Key Takeaways
- Set up and fund a foreign irrevocable trust at least 5 years before becoming a US person
- A “drop-off trust” can shield future income on transferred foreign assets from US tax
- Irrevocable transfer of foreign assets can also remove them from the US taxable estate
- The settlor must not retain any powers that could pull assets back into the estate
Income Tax Planning
One strategy is to set up a foreign irrevocable trust before moving to the US and irrevocably transfer foreign assets into that trust (a “drop-off trust”). The non-resident should set up and fund the trust at least 5 years before becoming a US person — otherwise, the US person will be subject to US tax on future income earned on those assets.
Estate and Gift Tax Planning
An irrevocable transfer to a foreign trust of foreign assets can move those assets out of the estate. Care must be taken that the settlor does not retain any rights or powers — control over distributions, beneficial enjoyment, substitution rights — which could pull assets back.
Alternative Route
Before migrating, the taxpayer can transfer foreign assets to a foreign irrevocable discretionary trust, where they and family members become discretionary beneficiaries. The taxpayer may still be considered a grantor for US tax purposes, but if structured properly, those assets remain outside the taxable estate.