TRUST & ESTATE PLANNING

The Advantages of Establishing a Foreign Trust in Delaware

10.05.2015

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There are tax and asset protection benefits to establishing a foreign trust in Delaware for non-US persons. Of course, to ensure intended benefits are achieved it is important to properly structure these trusts.

Protecting a Foreign Trust from US Taxes
Properly-structured foreign trusts help protect the trust from US income, estate or generation-skipping transfer taxes commonly imposed on US trusts. Under current US tax laws, both of the following factors must be present in order for a trust to be considered a US trust for tax purposes:

  • A US court can exercise primary supervision over the administration of the trust; and
  • One or more US fiduciaries have the power to control all substantial decisions of the trust.
Absent any one of these factors, a trust is a foreign trust for tax purposes. Although the statute refers to “fiduciaries,” if a person such as a Protector has the power to control substantial decisions of a trust, that person will be treated as a “fiduciary” for purposes of the statute. Substantial decisions include any one of the following: whether and when to distribute income or principal; the amount of any distribution; the selection of a beneficiary; the power to make investment decisions; allocation of receipts to income or principal; whether to terminate the trust; whether to compromise, arbitrate or abandon claims of the trust; whether to sue on behalf of the trust or to defend a suit; or whether to remove, add or replace a trustee.

Therefore, by naming Fiduciary Trust International of Delaware a trustee of a properly-structured trust created by a non-US person and selecting a non-US Protector who has any one of the foregoing powers, the trust will be considered a foreign trust for US tax purposes. That means that the trust will not be required to file a US income tax return or pay any US income tax on income and gains. What’s more, Delaware does not impose income tax on trusts created by non-Delaware residents when no trust beneficiary is a Delaware resident. Of course, the best way to ensure a trust is properly structured is to work closely with a trusted professional advisor.

Advantages of Creating a Foreign Trust in Delaware
Using the US–and using Delaware, especially–as a foreign trust jurisdiction has a number of advantages over using an offshore “tax haven” jurisdiction.

Reputation. Many offshore “tax haven” jurisdictions have at times been viewed as places where individuals hide assets from taxing and other governmental authorities. The US has traditionally not been viewed as such a jurisdiction. Therefore, individuals who choose the US as their trust jurisdiction may avoid the appearance of any negative implications that may otherwise arise.

Government Stability. The US government is considered by many to be the most stable government in the world, thereby providing assurance to an individual that his or her personal assets will remain available to him or her. Delaware, in particular, has well-developed local case law.

Recognition of Fully Revocable Trusts. The US has long recognized the viability of fully revocable trusts, unlike jurisdictions whose trust laws are governed by the English rules.

Efficiency and Service. Delaware courts are widely regarded as efficient. Cases are handled expeditiously and services are delivered by highly-skilled professionals. US personnel are highly trained in delivering quality service in a fast-paced business environment.

US Beneficiaries. When a non-US individual creates a trust which will have US persons as beneficiaries, establishing a foreign trust in the US eliminates the need to move a portion of the trust in the future to a new US trustee. There will likely never be an estate or generation-skipping transfer tax imposed on those assets put in the trust, even though the trust has a US beneficiary.

Advantages of Delaware Trust Laws. Delaware especially has favorable trust laws including the following: (a) no rule against perpetuities, allowing most property to remain in trust for multiple generations with no requirement that  it be paid out at any given time;  (b) strong asset protection rules, similar to those of many offshore jurisdictions, for properly-structured trusts; and (c) a sophisticated court system and bar known for its corporate and trust expertise. Selecting Delaware as the trust’s situs does not require trust assets to be managed in Delaware.

Additional Considerations
Even though no tax may be payable, foreign grantors, US trustees and beneficiaries of foreign trusts may be subject to significant compliance and reporting requirements, including:
  • Report of Foreign Bank and Financial Accounts (FBAR)
  • Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (Form 3520);
  • Statement of Specified Foreign Financial Assets (Form 8938).
They are also subject to regulations such as the Foreign Account Tax Compliance Act (FATCA). Fiduciary Trust International of Delaware as trustee can assist in the preparation and filing of many of these forms and with the FATCA registration process.

This communication is intended solely to provide general information. The information and opinions stated are as of October 10, 2015, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.
IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA institute.

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