As the world has become more interconnected, it has become common for individuals to make friends or fall in love with people from all over the globe. However, if you are planning your estate and want to name a non-U.S. citizen as your trustee or beneficiary, you should be aware of certain complications that could reduce the value of your estate.
The citizenship of beneficiaries and trustees in Lombard estate planning should not be ignored. If you have questions about who you can name as your beneficiary, representation from a skilled estate planning lawyer who values guidance, protection, and peace of mind could be invaluable.
Revocable living trusts are frequently-utilized estate planning devices that allow the person making the trust—the grantor—to continue managing his or her assets during his or her lifetime. Upon the grantor’s death, the financial responsibility for managing the trust transfers to a successor trustee.
If the grantor names a successor trustee who is either not a U.S. citizen or is a U.S. citizen living abroad, the trust may be considered a foreign trust and therefore subject to much higher tax liabilities. Often, the taxes required with a foreign trust significantly deplete the assets in the trust before they ever reach the intended beneficiary.
To avoid being classified as a foreign trust, the grantor must first ensure that a United States court has jurisdiction to administer the trust. Usually, a grantor might fulfill this requirement by mandating that the trust be administered in a certain jurisdiction, like the State of Illinois. If, however, the trust contains language that moves the trust corpus to a person living in another country, whether he or she is a U.S. citizen or not, it could be considered a foreign trust.
Additionally, the trust must be managed and administered by a person who is a resident of the United States. It does not matter if the successor trustee is an American citizen or not. As long as the trustee is a resident of this country and administers the trust here, it should not be classified as a foreign trust.
The beneficiary of a trust is a person who is entitled to receive assets or money from the trust corpus. A trust can have multiple beneficiaries, one of whom may be the trustee him or herself.
The trustee must determine the tax status of the beneficiary before making any distributions from the trust. If the beneficiary lives in a foreign country or is not a U.S. citizen, the trustee may be required to withhold additional taxes from the assets that he or she transfers. In addition to paying extra taxes to the IRS, the beneficiary may also be required to pay taxes based on the foreign country’s tax and inheritance laws.
The easiest way to avoid these kinds of tax issues is to name a citizen who is a resident of the United States as the trustee. If the grantor does not have any people that fit this description in his or her life, he or she may want to look into hiring a professional trustee to manage the assets on behalf of the beneficiaries after the grantor’s death.
In some circumstances, the grantor may be able to create a qualified domestic trust to avoid some tax liability. Known as a QDOT, these trusts transfer assets to a non-citizen spouse in a way that circumvents the estate tax.
If you are planning to leave your estate to a non-U.S. citizen or a person who lives in a foreign country, it could be vital to consult with an experienced estate planning attorney. Planning this type of gift requires knowledge of complex foreign and domestic tax laws, and grantors generally should not attempt to create them without seeking legal advice. To find out more about the citizenship of beneficiaries and trustees in Lombard estate planning, schedule an appointment with a qualified trusts & estates lawyer today.
