A FGT is used to describe a trust established by a Grantor, a non United States (“US”) person to benefit US beneficiaries. For US Federal tax purposes, the Grantor will still be regarded as the owner of the FGT’s assets in his/her lifetime. The Grantor would normally be exempted from US tax on non- US assets, income or gains.
US Transfer Tax Planning
US Estate and Gift taxes are among the highest in the world, and it is applicable to the worldwide assets of a US Person regardless of their residency status. Despite holding a passport from, or being a citizen of, another country, a US Person, Green Card holder or US tax resident individual is not exempted from their worldwide US tax and reporting obligations. A trust that does not qualify as a FGT might subject US family members to adverse tax rates with an additional compounding interest charge on any undistributed income and gains in the year realized. This could result in current tax and/or reporting obligations for the US family members with respect to any Passive Foreign Investment Companies or Controlled Foreign Corporations assets held by the trust. Furthermore, assets transferred to US family members are taxable on future income and gains, and are generally reportable to the US IRS. Grantors should seek US tax advice when creating a FGT. The advice should take into account the restructuring of the trust upon the Grantor’s demise. This includes taking into consideration the size of the trust assets, trust fund distributions and the needs of the US family members at the time of the Grantor’s passing, so as to achieve desirable tax benefits.
US law treats the United States persons and foreign persons differently for tax purposes. Foreign Grantor Trust (FGT) is a trust established by a foreign person who intends to benefit the US beneficiaries. The trust is revocable and is structured in a manner which treats the non-US grantor as the tax owner of the trust assets for US purposes, no US income tax on non-US source income of the trust are involved.
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