Can I Set Up a Foreign Trust to Avoid Taxes?

When many people think of a foreign trust, they often think of the Cayman Islands or luxurious Luxemburg. They may think that by entrusting money to institutions in these exotic locations, they are sheltered from 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. Under prior law, a trust was considered foreign or domestic based upon such factors as the residence of the trustee, the principal place of trust administration, the governing law of the trust, the nationality of the trust settlor and the beneficiaries, and the situs of trust assets. In 1996, the Small Business Act replaced that test and now to qualify as a domestic trust, two conditions must be met:

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

Therefore, under this newer test, a U.S. citizen could create a trust, with U.S. based assets and beneficiaries and it could still be deemed a foreign trust. Transferring assets to a foreign trust does not protect those assets from taxation. Under IRC Section 684, transfers of property to a foreign trust triggers a taxable event, in which the U.S. person must recognize gain (but not loss) on the property transferred.

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.