It is common for Australian estate planning purposes, to plan for the succession of control of an inter vivos trust either by Will or by deed, and to have a testamentary trust established by Will. Often, it is the testator’s children who are the specified primary beneficiaries and the succeeding trustees and/or appointors of such trusts. This is an effective planning mechanism for Australian trust law and tax law purposes, as it can provide for asset protection and tax efficient distributions of income to beneficiaries.
Such structures do however require review for both U.S. and Australian tax purposes where a beneficiary is a non-tax resident of Australia / or a “U.S. Person” (a U.S. citizen or green card holder).
1. For Australian tax purposes, if the trust holds an asset portfolio of Australian and foreign investments, this could trigger unfavorable tax outcomes for a beneficiary living outside of Australia, as foreign beneficiaries are now taxable in Australia on income from all sources (and not just Australian sourced income) following the recent release of ATO draft Tax Determinations TD 2019/D6 and TD 2019/D7. These draft Tax Determinations discuss the taxation of capital gains attributed to a foreign resident beneficiary of an Australian resident trust (for further information see our blog CGT and foreign resident beneficiaries: TD 2019/D6 and TD 2019/D7)
2. For U.S. tax purposes, a Primary Beneficiary / trustee / appointor who is a U.S. Person is taxable in the U.S. on a worldwide basis. If they are a beneficiary of a foreign trust, they are also taxable if they:
a. derive income from the foreign trust; or
b. are the “grantor” of that trust; or
c. are otherwise regarded as an “owner” of that trust.
A “grantor” of a trust is essentially the settlor or notional settlor of the trust. Additionally, if a person (other than the grantor) has a power exercisable solely by themselves to vest the income or capital of any portion of the trust in themselves, they will be treated as the owner of that portion of the trust. The income and assets of the trust may then be attributed to that beneficiary and reportable in the US under the “foreign grantor trust rules” (see our blog Is your Australian trust a “grantor trust” for US tax purposes?)
Careful consideration of an estate plan is required therefore in order to achieve a cohesive cross-border outcome.
Depending on a testator’s personal circumstances, alternative options that could be considered include:
1. marking deliberate decisions as to the income and capital distributions of the trust and avoiding default distributions;
2. making direct bequests to individuals;
3. appointing independent appointors and trustees;
4. removing U.S. persons from the decision making process, or alternatively, requiring appointors and trustees to made decisions jointly; and
5. severing any clauses in the trust deed that could otherwise treat the trust as being a grantor trust or as being owned by a U.S. Person pursuant to the terms of the Internal Revenue Code.
Our upcoming whitepaper International Estate Planning for U.S.-Australia cross-border clients which is due for publication in April 2020 provides an in-depth analysis of international estate planning issues.
If you have any questions, please contact:
Senior Tax Advisor
U.S. Australia Tax Desk