Mitigating the Tax Impact on US Beneficiaries of Foreign Trusts Strategies for a Changing Tax Landscape

1. Mitigating the Tax Impact on US Beneficiaries of Foreign Trusts: Strategies for a Changing Tax Landscape by Matthew Ledvina, a U.S. tax expert, discusses the complexities associated with the taxation of Foreign Grantor Trusts (FGTs) and Foreign Non-Grantor Trusts (FNGTs) for U.S. beneficiaries, particularly after the death of a foreign grantor. Key Takeaways 1. Tax Efficiency and Inefficiency: Foreign Grantor Trusts (FGTs) are generally tax-efficient for U.S. beneficiaries while the grantor is alive. However, upon the death of the grantor, the trust’s status changes to a Foreign Non-Grantor Trust (FNGT), becoming a tax-inefficient vehicle. Taxation Factors: Taxation for FNGTs mainly depends on two factors: Distributable Net Income (DNI) and Undistributed Net Income (UNI). Distributions up to the amount of DNI are generally taxed favorably. Exceeding DNI by dipping into UNI can result in harsh throwback taxes and interest charges. Distribution Policies: Instead of making direct distributions to U.S. beneficiaries, who may be subject to higher federal and state taxes, distributing the income to a U.S. trust situated in a state without income tax can result in significant tax savings. Accumulation of Income Strategy: For FNGTs with both U.S. and non-U.S. beneficiaries, a planned accumulation of income can lead to more wealth for all beneficiaries if executed strategically. 2. 3. 4. Detailed Insights Distribution Policy: One approach to minimize tax liability is to have the income distributed to a U.S. trust located in a tax-friendly state like Delaware. This avoids state and local taxes and allows the income to grow outside the beneficiary’s taxable estate. The article gives an example of how this strategy could save more than $22 million in income taxes and result in a tremendous increase in overall wealth over 30 years.

2. Accumulation of Income Strategy: For trusts with multiple beneficiaries (U.S. and non-U.S.), accumulating income in the trust until it reaches a substantial value may also be advantageous. After that, the trust could be split among the beneficiaries in such a way that the U.S. beneficiaries receive the tax-efficient principal, while non-U.S. beneficiaries receive the UNI. The article’s example demonstrates that this strategy could result in an additional $17 million of wealth for the U.S. beneficiary. Flexibility and Planning: The article emphasizes the importance of flexibility in trust provisions and well- thought-out distribution strategies. Correct planning can minimize the adverse impact of transitioning from an FGT to an FNGT, thereby preserving the trust’s efficiency. Overall, the article provides insightful strategies for practitioners dealing with the complexities of cross- border taxation, especially as it relates to trusts with U.S. beneficiaries. About Matthew Ledvina Through his almost 15 years of experience working as a US tax advisor, Matthew Ledvina has provided advice to his clients on areas involving trusts, banking and taxation. This has required him to work in several of the world’s major economies, including he United States, France, the United Kingdom and Switzerland. Matthew holds memberships to multiple professional bodies, such as the Society of Trust and Estate Practitioners, the International Tax Planning Association, the International Bar Association, and the International Business Structuring Association. Serving in several senior positions for global tax advisory firms, Matthew has worked with clients in countries that span every continent, including Switzerland, Italy, France, Spain, the United Kingdom, the US and Canada, as well as in Asia and Latin America.