United States: U.S. Tax Planning For Non-U.S. Persons, Assets And Trusts - An Introductory Outline, 2019 Edition

Last Updated: February 20 2019
Article by G. Warren Whitaker and Dina Kapur Sanna

Estate planning for non-U.S. persons differs from domestic planning, not only in the specific rules that apply but also 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 taxes, and we then hunt for exceptions (aka "loopholes") that will shelter some income and assets from these taxes, e.g., 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 create 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 it 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. (Internal Revenue Code [IRC] §§ 1, 61).
  • Individuals who are U.S. persons are also subject to estate, gift and generationskipping transfer taxes on their worldwide assets. (IRC §§ 2001, 2031-2046, 2601)
  • Non-U.S. persons are subject to U.S. income tax only on their U.S. source income, including income that is effectively connected with a U.S. trade or business.
  • Individuals who are non-U.S. persons are subject to estate, gift and generationskipping transfer taxes only on U.S. situs assets.

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


  1. Individuals, Corporations and Trusts. The term "U.S. person" includes U.S. individuals as well as domestic corporations and U.S. trusts. (IRC § 7701(a)(30))
  2. 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 United States and one or more other countries; or
    • A U.S. resident, regardless of citizenship.
  3. 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). (IRC § 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.e., when he or she was first physically present in the United States with a green card. (IRC § 7701(B)(2)(A)) For the last year of residence, if an individual turns in his or her green card and leaves the United States, is not a U.S. resident in the following year, and has a closer connection to another tax jurisdiction, he or she will be a U.S. income tax resident for only the portion of the year that he or she was a cardholder. (IRC § 7701(B)(2)(B)) (As for 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 (i)is present in the United States for 183 days or more in that year; or (ii) is present in the United States for at least 31 days of that year, and the total of the days present in the United States during the current tax year, plus one-third of the days present in the previous year, plus one-sixth of the days present in the second previous year, equals 183 days on a weighted basis. (A person who is never in the United States for more than 121 days per year will never exceed this figure.) (IRC § 7701 (b)(3)(A))


      1. A full-time student, teacher or trainee visa (for a limited time); a person holding a diplomatic visa; or an employee of an international organization is not a U.S. resident, regardless of the number of days spent in the United States. (IRC § 7701 (b)(5)(A) and (B))
      2. A person who is present in the United States for fewer than 183 days in the calendar year, but whose three-year weighted total is greater than 183 days, can avoid U.S. resident status by filing with the Internal Revenue Service (IRS) and demonstrating that he or she has a tax home in and a "closer connection" to a foreign country. (IRC § 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 applies for estate and gift tax purposes, it is possible for an individual to be a U.S. resident for purposes of one tax and not for the other.
  4. What Constitutes a Domestic Corporation? A corporation that is organized or created in the United States. (IRC § 7701(a)(3)) It does not matter where the directors reside or meet, or where the corporation's assets are located.
  5. What Constitutes a Domestic Trust? Under IRC §§ 7701(a)(30)(E) and (31)(B), every trust is a foreign trust unless both of the following are true:

    1. A U.S. 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 Treas. Reg. § 301.7701-7, the "United States" refers only to the 50 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 United States, has no provision directing administration outside the United States and has no automatic change of situs clause (except in case of foreign invasion or widespread confiscation of assets in the United States). If a person other than a trustee (such as a protector) has the power to control substantial decisions, that person's powers will be counted 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.

      The Treasury regulations provide a nonexclusive list of "substantial decisions," which include:

      • Whether and when to distribute income or corpus
      • The amount of any distribution
      • The selection of a beneficiary
      • The power to make investment decisions (However, if a U.S. person [trustee, protector, etc.] appoints a foreign investment advisor and can remove that advisor, the appointment of the foreign advisor will not make the trust foreign.)
      • Whether a receipt is allocable to income or principal
      • Whether to terminate the trust
      • Whether to compromise, arbitrate or abandon claims of the trust
      • Whether to sue on behalf of the trust or to defend suits against the trust
      • Whether to remove, add or name a successor to a trustee; provided, however, that the power solely to name a successor will not be considered a substantial decision if it is limited such that it cannot be exercised in a manner that would change the trust's residency from foreign to domestic, or vice versa)

      If a vacancy occurs through the death or sudden resignation of a trustee that would shift control of a substantial decision out of the hands of U.S. trustees, the trust has 12 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 12 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 definition is heavily tilted toward a conclusion that a trust is foreign. For instance, if a New York resident creates a testamentary trust for his or her New York resident children by his or her will probated in New York, with a New York bank and an Irish cousin as trustees, and if principal distributions to the children can be made only by majority vote of the trustees, the trust is a foreign trust since substantial decisions are not controlled by the U.S. fiduciary.

To view the full article, please click here

Click here to read further Insights from Day Pitney

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
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