Can I Set Up a Foreign Trust to Avoid Taxes?

August 9, 2019

When many people think of a foreign trust, they oftenthink of the Cayman Islands or luxurious Luxemburg. They may think that byentrusting money to institutions in these exotic locations, they are shelteredfrom the burden of U.S. income taxes. Unfortunately, that is not the case.

We help clients create trusts to protect assets; however,typically these are known as domestic trusts. Underprior law, a trust was considered foreign or domestic based upon such factorsas the residence of the trustee, the principal place of trust administration,the governing law of the trust, the nationality of the trust settlor and thebeneficiaries, and the situs of trust assets. In 1996, the Small Business Actreplaced that test and now to qualify as a domestic trust, twoconditions must be met:

  1. AU.S. court has jurisdiction to exercise supervision of the trust; and
  2. Oneor more U.S. citizens controls the substantial decisions of the trust.

Therefore, under this newer test, a U.S. citizen couldcreate a trust, with U.S. based assets and beneficiaries and it could still bedeemed a foreign trust. Transferring assets to a foreign trust does not protectthose assets from taxation. Under IRC Section684, transfers of property to a foreign trust triggers a taxable event, inwhich the U.S. person must recognize gain (but not loss) on the propertytransferred.

If you are looking for ways to minimize taxes and protect your wealth, consult with an experienced estate planning attorney in the Greater Baltimore area. At Stouffer Legal, we utilize many asset protection tools to help you preserve wealth while minimizing tax consequences. Call Stouffer Legal today at 443-470-3599 for a free consultation.

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