Creating a Non-U.S. Citizen Trust involves complex tax and legal issues that depend upon several factors, including the trustee’s residency and location of assets which can cause the trust to be classified as “foreign” for tax purposes.    

1. First question is does the non-U.S. Citizen have residency status? 

• Resident Aliens like green card holders or those that can satisfy the substantial presence test are generally taxed like U.S. citizens.  
• Nonresident Aliens are taxed only on income that is generated from income and property in the United States. 

2. Trust Classification – Foreign Trust vs Domestic Trust
The Internal Revenue Service in the United States determines if a trust is “domestic” or “foreign” under Internal Revenue Code Section 7701(a)(30)(E) and (31)(B) based on two tests: 

1. • The Court Test is when a court within the United States has primary supervision over the trust’s administration. 
   • The Control Test is when United States individuals either one or more have authority to control all substantial decisions of the trust.

A trust is considered “foreign” if it fails the Court Test or the Control Test. When a trust is considered, a Foreign Trust there are complex tax implications.  If either test fails, the Trust would be treated as “foreign” by the IRS – even if created and funded in the U.S. which leads to complex annual IRS filings Form 3520 and 3520-A, potential penalties, and loss of favorable tax treatments.  

Additionally, when a non-U.S. person creates a foreign grantor trust to gift assets to United States beneficiaries then, if done properly, it will avoid US gift, estate, and income taxes on the original transfer.  

U.S. court test or control test.

• Foreign trusts trigger additional IRS reporting requirements (Forms 3520, 3520-A, FATCA).

3. Estate & Gift Taxes

• Non-U.S. citizens have a much smaller U.S. estate tax exemption of only $60,000.00 compared to U.S. Citizens at over $15 million.  However, with proper trust planning we can reduce estate tax exposure.  

4. Asset Protection

• Create a domestic onshore protected trust like a Nevada Asset Protection trust as these are great options for non-U.S. citizens which provide strong protection from creditors and provide trustees to move assets to offshore jurisdictions. 

Creating for non-U.S. citizens a Nevada Asset Protection Trust provides benefits no other trust can provide.  First, the Nevada Asset Protection Trust is identified as a grantor trust which means it follows all the grantor trust laws.  A grantor trust is where the foreign settlor or trustor or grantor is considered the owner of the trust’s income, and subject to taxation. 

A Non-U.S. Citizen Trust may enable a foreign grantor or trustor to provide an effective transfer of wealth to future generations.  This means that the foreign grantor or trustor may continue to be exempt from U.S. tax on certain non-U.S. sourced income like real estate or interest income.  So Non-U.S. Citizen Trusts such as a Nevada Asset Protection Trust, when created and funded correctly following all the tax rules, may provide the advantage of current U.S. income tax saving benefits during the foreign grantor’s lifetime while also avoiding being taxed on the distributions received by the U.S. beneficiaries.  

Contact David Bindrup Law Firm to learn more about how to properly build, structure, and maintain your Non-U.S. Citizen Trust to provide protection now and throughout the lives of your beneficiaries.