When a non-US citizen spouse is named as a beneficiary, there are issues that can arise for the US estate. These include issues with taxes, inheritance and fiduciary duties.
A trust is a legal entity created to hold and administer funds and assets for the benefit of its beneficiaries. It is administered by a trustee who is legally obligated to distribute the assets according to the trust’s terms.
Taxes
A non US citizen may be eligible to be a beneficiary of a US trust. However, there are a number of tax considerations that need to be taken into account.
One is the fact that a foreign trust will be subject to US income tax. In addition, a non US citizen will be subject to tax on any capital gains accumulated within the trust.
This is a complex area and requires advice. The rules are also governed by the type of foreign trust.
There are two types of foreign trusts, a “grantor” and a “non-grantor” trust.
The latter is a more complicated and often less attractive choice for US owners because it means that worldwide income and capital gains will be treated as if earned by the grantor personally.
Consequently, a non US citizen will be subjected to a higher effective tax rate than the grantor for all of the income items that the trust earns. This can have an adverse impact on the net distribution benefit received by a non resident beneficiary compared to his or her fellow US beneficiaries.
Inheritance
Inheritance is a complex matter that can have many nuances, and it’s best to consult an experienced estate planning team to sort through the issues. They can help your family address the legal and income tax implications of an inheritance and construct a plan that smoothly transitions assets to their beneficiaries.
The federal government doesn’t want non-US citizens to inherit assets that will be left untaxed, so it imposes limits on transfers between spouses during life and at death. These rules are known as the unlimited marital deduction (UMD).
However, if you’re married to a non US citizen, it can make transferring your assets at death more complicated. One solution to this problem is to establish a qualified domestic trust.
A QDOT is an irrevocable trust that allows you to transfer your estate at the first death above the lifetime exemption amount to a surviving non-US citizen spouse in a way that preserves the unlimited marital deduction. It also offers you the benefit of distributing the principal without being subject to a large tax.
Fiduciary duties
Fiduciary duties are an important aspect of any relationship between people. They can be between a lawyer representing a client, a trustee and beneficiary, a corporate board or shareholders, and even an employer and employee.
Fiduciaries are obligated to make decisions with the highest degree of care, caution, and skill while acting in their beneficiaries’ best interest. They also have to disclose all information that could impact their beneficiaries or their ability to uphold their fiduciary duties.
A breach of fiduciary duty is a serious matter that requires action. For example, if a director of a company leaked confidential information to a friend and caused the deal to fall through, the beneficiary can sue the board member for damages.
In addition to the legal duties, executors and trustees often need to make certain administrative tasks, such as marshaling all assets in an estate or trust and valuing them. These tasks often require considerable time and effort, so it is common for the terms of a will or trust to provide for compensation of fiduciaries.
Administration
Trusts are an excellent way to hold assets, pass money along and ensure your wishes are met after your death. However, they also have many legal and tax implications that you should be aware of.
The first and most important is that your trust must be administered within the United States. If your trust is not, it will be considered a foreign trust.
To avoid this, your trust documents must ensure that a US court has primary authority over your trust administration. And, they must not contain any language that automatically migrates your trust’s administration to another country when a particular event occurs.
A non-US citizen can be a beneficiary of a US trust, but it is important to understand the legal and tax issues that this may create. It is important to work with an experienced team to minimize any tax consequences that might arise from naming a non-US person as either a beneficiary or trustee.
