Non-Resident Successor Trustee
While it is legally permissible to name a foreign person (such as a close relative from your home country) as your successor trustee, there are several problems that arise.
Ability to Assume Control of Minor Children
The first issue that arises is the pragmatic problem of the successor having to take immediate custody of minor children. The successor trustee would probably also be the person you wish to nominate as the “legal guardian” of you children. While a settlor may appoint in the trust agreement anyone to be in control of their assets (“successor trustee”) only a court can actually appoint a legal guardian of your children granting them legal custody. That requires a legal petition to be filed with the probate court. While a person living abroad may apply to be such a guardian, and the court may in fact believe that such an appointment is in the best interest of the children and even that the children should live abroad, it takes time for that to occur. In addition, the foreign person must first obtain an order from their home country approving their guardianship. Hence, at the very least there should be a US resident appointed as the “temporary successor trustee” and the “temporary legal guardian” to allow that person to immediately take control of trust assets and custody of the children.
The second issue that arises from naming a foreign person as a successor trustee involves taxes. If both spouses pass away, then the successor trustee effectively becomes the owner of your property, although they hold it in trust for your beneficiaries. So, if they live abroad, your trust estate (your property) is being given to someone who lives abroad, and hence “tax withholding” issues arise. The trust becomes a “foreign Trust” under the Internal Revenue Code. The US Government makes the estate withhold money for taxes since once the money is paid to the person abroad, it is very difficult for the US IRS to collect, and hence they withhold some of the money until the final estate tax return is done. Specifically, payments made to a “foreign trust” are subject to a 30% income tax withholding requirement. And the IRS imposes other cumbersome reporting requirements and prohibitions such as owning stock of a “S Corporation” and the possibility of having to recognize capital gains on certain investments.
Naming US Person that has Legal Authority with a Co-Trustee
One way to avoid these results is to appoint a “U.S. person” that has the legal authority to control all “substantial decisions” of your trust [Internal Revenue Code Section 7701(a)(30)(E)(ii)] along with the foreign person as co-trustee. Legally that person would be the trustee in charge but the foreign “limited co-trustee” may actually handle all the daily needs for you children subject to the control and legal authority of the US Person. Therefore, you may name a foreign person as a co-trustee as long as language is added to your trust agreement to comply with these requirements.
Simply Comply with the Foreign Trust Requirements
Another option is to name a US person to act as temporary guardian for the pragmatic reasons described herein, but then turn over permanent control to a foreign person once the dust has settled. As stated earlier, it is legally permissible to have a foreign person as trustee as long as they comply with the tax reporting requirements. For estates that are relatively simply, the burden of such compliance is not prohibitive.
Name a Professional Trustee
The other option is to name a person or company that is a professional fiduciary. There are firms that provide “Professional Fiduciary Services” (PFS) and are licensed and bonded in California. You do not actually need to sign them up in advance. You can name a temporary trustee to appoint such a PFS if the need arises. The company I recommend is called Professional Fiduciary Services at http://trusteepro.com/.
Call Tony Bayard de Volo, Esq. at 408-288-5431 for a free consultation. www.vololaw.com - San Jose, California.