Whether it would be preferable for the grantor to create this trust during their lifetime or on their death under their will depends on the circumstances.
Contrast this to a direct inheritance of $13mn received by the UK child, which may then suffer UK inheritance tax on the child’s later death at 40 per cent on assets above their UK allowance of only £325,000 per person.
Thus, the well-advised US parent may save their UK family say $5.2mn in future inheritance tax, or $10.4mn for wealthy US spouses.
Trustee residency
Where there is a US trust, whether a living trust or not, the family must take care over the trustees’ tax residency status.
Trustee residency has a significant impact on when US or UK tax falls due, and on whose shoulders (the grantor, the trustees and/or a recipient beneficiary) that tax burden falls.
If a trust has solely US resident trustees then US tax may arise to the trustees, and UK tax on the beneficiaries on receipt of trust distributions, without a credit given for the trustees’ US tax.
Similarly, if a trust is UK resident, then the trust’s income and capital gains will be exposed to UK taxation as they arise, without a credit available for any later US tax suffered by a US citizen beneficiary upon receipt of a distribution.
Additionally, if a trust ceases to be UK resident (for example if a sole UK resident trustee ceases to be UK resident), this will 'export' the trust for UK capital gains tax purposes.
This triggers a capital gains tax charge on the trust’s unrealised gains, which can be particularly detrimental because the trustees would have no sale proceeds out of which to pay this "dry" tax charge.
If the family wishes to have UK trustees, then a possible solution to avoiding double taxation may be to make the trust "dual-resident" – that is, resident in both the US and UK under their respective rules at the same time.
A foreign tax credit might now be given in one jurisdiction for the tax paid in the other, because the taxpayer is the same in each jurisdiction (that is, the trustees).
That said, the trustees should still be careful of the above export charge if the trust ever ceases to be UK resident.
What should UK residents in these circumstances do?
It is of utmost importance that anyone involved in cross-border matters like these should take appropriate advice as soon as possible, because no one solution will fit every scenario.
