Dynasty Trust Disadvantages Foreign
Description
How to fill out Irrevocable Generation Skipping Or Dynasty Trust Agreement For Benefit Of Trustor's Children And Grandchildren?
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FAQ
Taxation of a Grantor Trust If it is a foreign trust, its income and gains earned after the death of the grantor will generally be subject to US income tax only if earned from US sources, or when distributed to its US beneficiaries, as discussed below.
Interest income earned by the trust is deductible if distributed to a foreign beneficiary but because the beneficiary is a nonresident alien, he will not be subject to U.S. income tax on the distribution. Therefore, the income is not subject to withholding tax (see Rev. Rul.
Income from a foreign grantor trust is generally taxed to the trust's individual grantor, rather than to the trust itself or to the trust's beneficiaries. For a U.S. owner, this means that the trust's worldwide income would be subject to U.S. tax as if the owner himself earned such income.
If a foreign trust is considered a grantor trust for tax purposes, the IRS will tax the trust's grantor rather than the trust itself or the trust's beneficiaries. For US owners, this means that the trust's worldwide income and capital gains will be taxed as if the owner had earned the income personally.
Since the trust is designed to continue and retain most assets for an indefinite period after its creators die, a dynasty trust often pays mainly income only to the beneficiaries. This income to your family can be eaten up by high legal and trustee fees, legal disputes, and misbehaving trustees.