S. sourced income. Therefore, the advantages of Nevada trust law and the stability of the the U.S. legal system can be obtained by families with no U.S. ties, without paying U.S. related taxes.

The advantages of a Nevada Foreign Grantor Trust include:

  • The trust can be revocable or irrevocable
  • Trust assets are not subject to U.S. income tax on non-US sourced income
  • The trust can improve jurisdictional diversify asset locations decrease sovereign risks
  • The trust can be converted to a Nevada Dynasty Trust upon the grantor’s death to avoid paying U.S. income tax on the distributions of accrued income
  • The trust may be funded by other offshore entities to eliminate U.S. estate taxes
  • Nevada does not tax trusts
  • Nevada trusts provide asset protection and financial privacy

The Grantor may receive tax-free distributions from the foreign grantor trust during their lifetime because, for U.S. tax purposes, they own the assets in the trust. Additional distributions made from the trust to a different beneficiary are considered a non-taxable gift from the grantor.

The recipient will be required to report any distributions received from the foreign grantor trust to the IRS if they are a U.S. beneficiary. The grantor can also receive a distribution from the trust and gift any amount of that distribution tax-free to a U.S. beneficiary. However, the U.S. beneficiary will be required to report any amount over $100,000 USD as necessary by regular U.S. tax reporting.

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