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/..