United States: U.S. Tax Planning For Non-U.S. Persons And Trusts: An Introductory Outline

Last Updated: January 17 2012
Article by G. Warren Whitaker

Estate planning for non-U.S. persons differs from domestic planning not only in the specific rules that apply, but in the mental outlook that the planner must bring to the process. To put it simply, in planning for a U.S. person we begin with the assumption that all income and assets are subject to U.S. income, estate and gift tax, and we then hunt for exceptions (a.k.a. "loopholes") that will shelter some income and assets from these taxes, i.e., municipal bond interest, charitable deductions, the estate tax marital deduction. Non-U.S. persons, on the other hand, start out in an environment in which no U.S. income or estate taxes are payable, and the planner's job is to keep an eye out for pitfalls (U.S. residence, U.S. source income and U.S. situs assets) that may produce such taxes.

The following is an outline of the rules that apply in estate and tax planning for non-U.S. persons and trusts. It is not intended to be the exhaustive word on the subject—volumes are required for that task—but is meant to serve as a general guide to the subject.


The following are the basic rules of international estate planning:

  • U.S. persons are subject to U.S. income taxation on their worldwide income. (I.R.C. §§ 1, 61)
  • Individuals who are U.S. persons are also subject to gift, estate and generation-skipping transfer taxation on their worldwide assets. (I.R.C. §§ 2001, 2031-2046, 2601).
  • Non-U.S. persons are subject to U.S. income tax only on their U.S. source income.
  • Individuals who are non-U.S. persons are subject to estate, gift and generation-skipping transfer tax only on U.S. situs assets.

These rules are elaborated upon on the following sections of this outline.


A. Individuals, Corporations and Trusts. The term "U.S. person" includes U.S. individuals as well as domestic corporations and U.S. trusts. (I.R.C. § 7701(a)(30))

B. When is an Individual a U.S. Person? An individual is a U.S. person if he or she is either:

  • A U.S. citizen, regardless of residence, and including a dual citizen of the U.S. and one or more other countries; or
  • A U.S. resident, regardless of citizenship.

C. Who is a U.S. Resident?

1. Income Tax Resident: A resident for income tax purposes is:

  1. A green card holder (or other lawful permanent resident) who is present in the United States for at least one day of a calendar year. (I.R.C. § 7701 (b)(1)(A)) There are special rules for the first and last year of lawful residence. For the first year, if the individual was not a resident in the prior calendar year, the individual is treated as a resident only for the portion of the year starting when the residence began. (I.R.C. § 7701(B)(2)(A)) For the final year, if an individual turns in his green card and leaves the U.S., is not a U.S. resident in the following year and has a closer connection to another tax jurisdiction, he or she will only be a U.S. income tax resident for the portion of the year that he or she was a card holder. (I.R.C. § 7701(B)(2)(B)) (As to departing residents, however, there are special rules for Long-Term Residents, discussed infra)
  2. Under the "substantial presence" test, a person is a U.S. resident for a given calendar year if he or she either (a) is present in the United States for 183 days in that year, or (b) is present in the U.S. for at least 31 days of that year and has been present in the U.S. for an average of more than 121 days per year over that year and the two prior years. (I.R.C. § 7701 (b)(3)(A))


  1. A person holding a diplomatic visa or a full-time student, teacher or trainee visa, or an employee of an international organization, is not a U.S. resident, regardless of the number of days spent in the U.S. (I.R.C. § 7701 (b)(5)(A) and (B))
  2. A person who is present in the U.S. for less than 183 days in the calendar year, but whose 3-year average is greater than 121 days, can avoid U.S. resident status by demonstrating that he or she has a tax home in and a "closer connection" to a foreign country. (I.R.C. § 7701(b)(3)(B))
  3. Treaties with some countries contain "tie-breaker" provisions to resolve the issue of residence for a person who would otherwise be treated as a resident of both of the treaty countries.

