Trusts are hard to create. You are trying to predict and control the future. Can you imagine what your family will be like in 50 years? Can you imagine what life, the economy, and the world will be like in 50 years? Now think of writing a document that is designed to send a time capsule containing a fortune 50 or 100 years into the future.
The U.S. tax system is generally hostile to foreign trusts if there is a U.S. taxpayer involved. The hostility is understandable–trusts interfere with the government’s ability to impose or collect tax. As a result, the laws are slanted against foreign trusts. Income is taxed punitively. The right paperwork must be prepared “just so” and filed on time, or massive penalties can result.
Distributions to beneficiaries require the trustee to keep complex financial accounting records that satisfy U.S. tax requirements, even if under local laws the recordkeeping and accounting is unnecessary.
U.S. beneficiaries may pay gigantic U.S. income tax bills when they receive distributions. And the government doesn’t even have a proper U.S. income tax return for a foreign trust–we have to use Form 1040NR, the tax return for a nonresident individual.
Yet foreign trusts are essential tools for our clients, and it is well worth the pain and expense of using them.
We use trusts as firewalls against the unwanted tentacles of forced U.S. tax reporting. Imagine a family outside the United States with one U.S. citizen member. The family’s business, wealth, and banking relationships–all of which have been created over generations outside the United States–may be exposed to U.S. government scrutiny. Trusts can firewall the U.S. citizen away from matters that should not be any business of the United States to know or tax.
We use them as firewalls against the U.S. estate tax. Why should a family’s wealth, created by hard work over generations outside the United States, be subjected to the U.S. estate tax? Why should a U.S. real estate investment be subjected to the U.S. estate tax simply because a family member dies?
We use them as privacy firewalls. They can create a disconnect between the identity of the owner of assets and who receives the economic benefit from the assets.
We like foreign trusts
Our view of trusts is simple. We think they’re great. We think they are great precisely because they are complicated and hard to deal with. Technical difficulty itself offers opportunity. Know what you’re doing, do it exquisitely correctly, don’t cut corners. That’s a winning recipe.
We create, operate, amend, and terminate foreign trusts, using many different countries’ laws. We fix problems with foreign trusts–accounting problems, tax problems. Even problems that arise because a trust created two or three generations ago is now a problem, not a benefit, to the family.