Navigating the Global Trust Landscape: Essential Considerations for International Estate Planning

For high-net-worth families with international connections, trusts remain a cornerstone of sophisticated estate planning. However, the familiar utility of trusts under U.S. law often collides with unfamiliar — and sometimes unfriendly — treatment abroad. Understanding how different legal systems approach trusts is essential for anyone holding foreign assets or contemplating permanent residence outside the United States.

The Recognition Problem: Not All Legal Systems Embrace Trusts

The foundation of effective trust planning begins with a critical question: Does the relevant foreign jurisdiction actually recognize trusts as valid legal structures? The answer depends largely on the legal tradition governing that jurisdiction.

Common law countries, sharing legal heritage with the United States and United Kingdom, generally recognize trusts but approach them with varying degrees of scrutiny. While the basic trust concept translates across common law jurisdictions, recognition doesn’t guarantee favorable treatment. Many common law nations impose substantial taxes on trust income and transfers, and, increasingly, governments maintain public or semi-public trust registries that compromise the privacy traditionally associated with trusts.

Civil law jurisdictions present more fundamental challenges. In countries following the civil law tradition — encompassing much of continental Europe, Latin America, and parts of Asia — trusts may not be recognized at all. Or a foreign trust may be recognized but with limitations and consequences that differ from treatment in the United States. Tax authorities may look through a trust to the settlor or the beneficiaries, with unanticipated tax consequences. Additionally, civil law countries frequently enforce forced heirship rules that guarantee certain relatives a portion of a decedent’s assets, potentially overriding trust distribution provisions entirely. Further, trust registries are more prevalent in civil law jurisdictions.

Religious legal systems add another layer of complexity. Islamic law jurisdictions, for instance, may similarly decline to recognize trusts and enforce their own mandatory inheritance rules that conflict with testamentary freedom.

The Foreign Jurisdiction Problem: When Does Foreign Jurisdiction Attach?

Even when a trust is established under U.S. law by U.S. persons, foreign jurisdictions may assert taxing or regulatory authority over it. Several connection points can trigger foreign oversight and carry significant tax and regulatory implications:

• Trust property is located within a foreign country: For example, real estate in France or securities held in a Singapore account
• Beneficiary (including contingent remainder beneficiary with no current rights to distributions) resides in a non-U.S. jurisdiction
• Grantor or trustee resides in a non-U.S. jurisdiction

Each of these scenarios requires careful consideration and planning in collaboration with legal and tax counsel in the foreign jurisdiction.

The Non-Recognition “Problem”: The Double-Edged Sword of Non-Recognition

When a foreign jurisdiction doesn’t recognize a trust, consequences can cut both ways. Occasionally, non-recognition works in the taxpayer’s favor. If the foreign country treats the trust as a disregarded entity, taxation may flow through to individuals in ways that prove simpler or more advantageous than trust-level taxation.

More commonly, however, non-recognition can create unanticipated problems. It creates confusion as to whether the settlor, the beneficiary, or multiple beneficiaries will be taxed. In a discretionary trust with multiple beneficiaries where the trustee determines to whom and when to make distributions, beneficiaries might be taxed on income received by the trust but not currently distributed to them. And there is also the potential for double taxation with no avenue for relief under tax treaties. When the United States taxes trust income to the trust or grantor while a foreign country taxes it to beneficiaries, treaty relief evaporates because of the mismatch of the taxpayers across jurisdictions.

Furthermore, “pour over” from a decedent’s will to a revocable trust, a common occurrence in U.S. estate plans, may not be recognized, resulting in property passing according to the laws of intestate succession rather than the will and revocable trust agreement.

The Unanticipated Burdens Problem: Higher Tax Rates and Additional Taxes and Compliance

Beyond potential non-recognition, trusts with foreign connections face additional burdens. Some jurisdictions tax trusts at rates exceeding those applied to individuals or corporations. Others impose additional inheritance and similar taxes on the beneficiaries of trusts. Others impose periodic wealth taxes on trust principal itself, not just income. Trust information may require registration with government authorities, potentially becoming part of public or searchable records that undermine confidentiality.

The reporting obligations alone can be substantial, with trust details, beneficiary information, and financial data flowing to foreign tax authorities under increasingly aggressive information-exchange regimes.

The Strategic Solutions: Planning to Avoid Pitfalls

For families with international dimensions, trust planning requires looking beyond U.S. borders from the outset. The structure that works seamlessly in Dallas may create chaos in Dubai. Careful coordination with advisors knowledgeable in the relevant foreign jurisdictions is not merely prudent — it’s essential to avoid costly pitfalls and ensure your planning achieves its intended objectives across all relevant legal systems.

Evaluating your international estate plan? Reach out to Suzanne Shier or another member of LP’s Trusts and Estates Group.