2. Estate and Gift Tax Resident: A U.S. resident for estate and gift tax purposes is a person whose primary residence, or domicile, is in the United States. This means that the person lives in the United States and has no definite present intent to leave, as shown by the surrounding facts and circumstances. (Treas. Reg. § 20.0-1(b)(1); Treas. Reg. § 25.2501-(1)(b)).

Because a "bright line" test applies for income tax purposes and a "facts and circumstances" test for estate tax purposes, it is possible for an individual to be a U.S. resident for purposes of one tax and not for the other.

D. What Constitutes a Domestic Corporation? A corporation that is organized or created in the United States. I.R.C. § 7701(a)(3)

E. What Constitutes a Domestic Trust? Under the law in effect as of 1996 (I.R.C. §§ 7701(a)(30)(E) and (31)(B)), every trust is a foreign trust unless both of the following are true:

  1. A United States court can exercise primary supervision over the administration of the trust; and
  2. One or more U.S. persons have the power to control all substantial decisions of the trust.

Under Reg. § 301.7701-7, the "United States" refers only to the fifty states and the District of Columbia. A safe harbor is created whereby a trust is a domestic trust if it is administered exclusively in the U.S., has no provision directing administration outside the U.S., and has no automatic change of situs clause (except in case of foreign invasion or widespread confiscation of assets in the U.S.) If a person other than a trustee (such as a Protector) has the power to control substantial decisions, that person will be treated as a fiduciary for purposes of the control test. Powers exercisable by a grantor or a beneficiary, such as a power to revoke or a power of appointment, will also be considered in determining "substantial control."

Under the Regulation, "substantial decisions" include:

  1. Whether and when to distribute income or corpus.
  2. The amount of any distribution.
  3. The selection of a beneficiary.
  4. The power to make investment decisions. (However, if a trust has a foreign investment advisor who can be removed by the U.S. trustee at any time, this will not make the trust foreign.)
  5. Whether a receipt is allocable to income or principal.
  6. Whether to terminate the trust.
  7. Whether to compromise, arbitrate or abandon claims of the trust.
  8. Whether to sue on behalf of the trust or to defend suits against the trust.
  9. Whether to remove, add or name a successor to a trustee.

If a vacancy occurs through the death or sudden resignation of a trustee which would shift control of a substantial decision out of the hands of U.S. trustees, the trust has twelve months to reassert U.S. control by either a change of fiduciaries or a change of residence of a fiduciary. If such a change is made within twelve months, the trust will be treated as having remained a U.S. trust; if no such change is made, the trust will have become a foreign trust on the date the vacancy occurred.

This new definition makes it easier to determine whether a trust is U.S. or foreign. It also is heavily tilted towards a conclusion that a trust is foreign. For instance, if a New York resident creates a testamentary trust for his New York resident children by his will probated in New York, with a New York bank and an Irish cousin as trustees, and if principal distributions to the children can only be made by majority vote of the trustees, the trust is a foreign trust under the new law since a substantial decision is not controlled by a U.S. fiduciary.


Persons who are neither U.S. citizens nor U.S. residents ("Non-Resident Aliens" or "NRAs") are subject to U.S. taxes as follows:

A. Income Tax: NRAs are subject to U.S. income tax only on U.S. source income, generally at a 30% withholding rate. (I.R.C. § 871(a)(1))

U.S. Source Income for Income Tax Purposes (I.R.C. § 871(a)):

  • Dividends from U.S. corporations, but not the proceeds of sale of U.S. securities.
  • Rent from U.S. real property, and capital gains on the sale of U.S. real property or real property holding companies.
  • Interest on debts of U.S. obligors. However, interest on most publicly traded bonds issued after July 18, 1984 constitutes "portfolio interest" and therefore qualifies for the portfolio exemption and is not taxed as U.S. source income (I.R.C. § 871(h)).
  • Salaries paid by U.S. and non-U.S. entities for services performed by the recipient in the United States.
  • U.S. royalties.

