We live in an age of wonders. People from every country in the world have the power and the means to come and work and live in California. Work means money, assets-- and assets have to be protected. That’s what an Estate Plan is for, to protect your assets and your interests should the worst come to pass.
But what if you’re not from California originally? What if you have family living abroad? Can you list them as successor trustees if both you and your spouse die? Do your successor trustees have to be US citizens or can they be living in California on a green card?
In a typical joint revocable trust for a married couple, both spouses are the settlors and original co-trustees, and if one of them dies or becomes incapacitated, the surviving spouse remains as sole trustee. Under these circumstances, the trust is not deemed a Foreign Trust if at least one of the spouses is a U.S. resident or citizen.
However, if both spouses pass away, become incapacitated, or resign as trustee, the residence or citizenship of the successor trustee whom they nominated in the trust becomes important. The choice of successor trustee has a bearing on whether a trust will be deemed a U.S. Trust or a Foreign Trust, and being deemed a Foreign Trust may have unwanted tax and reporting implications.
Definition of Foreign Trust
A Foreign Trust is defined in the negative, (i.e., whatever is not a U.S. Trust is a Foreign Trust.) There are two requirements for a trust to be considered a U.S. Trust.
First, a court in the U.S. must be able to exercise primary supervision with regard to its administration. If the trust instrument requires administration in the U.S. and/or has a provision stating that the law governing administration rests with a particular court in the U.S. (thus granting the court primary supervision authority), then this first requirement should be met.
Second, at least one U.S. resident or citizen must have authority to control all substantial decisions. If there's a Co-Trustee that's a U.S. person (e.g., a U.S. Trust Company), then this requirement should be met.
If either one of these two requirements is not met, the trust is considered a Foreign Trust.
Implications of Foreign Trust
There are at least two implications if a trust is deemed a Foreign Trust: recognition of capital gain and IRS reporting requirements. When drafting documents for an international client, this paragraph may be included in the documents:
All trusts created hereunder shall be administered (and all books and records maintained) in the United States at all times so that all such trusts shall be considered domestic trusts and U.S. Persons for federal tax purposes as defined in Code Sec. 7701(a)(3)(E). No person shall be deemed to be qualified to serve as a trustee or co-trustee of a trust hereunder if as a result of such person’s serving as a trustee or co-trustee, the trust would no longer be deemed a U.S. Person within the meaning of Code Sec. 7701(a)(30)(E).
If you wish to discuss foreign trusts and your existing or future estate plan in detail, you should speak to an experienced Estate Planning Attorney. By making the right decisions under the right guidance, you can save your loved ones a lot of money, hassle and headache in the middle of a time meant for mourning. Don’t take chances with your legacy. You may only have one chance to get it right. At Rayo Law Offices, we can help protect the part of you that will remain to benefit and nurture those who matter most in the world to you.
Rayo Law Offices Can Help:
Call (916) 668-9606 or (925) 825-1955 or contact Zachary Rayo online to set up an appointment for an initial “meet and greet” consultation.