Trusts and Trustees Across the Border

Leave a foreign heir’s share outright—as beneficiary of a life insurance policy, by POD designation on a bank account (section “Payable Upon Death accounts (POD)”), or as a cash bequest the executor pays from the sale proceeds—unless you have a concrete reason for a trust. Do not name a foreign heir as transfer-on-death beneficiary of a brokerage account: that skips the executor and hands them the US shares the executor should have sold (section “What Each US Account Becomes in Foreign Hands”). Most of continental Europe, Russia, and Latin America have no common-law trust of their own, and their tax authorities improvise: the same distribution can be taxed as income, as a gift made the day it is paid, or both. If the reason is real—a minor, a spendthrift, an heir in a shaky marriage—get a written opinion from a lawyer in the heir’s country on how distributions will be taxed there before you sign.

Then keep the foreign heir out of the trustee’s chair. A trust is domestic only if a US court can supervise it and US persons control every substantial decision, including distributions, investments, and removing the trustee (IRC §7701(a)(30)(E), “Definitions”; Treas. Reg. §301.7701-7). Name your nephew in Frankfurt as co-trustee, or give him a veto, and the trust becomes a foreign trust the day he takes office. Under IRC §684(c), “Recognition of gain on certain transfers to certain foreign trusts and estates” that change is treated as a sale of everything the trust owns. From then on every US beneficiary reports distributions on Form 3520 and lives under the throwback regime (section “Offshore Trusts”). The regulations give twelve months to replace a trustee who becomes foreign by accident, such as a US trustee who moves abroad; use them. Apply the same caution to the executor. Several states restrict who may serve from out of state—Florida admits only close relatives—and every state makes the job harder from abroad. Name a US executor, or a US co-executor beside the foreign one.