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 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.