Estate Planning Purposes

A stand alone purpose for the use of a foreign trust would be as part of an estate plan. Unlike the taxation treatment of a Settor upon transfer of property to a foreign trust as required by Section 679 of the Code, (1) a Foreign Trust is exempt from the provisions. A transfer of assets by a United States decedent by virtue of the provisions of his or her testamentary disposition, Last Will and Testament or a Living Trust that is the receptacle of a Last Will and Testament (a pour-over Will) is except from this tax treatment. (2)

To illustrate the use of such a foreign trust, the following hypothetical can be a guide to understand its use:

Hypothetical Last Will and Testament: Settlor establishes an un-funded, minimal, revocable trust pursuant to the laws of a Financial Haven, and the trust becomes irrevocable upon Settlor’s death. The revocable trust would contain the natural provisions of a testamentary disposition at the time of death. For purposes of illustrating this possible use, a hypothetical revocable foreign trust containing the Settlor’s testamentary disposition shall be referred to as the Settlor foreign trust A.

The United States Settlor would then make a Last Will and Testament in the United States that named as the beneficiary, the trustees of the Settlor Financial Haven Trust A. An illustrating phraseology contained in such a pour-over will would be as follows:

Article Sample – Probate Estate

“…The rest of my Probate Estate, being all property (including but not limited to cash) of whatever nature and character and wherever situated, in which I may have any interest at the time of my death not otherwise effectively disposed of, excluding any property over which I may have a power of appointment, (general, special or otherwise) I devise and bequeath to the then Trustee or Trustees, as the case may be, of the Settlor of “Financial Haven Trust A”, executed on the ____ day of ________, 2014, between Settlor as the Settlor and Trustee of Financial Haven Trust A. Such property shall be added to the corpus of such trust and held by the Trustee in accordance with the terms and conditions of such trust agreement. The receipt by the Trustee and/or Trustees shall be a full discharge to my Executor or Executrix for the distribution of such property of whatever nature and character. Upon such distribution to the Trustee and/or Trustees of said trust, the administration of my Estate shall cease with respect to the assets then passing to the Trustee and or Trustees…”.

This Probate Estate article in the Last Will and Testament directs the executor or executrix of the document to distribute all the assets of the testator or testatrix to the foreign trust document and those assets are then to be administered in accordance with its terms. Section 679 of the Code, which caused the transferred assets to a foreign trust to remain taxable to the Settlor, does not cause the transfer of assets by the estate of the decedent to be taxable to the estate. The income taxation consequences are then shifted to the Financial Haven Trust A which became irrevocable upon Settlor’s demise.

****************

Footnotes

1. Treas. Reg. Section 1.679- 1 (a). A U.S. transferor who transfers property to a foreign trust is treated as the owner of the portion of the trust attributable to the property transferred if there is a U.S. beneficiary of any portion of the trust, unless an exception in §1.679-4 applies to the transfer.

2. Treas. Reg. Section 1.679-4 (a) (1). Section 1.679-1 does not apply to … Any transfer of property to a foreign trust by reason of the death of the transferor.

In accordance with Circular 230 Disclosure