If you're a US citizen, resident or and Green Card Holder (AKA a US person) and are the settlor or a beneficiary of a non-US trust, there are US tax and compliance issues that you need to be aware of. Our latest Stepping Stone focuses on the tax issues that US beneficiaries face.

The popularity of trusts with families has expanded globally over the years as a tool for asset protection and wealth preservation. However, with millions of people migrating into and out of the US, there are many situations where there are non-US (foreign) trusts with US beneficiaries, as well as US trusts with foreign beneficiaries.

There are also examples of US domestic trusts that have been exported out of the US due to the trustees moving outside of the US. These could be considered as foreign trusts with US beneficiaries.

It is important for beneficiaries to understand the tax implications of a US trust, as there are some adverse rules that can result in high or unexpected taxation.

Case study

Anita is a Hong Kong citizen who lives in Hong Kong with her parents and three siblings. Anita was born in the US, when her parents were living there temporarily in the early 1990s, during her father’s five-year work assignment in New York. Neither her parents nor her siblings were born in the US and they do not live there or have permanent resident (‘Green Card’) status.

Anita and her three siblings are the beneficiaries of a trust established in Hong Kong by her grandfather, who passed away in 2019. Her grandfather was not a US citizen, resident or Green Card Holder and during his lifetime, he was the sole beneficiary of the trust. Only since his death have Anita and her siblings become entitled to the trust funds. Anita has no other sources of income.

There are substantial funds within the trust consisting mainly of cash, a Hong Kong rental property and a portfolio of non-US financial assets, in the form of stocks and bonds. The trust is about to start making distributions to Anita and her three siblings.

Anita’s US tax status

Anita is a US citizen because she was born in the US when her parents were living there. Neither her parents nor her siblings are US citizens, residents or Green Card holders, but Anita is a citizen just because she was born in the US. This is the case, even though she has not lived there since the family left the US after her father’s assignment ended, and even though she has no assets or sources of income in the US. As a US citizen, when her income exceeds the filing threshold, Anita has a requirement to report her worldwide income and gains to the IRS, regardless of where she is resident at the time and regardless of where her assets are located.