Under the U.S. tax laws, foreign trusts (i.e., non-U.S. trusts) may be classified as grantor or nongrantor trusts. Generally, nongrantor trusts are not taxable in the U.S. absent any U.S. sourced income. On the other hand, grantor trusts are taxable in the U.S. since all of the trust income is attributed to the grantor for federal income tax purposes. The U.S. grantor will also be under an obligation to comply with the U.S. information reporting and tax filing requirements.
A foreign trust may be considered as a grantor trust where the grantor:
- retains a certain degree of dominion and control over the trust’s income, credit and deductions, as to classify the grantor as the owner of the trust; or
- makes a gratuitous transfer of property to a foreign trust with one or more U.S. beneficiaries, or potential U.S. beneficiaries.
Our whitepaper, Interaction of Indian and U.S. Tax Laws, discusses the U.S. tax implications of Indian families, or Indian family-business owners, who are moving to the U.S. with assets in India.
It is important to consider the U.S. tax implications of the grantor trust rules if you are in the process of a high net worth individual in the process of tax and estate planning before immigrating to the U.S. Our whitepaper titled Interaction of Indian and U.S. Tax Laws discusses the interaction of the U.S. tax rules on grantor trusts with the Indian tax rules on the taxation of contributions made by a settlor to a trust and subsequent distributions of trust income and trust property. Through this discussion, our whitepaper aims to provide you with an understanding behind why using a trust structure in an estate or tax plans may be beneficial.