International Estate Planning: Trusts for US-Based Children
For high-net-worth families with children living in the U.S., international estate planning is more than just transferring wealth. It’s about minimizing taxes, protecting assets, and ensuring financial security for future generations.
But cross-border estate planning between your home country and the U.S. comes with unique challenges — including U.S. estate taxes of up to 40% on U.S.-based assets, capital controls that restrict overseas money transfers, and complex tax rules surrounding foreign trusts.
Let’s explore the best U.S. trust options for foreign nationals and how they fit into an efficient international estate plan.
Understanding U.S. trusts for foreign nationals
A trust is a legal entity that holds assets for the benefit of heirs while managed by a trustee. Selecting the correct trust structure depends on tax efficiency, asset protection, estate planning goals, and U.S. tax compliance. The best option will depend on your unique goals and financial situation.
Top U.S. trust options for high-net-worth foreign families
Dynasty trust
A dynasty trust holds assets for multiple generations, helping to minimize estate and gift taxes. It protects assets from creditors, lawsuits, and potential divorce, and ensures long-term wealth preservation for descendants.
Although irrevocable, the grantor (who creates the trust) can establish specific rules and guidelines for managing and distributing the trust assets. The grantor can designate beneficiaries, including future generations, and specify how and when they receive distributions.
A dynasty trust is particularly beneficial for foreign families seeking to preserve wealth across multiple generations while minimizing estate and transfer taxes. The trust grows assets outside the grantor’s estate and distributes them across generations without triggering additional estate taxes.
Typically established in trust-friendly U.S. states such as South Dakota, Delaware, or Nevada, these trusts offer substantial asset protection and enable seamless wealth transfer. However, dynasty trusts require careful planning and must be properly structured. The grantor must relinquish direct control over the assets to a U.S. trustee, and once established, the trust cannot be altered or dissolved by the grantor or beneficiaries.
Foreign grantor trust (FGT)
A foreign grantor trust allows a foreign national to set up a trust outside the U.S. while retaining control over the assets. The grantor retains authority over the trust, and income is not taxed in the U.S. until distributed to U.S. beneficiaries. These trusts are typically set up in foreign jurisdictions such as Hong Kong, Singapore, or the Cayman Islands and can hold U.S. and non-U.S. assets without triggering U.S. estate tax.
Still, careful planning is necessary to avoid anti-deferral tax rules and comply with IRS reporting obligations. U.S. persons who create a foreign trust or have transactions with a foreign trust may face both U.S. income tax consequences and information reporting requirements. Generally, a U.S. person treated as the owner of a foreign trust under the grantor trust rules (IRC Sections 671-679) is taxed on the trust’s income. Meanwhile, a U.S. beneficiary receiving a distribution from a foreign non-grantor trust must report their share of the trust’s distributable net income (DNI). Additionally, IRC Section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust by a U.S. person.
U.S. domestic non-grantor trust
A U.S. non-grantor trust is established inside the U.S. and is considered a domestic trust under U.S. law. Because it is legally separate from the grantor, assets in the trust are not part of the grantor’s taxable estate. Beneficiaries are taxed on income distributions, but the trust provides strong legal protections.
This structure is best for families seeking robust asset protection and estate tax avoidance, though it requires relinquishing control to a U.S. trustee. A trust’s income taxation is similar to that of individuals, but its tax brackets are highly compressed, presenting an opportunity to manage the trust’s taxable income effectively. If the trust’s distribution provisions allow for discretionary distributions, a trust distribution will be taxed at the beneficiary level.
While the beneficiaries may be in lower income tax brackets, it is important to consider the trust’s estate planning and asset protection objectives. To the extent that income is distributed from the trust, it will be included in the beneficiary’s estate and may also be subject to the beneficiary’s creditors, potentially conflicting with the trust’s original objectives. Therefore, the trustee should carefully consider discretionary distributions, considering all relevant facts and circumstances.
Foreign irrevocable trust
A foreign irrevocable trust can offer significant tax advantages for families looking to minimize U.S. taxes. However, assets placed in the trust are generally not subject to U.S. estate tax, but distributions to U.S. beneficiaries may be, depending on the structure and source of the income.
Trusts are often established in offshore jurisdictions such as Hong Kong, the Cayman Islands, or Singapore, which offer favorable legal and tax environments. This is a good news/bad news situation: a high degree of tax independence (good) comes with complex compliance and reporting (bad).
Foreign trust transactions can result in U.S. income tax consequences and mandatory reporting, including Forms 3520 and 3520-A. This is especially true when you consider that trust rules and terminology vary worldwide, raising legal and tax considerations.
If the trust has a foreign grantor, it is generally subject to U.S. taxation only on income sourced from the United States. This structure creates a valuable planning opportunity: the trust can accumulate income from non-U.S. sources, which may then be tax-free to U.S. beneficiaries, provided proper compliance is maintained.
However, when a foreign non-grantor trust distributes income to U.S. beneficiaries, those beneficiaries are taxed on the distributions. They may face additional complexities such as the throwback tax and interest charge on accumulated income.
In short, a foreign irrevocable trust can be a powerful estate and tax planning tool, but it requires careful structuring and ongoing compliance to avoid unintended tax consequences.
Choosing the right trust for your needs
| Trust Type | Best For | U.S. Estate Tax | U.S. Income Tax | Key Considerations |
| Dynasty Trust | Long-term generational wealth transfer | Avoided if structured correctly | Taxed if classified as a U.S. trust | Requires a U.S. trustee |
| Foreign Grantor Trust | Tax-efficient U.S. wealth transfer | Avoided if structured correctly | Taxed only upon distribution | Best for parents funding U.S. heirs |
| U.S. Non-Grantor Trust | Strong asset protection | Avoided if structured properly | Taxed annually | Requires a U.S. trustee; grantor gives up control |
| Foreign Irrevocable Trust | Limiting U.S. tax exposure | Avoided | Not subject to U.S. trust taxation | Works best in offshore jurisdictions |
Next steps: setting up the right trust structure
The right trust depends on your long-term estate planning goals, tax exposure, and asset protection needs. Working with an experienced estate planning specialist can help ensure compliance with U.S. and foreign tax laws. At the same time, a cross-border wealth advisor can assist in structuring the trust for maximum tax efficiency.
Contact us today for expert guidance in setting up the best trust for your family.
This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.
