Explaining a Foreign Trust In Easy-to-Understand Language
In this global economy, it’s becoming increasingly common for U.S. citizens and residents to have financial ties overseas. These financial ties often come in the form of foreign bank accounts, real estate holdings, and trusts.
Foreign trusts in particular are subject to special rules under the Internal Revenue Code (“IRC”). However, understanding what constitutes a foreign trust and its treatment under the IRC can be difficult even for the most seasoned lawyer.
What Is A Trust?
The Internal Revenue Service (“IRS”) defines a trust as “an arrangement created either by a will or by an inter vivos declaration [in other words, a declaration during the life of the person setting up a trust] whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.”[1]
In the United States, trusts are formed under state law. Thus, the law of the particular state in which the trust has been or will be formed must be consulted for any particulars regarding trust formation and administration. However, below are some general definitions that may prove helpful in the discussion that follows:
- “Settlor” or “Grantor”: The “settlor” or “grantor” is the person who creates a trust;[2]
- “Trustee”: The “trustee” is the person who holds title to the property in the trust;[3]
“Beneficiary”: The “beneficiary” is the person for whose benefit the trustee holds the property in the trust.[4]
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