Foreign Grantor Trust (FGT) Planning
For non-U.S. individuals with children, family members or other beneficiaries in the United States, a Foreign Grantor Trust (FGT) can provide a way to establish an estate plan and structure a future inheritance without creating U.S. tax reporting obligations for those beneficiaries during the grantor’s lifetime.
An FGT is a trust that qualifies as a “foreign trust” under U.S. tax rules and in which the non-U.S. person who funds or controls the trust (the grantor) retains certain powers or benefits over the trust and its assets. As a result, the grantor, rather than the U.S. beneficiaries, is treated as the owner of the trust’s assets during the grantor’s lifetime.
An FGT does not necessarily reduce the taxes that will ultimately apply to family wealth. Instead, its value lies in allowing a non-U.S. grantor to establish and maintain a trust for U.S. beneficiaries while the grantor is living, with the grantor remaining the owner of the trust’s assets for U.S. tax purposes, which does not cause any reporting for the beneficiaries as long as certain rules are followed.
Because the U.S. tax treatment of a foreign trust can change after the grantor’s death, careful planning is important both when establishing the trust and when preparing for the eventual transfer of wealth to U.S. beneficiaries. Hone Maxwell LLP works with international families to structure FGTs around their estate planning objectives while addressing applicable U.S. tax and reporting requirements.
FGTs can be particularly useful for non-U.S. individuals who want to establish an estate plan for children or other beneficiaries living in the United States. Our attorneys advise clients on matters including:
HMLLP takes a coordinated approach by integrating FGT planning with the firm’s International Estate Planning, International Tax & Business and Global Private Counsel (GPC) services. Through GPC, clients benefit from coordinated legal representation across multiple jurisdictions through a single, trusted relationship, helping ensure their advisors work together efficiently as their personal and business interests evolve.
HMLLP advises clients around the world on sophisticated international estate planning matters. With attorneys experienced in international tax law and a multilingual, multicultural team, we help clients develop practical, customized solutions for protecting wealth across generations and borders.
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A Foreign Grantor Trust (FGT) is a trust that qualifies as a “foreign trust” (based on U.S. tax rules) where the grantor retains certain powers or benefits that result in them being treated as the owner of the trust’s assets for U.S. tax purposes.
A FGT can be useful in a variety of circumstances. They are commonly used for estate planning and wealth management purposes by non-U.S. persons with beneficiaries in the United States.
For the grantor: The grantor continues to be treated as the owner of the trust assets.
For U.S. beneficiaries: If distributions are made to U.S. beneficiaries, they may have reporting obligations but generally do not pay income tax unless the trust changes status.
There are many various types of trusts, and the U.S. tax law applies differently. Depending on your current trust structure, you might be able to make changes or simply convert/decant the trust assets into a more advantageous structure like the FGT.
Yes, it is good to have periodic updates of your structure and plan to see if there were any legal changes, or if there are changes in your personal decisions about your family wealth planning or residency plans.
If U.S. and foreign assets are held within the same holding company, it could trigger U.S. estate taxes on the U.S. assets when the grantor passes away. Ideally, U.S. and foreign assets will be held in separate holding companies before the grantor passes away.
Yes, relevant parties should be aware of future tax obligations and be prepared for required actions when the grantor passes away. Some matters can be prepared in advance to ease the administrative burden on beneficiaries when the grantor passes away, such as:
“Checking the box” refers to filing IRS Form 8832 to choose how an entity is classified for U.S. tax purposes, such as a disregarded entity or corporation. This election can be used to achieve a better tax result but requires careful planning to prevent unintended tax consequences.