What is Tax Treatment of Trust with Non-U.S.-Based Trustees?

 In Non-US Citizens
Foreign trust for tax purposes

Photo by Michael Baccin on Unsplash


My sister who lived in the Massachusetts has passed away. In her will, she asked that my other sister and me to manage a trust fund until her daughters reach 30. My other sister and I are not U.S. citizens and both live overseas, in the UK and Australia. Her daughters have asked that we hand over management of the trust fund to a U.S.-based delegate as there will be tax implications if managed by overseas residents. I don’t understand that as managers and not beneficiaries and as we wouldn’t actually be receiving any benefit why there would be tax implications.


The mysteries of the United States tax system. Your nieces are correct that you and your sister acting as trustees will complicate the tax situation. This is actually outside my area of expertise, so I asked Rita Ryan, of Wolf & Company, for counsel. Here’s what she wrote:

The status of a trust as either foreign or domestic will have a direct impact on the information reporting, as well as income reporting not only for the beneficiary but for the trust itself.  There is no definition of a foreign trust in the IRC rules and regulations. However,  trusts that cannot meet both the “Court Test” and “Control Test” are considered foreign trusts.

international tax

Rita Ryan

The Court Test is satisfied if any U.S. federal, state, or local court is able to exercise primary authority over substantially all of the administration of the trust.  There are a few instances where trusts are considered to unequivocally meet the Court test:

  1. When the trust is registered with a U.S. Court
  2. In the case of a testamentary trust, the trust will meet the Court test if all fiduciaries have been qualified as trusts of the trust by a court in the US
  3. If the trust specifically states that a court within the US has the authority to exercise primary supervision over enforcing the governing law of the trust.

There is a also a safe-harbor rule which states that if the trust instrument does not direct the trust to be administered outside the U.S., the trust is exclusively administered in the U.S., and the trust has no automatic migration provision, it is a U.S. trust.

It would appear that your sister’s trust meets this requirement because it would be governed under Massachusetts law and the Massachusetts courts. But the Control Test is another question.

The Control Test is satisfied if one or more of the U.S. persons have the authority, by vote or otherwise, to make all the substantial decisions of the trust.  A U.S. person can be a U.S. citizen living in the United States, a U.S. citizen not living in the United States, or a non-U.S. citizen who is considered a resident of the United States.

If your nieces are receiving advice to ask that Trustees be changed to U.S. trustees – this is probably why.

If the trust is considered to be a foreign trust  – there are a few things to consider:

  • The U.S. beneficiary will potentially have Form 3520 filing obligations to report both her share of the income of the trust but distributions received from the trust.  If not completed correctly or if not filed at all, this form can carry a $10,000 penalty,
  • The trust may have Form 3520-A reporting obligations and may need to appoint a US agent so as to supply the IRS with any required documentation,
  • The trust may have its own US reporting obligation if it has US source income;
  • A foreign trust with a U.S. beneficiary will need to generate a Foreign Non-Grantor Trust Beneficiary Statement so that the U.S. beneficiary can report items of income as they are characterized by the trust rather than relying on a default calculation,
  • The trust as a foreign trust may be subject to non-resident withholding (potentially 30%) on income earned in the accounts held by the trust; and
  • Special care will need to be used to ensure there is no undistributed net income annual so as to avoid the application of the “throwback rules” (interest and penalties to back to when the income was earned) when trust income is actually distributed.

All of this seems complicated. So it’s probably easier that you and your sister resign and name U.S.-based trustees to take your place.

Leave a Comment

Start typing and press Enter to search