NRAs are also subject to income tax at the same graduated rates as U.S. persons on their income in connection with the conduct of a trade or business in the U. S. (I.R.C. § 871(b))

Interest on U.S. bank accounts, including time deposits and certificates of deposit, is not U.S. source income.

Income tax treaties between the U.S. and other countries can alter these rules, particularly the withholding rate.

B. Estate Tax: Estates of NRA individuals are subject to U.S. estate tax only on U.S. situs assets. The tax is assessed at the same rates as for U.S. citizens, up to 35% for 2011 and 2012, but with only a $60,000 exemption (as opposed to the current exemption of $5,000,000 for a U.S. person). (I.R.C. § 2106 (b)) Worldwide debts and administration expenses may be deducted, but only in the proportion that the U.S. assets bears to the decedent's worldwide assets. The unlimited marital deduction is available; however, if the surviving spouse is not a U.S. citizen, only property left to a Qualified Domestic Trust (QDT) will qualify (see Section VIII (B) below). The charitable deduction is available only for bequests to U.S. charities.

U.S. Situs Assets for Estate Tax Purposes: The following is a partial list:

  • U.S. situs real property, including houses and condominiums. (Treasury Reg. §§ 20.2104-1 (a)(2); 20.21051 (a)(2))
  • U.S. situs tangible personal property, such as jewelry, antiques, artworks and cars, unless the items are in transit or on loan for an exhibition. (Treasury Reg. §§ 20.2104-1 (a)(2); 20.21051 (a)(2))
  • Shares of stock of U.S. corporations, including shares of a U.S. co-operative corporation representing a co-op apartment. (I.R.C. § 2104(a)) Shares of non-U.S. corporations are not U.S. situs property. The location of the certificate is immaterial. Mutual funds (including money market funds) organized in corporate form are U.S. situs property if incorporated in the United States. (I.R.C. § 2104(a)) If the fund is structured as a partnership or grantor trust, the situs of the fund depends on the situs of the underlying assets of the fund.
  • Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs property. (I.R.C. § 2104 (c))
  • Debts of U.S. obligors. Once again, however, publicly traded bonds issued after July 18, 1984 qualify as "portfolio debt" and therefore are not subject to U.S. estate taxation. (I.R.C. § 2105 (b)(3)) Previously, only bonds with a maturity of more than 6 months qualified for the estate tax portfolio debt exemption, so that short-term Treasury bills, for example, were U.S. situs assets. However, this distinction was eliminated by the Taxpayer Relief Act of 1997, and bonds now qualify for the portfolio debt exemption regardless of maturity.
  • Interests in limited or general partnerships that either do business in the U.S. or own assets in the U.S. will probably be considered U.S. situs assets.
  • Life insurance proceeds paid by a U.S. insurer on the life of a non-U.S. person is not U.S. situs property. However, the cash surrender value of life insurance owned by a non-U.S. person on the life of another person is U.S. situs property if issued by a U.S. insurer. (Treasury Reg. § 20.2105-1 (g))

Bank accounts maintained with U.S. banks are not U.S. situs property: this includes checking and savings accounts, time deposits and certificates of deposit. (I.R.C. § 2104 (c))

Again, treaties with various countries can alter these rules, particularly as to whether U.S. stocks owned by a citizen and resident of another country will be taxed by the U.S.

