Technical article
My Heirs Live Abroad: Which Country Taxes the Trust?
A US trust that withheld 30% before paying an heir in Mexico leaves the heir to settle the rest at home.
Imagine a US settlor with a trust of US$20 million that pays out its income each year. The trust is run from the Cayman Islands. One heir lives in Mexico, one in Portugal and one in Thailand. The amounts are examples, not a forecast. If the family no longer lives where the settlor does, who taxes what the trust earns and pays out?
Three countries have a say. We take them in the order the money meets them.
| Order | Whose rules | What they do to the trust and its payments |
|---|---|---|
| 1 | The settlor's country, the United States | Gift tax at the start, withholding on payments, tax on skipping a generation |
| 2 | The place the trust is run from, Cayman | No income, gains or inheritance tax of its own |
| 3 | Each heir's country | Income tax on what the heir receives |
1. The settlor's country
The United States taxes the gift into the trust above US$15,000,000 per person in 2026, at 40%. The same US$15,000,000 is the allowance for the tax on skipping a generation, which falls on payments to grandchildren and below, wherever they live. So a payment to a grandchild in Thailand can be taxed in the United States if the allowance was not set against the trust.
A trust run outside the United States with only non-US heirs is a foreign trust. It pays US tax only on US-source income. The payer withholds 30% of US-source dividends and similar income paid to an heir who is not a US person. A treaty can lower that. Interest on bank deposits, most portfolio interest and capital gains are generally exempt. Income from outside the United States is outside this charge.
The settlor stays inside the US tax net if a US person can benefit or the settlor keeps certain powers. Heirs living abroad do not by themselves take the settlor out of it.
2. The place the trust is run from
Cayman has no income, capital gains or wealth tax, and no withholding or inheritance tax. It charges stamp duty of KYD40 to KYD100 on documents, and 7.5% on land. It shares account information with other countries under the Common Reporting Standard and a separate account-reporting deal with the United States (tier A). Other places differ. South Dakota has no state income tax, and Delaware taxes only the income a resident trust keeps.
3. Each heir's country
The heir's own country looks at what arrives, not at where it came from.
| Heir lives in | What the country does with a payment from a foreign trust | Tier |
|---|---|---|
| Mexico | Treats the foreign trust as transparent; income is counted yearly, at 10% to 35%. No inheritance or gift tax | B |
| Portugal | Investment income at a flat 28%, or 35% for a trust under a favourable regime, or at the progressive rate; 10% stamp tax on principal paid to a non-settlor at the end, but only on assets in Portugal | C |
| Thailand | Foreign income brought into Thailand from 2024 is taxed (sources differ on income earned before 2024); the top rate is 35% | B |
One payment can meet all three. A US trust that withheld 30% before paying an heir in Mexico leaves the heir to settle the rest at home. How much credit the heir's country gives for the tax already paid is the part that varies.
Who it touches
Each heir files in their own country. An heir in Portugal may also meet its reserved-share rules on the estate: two thirds is kept for a spouse and children together (tier U). A will, a trustee's records and an heir's tax return all need to agree on who received what.
If your family spans several countries, where did the surprise come from: the withholding, the heir's own tax, or the place the trust sits? Share it here. Another family may be about to face the same one.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- IRS estate and gift tax page and Internal Revenue Code ss.871, 1441 and 2631 (A)
- IRS Publication 515 (A)
- Form 1042 instructions (A)
- Cayman Islands tax guide (B)
- Cayman Tax Information Authority (A)
- Mexican tax guide, 2026 (B)
- Portugal investment income guide (C)
- Thailand tax guide (B)
- Portugal succession summary (U)
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