Technical article
An Income-only Trust over Three Generations: What Each Country Does at Each Step
It pays its income to a daughter for her life, then to her children, and in the end the principal goes to the grandchildren.
Picture a trust of US$10 million. It pays its income to a daughter for her life, then to her children, and in the end the principal goes to the grandchildren. The amount is an example. The question is the one many of us ask: my trust pays income to my children, then my grandchildren, so what tax comes at each handover?
We take one step at a time and four settlor countries. Each cell is a short version of what the sources say.
| Step | United States | United Kingdom | Germany | Canada |
|---|---|---|---|---|
| Putting money in | Gift tax of 40% above US$15,000,000 per person | 20% above GBP 325,000 | Gift tax, third class in practice: EUR 20,000 allowance, 30% to EUR 6 million, 50% above; none if the settlor keeps control | No estate or inheritance tax |
| Each year | Income paid out is deducted and taxed to the heir; income kept pays up to 37% | 45% on income (39.35% on dividends); 20% for an income-interest trust | Income attributed to a German-resident settlor or heirs each year, at 25% flat | Top rate on income kept (53.53% in Ontario, from one tier C guide) |
| Payment to an heir abroad | 30% withheld on US-source income | Credit of 45% on UK trust income | Taxed in full only if the heir or the giver is a German resident or within five years of leaving; otherwise only German assets (a reading of the statute, not a ruling) | 25% unless a treaty cuts it |
| Every 10 or 21 years | None; but 40% on payments to grandchildren above US$15,000,000 | Up to 6% above the allowance every 10 years | None for a foreign trust | Deemed sale every 21 years |
| The settlor dies | Only if powers were kept | Only if a benefit was kept | Not in the estate if outside control is real | No death event for the trust |
| An heir dies | Tax on skipping a generation when an interest ends by death | 40% when the life tenant dies | Does not end an opaque trust | Some trusts get a deemed year end |
What the rows say
Putting money in. Canada has no estate or inheritance tax. The United States charges nothing until the US$15,000,000 allowance is used. The United Kingdom takes 20% above its allowance, which is half its death rate, and the allowance is frozen to April 2031.
Each year. The United States and Canada deduct what the trust pays out. The United Kingdom does not, which is why 45% shows up so often for a UK-run trust.
The handover to a grandchild. In the United States this is where the tax on skipping a generation arrives: 40% of what exceeds the US$15,000,000 allowance, for a payment to a grandchild or below, wherever they live. In the United Kingdom, the charge every ten years takes up to 6% of value above the allowance, with a share of that on money leaving in between. Canada's deemed sale every 21 years taxes the gain at the top rate and allows ten yearly instalments. Germany's 30-year tax reaches only a family foundation managed or seated in Germany.
The heir's death. The sources are thinner here and the rows read as a first look. In the United States, a taxable termination arises when an interest ends by death, unless another person who is not a grandchild or below holds an interest afterward. In the United Kingdom, an income-interest trust inherited on a death pays 40% when the life tenant dies. Germany says the death does not end an opaque trust, and payouts to those with a legal claim stay subject to gift tax. In Canada, certain trusts get a deemed year end when a particular beneficiary dies.
The end. When the principal is paid out, the heir's own country applies. A German-resident heir pays 25% plus a 5.5% surcharge on principal too. A UK-resident heir meets matching rules against the trust's gains. A Portuguese heir meets a 10% stamp tax on principal paid out by a trust that ends, but only on assets in Portugal (tier C). One unofficial guide (tier U) says a French heir may find a payment recast as a gift, with duty from 5% up to 60%. The next article explains how to read that table.
Who it touches
A daughter, who gets the income. Her children, who wait. The grandchildren, who may live in a third country. A trustee, who files each step, and a settlor's executor, who deals with the first.
Where in this sequence did your family's trust surprise you? Share it here. Someone else may be at step one.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Internal Revenue Code ss.2001, 2036, 2612, 2613, 2641 and 871 (A)
- IRS Publication 515 (A)
- GOV.UK inheritance tax, trusts and income tax pages (A)
- HMRC manual IHTM42001 (A)
- German Inheritance Tax Act ss.7, 15 and 19 (A)
- BFH II R 31/19 (B)
- Income Tax Act ss.104 and 159 and Canada Revenue Agency guidance (B)
- Chambers trusts guides (B)
- French General Tax Code s.792-0 bis (B)
- Portugal trust-payout guide (C)
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