C. Gift Tax: NRAs are subject to gift tax only on gifts of U.S. situs real property and tangible personal property. The annual exclusion of $13,000 for gifts of a present interest may be applied; however, the $60,000 credit that NRAs have for estate tax purposes may not be applied to gifts. Gifts of shares of stock of U.S. corporations are not subject to U.S. gift tax. However, gifts of cash (possibly including checks) that take place within the United States may be subject to gift tax; therefore, any gifts of cash by a non-U.S. person to a U.S. person should be made outside the United States. (I.R.C. §§ 2501 (a)(3); 2511 (b))

D. Reporting of Gifts by NRAs to U.S. Persons: Any U.S. person who receives "large gifts" (over $100,000) from a foreign person during any calendar year must file a report describing these gifts. (I.R.C. § 6039F; Form 3520) (The recipient must be a U.S. person for income tax purposes, and the foreign person may be either a foreign individual for income tax purposes, or a foreign entity—corporation, partnership, trust or estate). The stated purpose of this reporting requirement is to insure that the purported gift is not really a disguised distribution of income from a foreign trust.

The term "gifts" includes bequests from estates of non-U.S. persons. (I.R.C. § 6039F(b)) Qualified medical or educational payments under I.R.C. § 2503(e) are not considered to be gifts and are not subject to reporting.

In determining whether a U.S. person has received gifts during the taxable year from a particular foreign donor in excess of $100,000, the U.S. donee must aggregate gifts from foreign persons that he knows or has reason to know are related, within the meaning of § 643(i)(2)(B). For instance, if an NRA mother and father each give their U.S. son $60,000, the gifts are aggregated, the $100,000 reporting threshold is exceeded and the son must report both gifts. Once the $100,000 threshold has been met, the donee must separately identify each gift in excess of $5,000.

A U.S. person is required to report the receipt of purported gifts from foreign corporations and foreign partnerships if the aggregate amount of purported gifts from all such entities exceeds $10,000 in any year. (This threshold is indexed for inflation and is presently $12,760.) The use of the word "purported" in the Notice gives an indication of the jaundiced eye with which the I.R.S. will view such "gifts." The I.R.S. may recharacterize those "gifts" as taxable dividends from the corporation.

The form used to report gifts from foreign persons (Form 3520) asks for a brief description of the property received as a gift, whether the foreign donor is an individual, corporation, partnership, or estate, and whether the foreign donor was acting as a nominee or intermediary for another person. The form does not ask for the identity of a foreign individual donor, although the IRS could ask for this information.

While there is no tax on gifts from foreign persons, the penalty for failure to report the gifts is severe. If a gift is not reported on Form 3520, the tax consequences of the receipt of the gift shall be determined by the Secretary. (I.R.C. § 6039F(c)(1)(A)) In addition, the recipient is subject to a penalty equal to 5 percent of the value of the gift for each month in which the gift is not reported, not to exceed 25 percent. (I.R.C. § 6039F(c)(1)(B)) The penalties can be waived if the failure to file was due to reasonable cause and not willful neglect. Ignorance of the law is not reasonable cause.

E. Estate Tax and Generation-Skipping Transfer Taxes: Transfers by a NRA to a U.S. person are not subject to U.S. income, estate or gift tax except as to assets that have U.S. situs for estate or gift tax purposes.

A transfer by a NRA will be subject to GST tax only if it is also subject to U.S. estate or gift tax, which will be the case only if it consists of U.S. situs property. (Treas. Reg. § 26.2663-2)

F. Treaties: Treaties with individual countries may alter some of these rules, particularly as to determination of residence, source of income, situs of assets and income withholding rates. The U.S. generally enters into treaties with countries that have significant taxes of their own, to help avoid double taxation. Therefore, if a treaty allows a NRA to reduce his U.S. tax liability, there will usually be an offsetting tax in the NRA's country of residence.

The United States never enters into a treaty which exempts U.S. citizens from worldwide income, estate, gift, or generation-skipping taxation.

At present the United States has estate tax treaties with the following countries

Canada (Third Protocol to Income Tax


South Africa
United Kingdom

The estate tax treaties with the United Kingdom, France, Germany, Austria, Denmark and Sweden are based on the unified system concept, and in consequence cover taxes on gifts and generation-skipping transfers as well as estate taxes.

The U.S. also has separate gift tax treaties with Australia and Japan.

To read this Outline in full, please click here.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions