Transatlantic Trust Issues and UK vs US Trusts

Complications that can arise in UK/US trusts

A family trust remains a popular vehicle for many to allow for the passing of wealth to the next generation. This is because it can provide flexibility, discretion and an element of control which is attractive to many.

For US citizens, residents trusts are often discussed in estate planning. They are an efficient vehicle to deal with often time consuming and costly probate processes in various states.

For transatlantic mobile families, the creator of a trust might be in one country and the beneficiaries in another. It is therefore very important to understand the rules applying to such arrangements.

Residence Position of Trusts – UK vs US

The UK and the US both consider trusts as separate taxable entities from those who create and those who can benefit from them. They therefore have rules which establish the tax residence position of the trust.

In the UK, the residence of the trust is determined by the residence of the Trustees. A situation can arise where some of the Trustees are resident in the UK and some outside the UK. So the residence is determined by the domicile of the settlor.

From a US tax perspective, the residence of a trust is established by the Court and Control Tests. In order for a trust to be considered ‘US resident’, there are some conditions. It must be governed by the law of one of the states of the United States. Also, it must also be under the trusteeship of majority US persons.

Tax Position in UK and US Trusts

First we must establish residency. So, if a trust is ‘resident’ or ‘not resident’ under the rules of the US and/or the UK. Once this is complete, we can begin to establish the tax position of both the trust itself and the beneficiaries. Provided that the Trust is resident in either the US or the UK, we start from the position that the trust is subject to tax. This will be on the income and gains of the trust as it arises and at the highest tax rate in both countries. 

Payments to the beneficiary would then be essentially free from tax albeit that from a UK tax perspective. Distributions from income of the trust would be reported as such on the beneficiary’s tax return. These come with a credit for the 45% tax already paid by the Trustee, with the beneficiary receiving a refund if their personal marginal tax rate is lower than 45%.

UK vs US Differences in Trusts

There are differences to be aware of in the UK. For example, when a trust one whereby the beneficiary is absolutely entitled to the income. In that case, the beneficiaries trust income will be taxable. With potentially lower rates of tax payable by the trust, for which the beneficiary will get a credit. But the capital gains will still be taxable on the trust.

There are also specific rules regarding the treatment, where the person who created the trust is themselves a UK resident and they or their spouse or minor children are also a beneficiary of the trust. This may result in income and potentially gains being taxable on the settlor rather than the Trustees.

In the case of the US, there are also specific rules about the person who funded the trust, known as the Grantor. Particularly is they are a beneficiary of the trust, or retain certain significant powers over the trust assets. This is by way of being a trustee or by the specific wording of the trust document. This can result again in the income and gains of the trust being taxable on the Trustee.

There’s the possibility under US tax rules, where a distribution is made to a beneficiary from trust income. Transferring the tax liability for that income to the beneficiary, rather than it being taxable on the trustees under what is known as a distribution deduction.

Trusts that are considered to be non-tax resident are taxed in both the UK and the US on certain income arising in that country, so may still have a reporting obligation.

Beneficiaries of UK vs US Trusts

Both countries also have their own rules as to how they regard distributions to tax resident beneficiaries from non-resident trusts. In the UK this can result in income and gains received by the trust over time being subject to tax on the beneficiary when they receive a distribution. A more detailed explanation can be found in our specific series of blogs in this area.

From a US perspective, beneficiaries receiving distributions from a non-resident trust are similarly subject to US income and capital gains tax. This is in respect of income and gains received by the trust over time. 

Additionally from a US tax perspective, if the income and gains of a non-resident trust (known as distributable net income or DNI) are not distributed within the calendar year or within 65 days of beginning of the new calendar year, they become undistributed net income (UNI).

When UNI is distributed to a beneficiary, it is taxed as ordinary income. This will be at their highest margin rate. Regardless of whether it is actually qualified dividend income or long term capital gains that are received. An email extra interest charge also arises. This increases with the length of time that passes before the UNI is considered to be distributed.

Without careful planning, it’s very easy for inefficient tax situations to arise. For example, where the income and gains are taxed on the trust in one country. But the beneficiary is potentially being taxed on the income and gains of the trust in the other county. This can cause double taxation issues as it is a situation not well provided for in the double taxation agreement. 

In Summary

Are you a family considering setting up a family trust, where there are people involved both in the UK and US? If so, it is important to carefully consider where the trust should be tax resident. You need to ensure it is set up appropriately. There are a number of factors to consider in this decision. Including the expected level of income and gains and expected distribution policy of the trust. It’s really important to take advice in order to be as tax efficient as possible.

Big firm expertise, with small firm practicality

Gillian has an excellent understanding of international tax matters, which is absolutely vital for me as I am an EU national residing in the UK.

Mutual trust & respect builds our winning team

Thank you very much for all your kind help and assistance. We were very pleased with the advice that James gave us and extremely grateful that he followed on with notes of our telecon.

Personal touch is our business-as-usual

It was a stroke of good luck when we connected with the kind consultants at Everfair Tax. They proved to be invaluable as we found our way through a maze of forms pertaining to our particular dual citizenship tax issues, and brought up scenarios it hadn’t even occurred to us to consider.

Motivated & Invested in being on the pulse

Thanks to you and your team for all your efforts, which I greatly appreciate. I’d be happy to serve as a reference for any prospective clients.
View More Testimonials

News

With weekly updates featuring tax changes, reminders for deadlines, pointers on how to maximise your accounts and information on Everfair Tax and their activities, you need look no further than our news & resources pages.

View More

Contact Us

Need some UK, US or Expat Tax Advice?
Contact us now & we will get back to you as soon as we can

  • This field is for validation purposes and should be left unchanged.

Weybridge Office

No. 5 The Heights, Wellington Way,
Weybridge, Surrey KT13 0NY

London Office

40 Gracechurch Street, London, EC3V 0BT

Tel: 01932 320 800
Email: info@everfairtax.co.uk