USA Law and Practice Contributed by: Christopher Boyett, David Scott Sloan, Max Angel and Eric Bracy, Holland & Knight LLP
Dynasty Trusts Dynasty trusts, often established in jurisdictions that permit perpetual or long-duration trusts, are used to preserve wealth across multiple generations while minimising exposure to estate, gift and GST taxes. These trusts frequently incorporate valuation dis - counts and other advanced techniques to enhance tax efficiency. Private Foundations and Donor-Advised Funds (DAFs) For charitable planning, private foundations and donor-advised funds (DAFs) are frequently utilised. Private foundations offer greater control over grant- making and governance, while DAFs provide a sim - pler, lower-cost alternative with similar tax benefits and flexibility in directing charitable contributions. Community Property Trusts A notable recent development is the growing use of community property trusts in certain jurisdictions that allow married couples to opt into a community prop - erty regime. These trusts can provide a full step-up in basis on all trust assets at the death of the first spouse, offering a significant income tax advantage not typically available under common law property rules. 3.2 Recognition of Trusts Trusts are fully recognised and respected under US federal law and form a cornerstone of estate and tax planning for high net worth individuals and families. As mentioned in 3.1 Types of Trusts, Foundations or Similar Entities , revocable trusts, irrevocable trusts and dynasty trusts are commonly used to avoid pro - bate, minimise transfer taxes, preserve family wealth across generations, and provide flexibility in managing and distributing assets. For families seeking centralised governance and con - tinuity, private trust companies (PTCs) are increas - ingly popular. These family-controlled entities serve as a trustee for one or more family trusts, offering enhanced privacy, control and alignment with fam - ily values. PTCs often operate in tandem with family offices, which provide integrated oversight of legal, financial and administrative matters. Together, these
structures support sophisticated, multigenerational wealth strategies and reinforce the United States’ reputation as a jurisdiction that supports advanced trust planning. 3.3 Tax Considerations: Fiduciary or Beneficiary Designation US citizens and residents who serve as fiduciaries or beneficiaries of foreign trusts, foundations or similar entities may face significant federal tax and reporting consequences. These rules are complex and often require co-ordinated legal and tax advice. Under US tax law, citizens and residents are taxed on their worldwide income. As such, any distributions received from a foreign non-grantor trust are generally subject to US income tax. If the trust has accumulated income from prior years, the beneficiary may also be subject to the throwback tax regime, which imposes punitive interest charges and compressed tax brack - ets on the distributed income. A US person acting as a fiduciary of a foreign trust may trigger additional reporting obligations. Failure to comply with these requirements can result in substan - tial penalties, even if no tax is due. If the grantor or a beneficiary also serves as a fiduci - ary, the trust may be classified as a grantor trust for US tax purposes. In such cases, the grantor is respon - sible for paying income tax on the trust’s earnings, which can be advantageous from an estate planning perspective. This structure allows the trust assets to grow without reduction from income taxes, effectively enhancing the value transferred to beneficiaries. Planning opportunities include: • structuring foreign trusts to avoid the throwback tax by ensuring current distributions of income; • using domestic trusts where appropriate to simplify compliance and improve tax efficiency; and • co-ordinating with foreign counsel to align trust terms with US tax rules and reporting obligations.
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