Foreign Grantor Trust: Basic Information

Care for Your Off-Shore Beneficiaries

Foreign families with loved ones in the U.S. may wish to set up a foreign grantor trust.

The foreign grantor trust allows international families to take advantage of tax benefits, increased flexibility, political stability, and secure asset protection laws.

What is a Foreign Grantor Trust?

A foreign grantor trust is both a foreign trust and a grantor trust. The trust is not subject to U.S. income tax on income produced by non-U.S. situs assets. 

A revocable foreign grantor trust established in the U.S. remains revocable until the death of the grantor at which time it becomes irrevocable. The irrevocable trust benefits the U.S. beneficiary, but any U.S. situs assets are then subject to U.S. tax. 

If the settlor has the power to revoke the trust, it is considered a revocable trust for U.S. tax purposes.

If the grantor is both the settlor and owns the assets in trust, it is also considered a grantor trust and is not subject to U.S. tax on non-U.S. sourced income.

Two Important U.S. Tax Tests: Court and Control

A revocable trust must fail two tests before becoming a foreign grantor trust. Otherwise, it is considered a domestic trust.

  • The trust fails the court test if it is not subject to the primary jurisdiction of a U.S. court.
  • The trust fails the control test if no one associated with the trust has any decision-making power over the trust.

What Happens to the Trust After the Grantor Dies?

Upon the death of the grantor, the revocable trust becomes irrevocable. The U.S. situs assets within the trust are now subject to U.S. estate tax. It is possible to restructure the trust to benefit the beneficiary further.

The foreign grantor trust will now need to pass both the control and court test to become a domestic trust.

At this point, trust jurisdiction becomes essential. A jurisdiction with no state income tax is beneficial and Nevada does not carry state income tax.

Benefits of Nevada Situs

The state of Nevada offers beneficial tax laws, powerful and secure trust laws, and flexible trust administration. Nevada has no state income tax and allows dynasty trusts for up to 365 years.

Foreign grantor trusts are complicated, this means you must tailor them to your situation. It’s imperative to speak to a professional to ensure your family attains its off-shore wealth planning goals.

One thought on “Foreign Grantor Trust: The Basics

  1. Hello

    I’m Not sure what you mean by this “The trust fails the control test if no one associated with the trust has any decision-making power over the trust.”

    since the trustee has the decision making power over the trust. this comment seems confusing

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