We have seen several recent examples of people who were convinced to set up international or foreign trusts in order to “shield income and assets” from needless taxation. No, these aren’t foreign citizens with foreign interests, they are US taxpayers who have been convinced to open a foreign trust which they have funded with onshore interests. This simply doesn’t make a lot of financial sense, especially when you consider the additional scrutiny the IRS has placed on all offshore accounts, investments, assets, income and yes, foreign trusts.
The IRS applies the “court test” and the “control test” to your trust, and if it fails either of these tests it is generally considered to be a foreign trust. The “court test” specifies that a US court (and US law) must have the “authority to address and exercise primary supervision” over all legal issues of substance concerning the administration of that trust. If your trust is governed by a foreign sovereignty it will be considered a foreign trust.
The second barometer is known as the “control test” by the IRS. This simply comes down to who has the authority to make substantial legal decisions for the trust itself. If one (or more) US persons has the ability to control decisions (as either a grantor or trustee) relating to investments or distributions, then the trust will be considered a “domestic trust.”
Why is this important? The primary issue is control over your money. In order to genuinely have a “foreign trust” you must not have control over your money or decisions regarding investment or disbursement. So, if someone convinces you to establish a foreign trust, then you must have an extremely high confidence in the stability of that foreign sovereignty and the credibility of the individual who will be making decisions on behalf of the trust. The taxation upon income and asset distribution of these international or foreign trusts is extremely complex. If you have been convinced to open a foreign trust and have questions or second thoughts, we invite you to contact us for a free and substantial consultation at 866-631-3470.