Key Takeaways
- An irrevocable trust can remove assets from the transferor’s taxable estate
- “Strings” provisions can pull assets back into the estate — careful drafting is essential
- No US gift tax for non-US citizens/domiciles transferring to irrevocable trusts
- Foreign trusts trigger extensive reporting: Forms 3520 and 3520-A
How Trust Planning Works
Placing assets into an irrevocable trust removes them from the transferor’s taxable estate. However, US tax code contains special “strings” provisions — retained powers such as control over beneficiaries, power of appointment, or ability to change terms can bring assets back into the taxable estate.
Gift Tax Considerations
For US citizens/domiciles, transferring assets to an irrevocable trust is a completed gift subject to gift tax. For non-US citizens/domiciles, no US gift tax applies on such transfers — a significant planning advantage.
Foreign Trust Complexity
US transferors remain treated as grantors for income tax purposes, meaning they remain liable for income tax on the trust’s income. Throwback tax may apply on distributions of accumulated income. Extensive information reporting (Form 3520, Form 3520-A) is required for US persons connected with foreign trusts.