At the end of last century, the Department of the Treasury led the way in making foreign trust popular. This may seem ironic given the Swiss bank account investigations. But, now, the Treasury Department allows the foreign trust tax status for domestic trusts. States such as Nevada also provide unique asset protection for these trusts. Here is how to save taxes and protect assets.
A domestic trust can be a foreign trust for income taxes while remaining a domestic trust for probate purposes. The tax advantage of a foreign trust is its classification as a “grantor trust”.
Unlike a domestic trust, all assets transferred to a foreign trust are allowed “grantor trust” status. They are also excluded from the taxable estate of the settlor.
As a “grantor trust”, the tax law allows transfers of assets to be income tax free. Thus, you can do what you want to protect your assets and reduce estate taxes without worrying about income taxation. Additionally, assets placed in trust before the proposed “Wealth Tax” is introduced in Congress can be exempt from the tax (tax laws can be retroactive to the date introduced).
A domestic trust becomes a foreign trust by simply inserting a “flee clause” (a requirement that the trust flees the US to a foreign country if a creditor tries to get the trust assets). By placing the trust in Nevada, you will have an asset protection trust.
This status will encourage foreign investors to use the USA not other tax havens for their international estate planning. Attorneys and CPAs have a great opportunity to provide a valuable and unique service using the domestic base tax exempt foreign trust.
Before you watch my two minute video below, please enjoy my Blog Talk Radio show on this topic. You can listen to it on the road or you can listen to the radio show now. The play time is about 22 minutes.
If you want to defer income taxes, then fund the trust with a loan due within five years. Such a loan is called a “qualified obligation“.
The IRS Form 3520-A (filed by the trustee) details the tax planning structure for a tax deferred foreign trust. You will want to use the “qualified obligation” found on page 3 of the Form 3520 (filed by the settlor). The Department of the Treasury rules for this unique tax advantage trust are on this link.
Learn the basics on offshore trust on this short video. Be an expert with International Taxation in America, available at Amazon.