Flexibility is important for legal planning. With its simple grantor trust status and pass-through taxation, as well as its initially domestic jurisdiction, the Gap Fill Trust has proven to be an incredibly flexible tool for U.S. persons wishing to provide a maximum level of asset protection with a minimum level of ongoing costs and compliance.
Can the Gap Fill Trust be used for non-U.S. persons who are immigrating into the United States? The answer is yes and depending on the goals of the person it can be used in several different ways.
The first way is to use the Gap Fill Trust just like a U.S. person would. Once the non-U.S. person secures a green card or passport, then they will be treated as a U.S. person for tax purposes. In this case, the trust would be a U.S. “Grantor” Trust and the earnings of the trust would pass through to the non-U.S. person as a U.S. taxpayer.
The trust will provide protection for all of the assets, which may include U.S. based assets, as well as non-U.S. based assets. While this is the simplest, it is not always the goal of the immigrating person. This leads us to the second way for a non-U.S. person to avail themselves of the benefits of the Gap Fill Trust.
The second options is to use the Gap Fill Trust to create an offshore enclave for non-U.S. assets before coming to the U.S. This use has a few more steps which are all important to meet, if the trust is going to achieve the goal of creating an offshore base:
- First, the Trust must be settled by a non-U.S. person other than the immigrating person. This means a family member or another person who will not be a US taxpayer.
- Second, the Trust must be funded with assets from that person. In many cases, this is exactly the situation. A potential client will call me and say they are going to inherit several million dollars from a non-U.S. relative and don’t want it to be included in their US assets. The other option is for the client to make any transfers of ownership to the non-US settlor prior to immigration. The U.S. has no look back period for transfers of non-U.S. persons. Whatever the case may be, ultimately the trust must be funded with assets from the grantor’s estate and not the client.
- Third, the Gap Fill Trust must be drafted in such a way that the grantor (not the immigrating client) is the beneficiary of the Trust, at least during their lifetime, and that the trust reserve enough flexibility that the grantor can amend the trust to meet their planning goals during their lifetime.
- The fourth step is to have the Gap Fill Trust create a wholly owned Limited Liability Company. This may be done offshore in a jurisdiction like Nevis, or even in the US, depending on the assets that the LLC is going to hold. This creates a safe and easy to use place to open accounts, buy real estate or even start and invest in other LLC’s or companies. The LLC would be a Manager-Managed LLC which means the manager is not an owner and is acting for the benefit of the owner (the Gap Fill Trust).
This is where the immigrating client come in the picture. The immigrating client can be designated to serve as the Manager of the LLC. This gives them control of the assets of the LLC, but with no ownership interest.
Additionally, the client may be appointed by the non-U.S. person as a “Protector” of the Gap Fill Trust. This gives them a critical role inside the Trust as the Protector’s approval can be required for many important actions of the Trustee, which would include adding or removing a beneficiary.
The net effect is, as long as the non-U.S. person is alive and the sole beneficiary of the Gap Fill Trust then the immigrating client may have control and even possession of the assets held in the LLC, but has no ownership, or even any potential ownership.
Of course, this means that the immigrating client may not be a beneficiary of the trust itself. If they are, then the U.S. will expand their reach and ‘deem’ the trust income as attributable to the client, and this of course defeats the purpose. This, of course can change in the future either by the grantor naming (with the consent of the Protector) the immigrating client as a beneficiary, or if the grantor simply makes a distribution during life to the client.
This limitation may seem limiting, but if the immigrating client is in fact in control of the assets through the LLC then most clients can overcome the fact that they are not a present beneficiary of the trust itself. And the benefits of keeping significant assets out of the U.S. tax system often will far outweigh the limitation. This is especially true if the immigrating client is keeping the option open of eventually moving out of the U.S.
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When you need legal help with asset protection, trusts, or businesses, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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