Technical article
The Same US$20 Million Trust Run from Home or from Cayman: What Changes and What Does Not
Income paid to a grandchild who is not a US person meets 30% withholding on US-source dividends and similar income, in either version.
Picture a US settlor with US$20 million in a trust that pays out its income each year. The heirs are grandchildren who are not US persons. The amount is an example. One version of the trust is run from a US state. The other is run from the Cayman Islands. Does moving the trust offshore change the tax on income paid to the grandchildren?
For this settlor, mostly no.
What stays the same
Income paid to a grandchild who is not a US person meets 30% withholding on US-source dividends and similar income, in either version. A treaty with the grandchild's country may lower it. Interest on bank deposits and most capital gains are generally exempt. Income from outside the United States is outside this charge in both versions.
The tax on skipping a generation is the same too. It is 40% on payments to grandchildren above the US$15,000,000 allowance, wherever the trust sits and wherever they live. Cayman adds no income tax, no withholding and no inheritance tax of its own (tier B).
What changes
| Run from a US state | Run from Cayman | |
|---|---|---|
| Yearly returns | Form 1041, a statement for each heir, Forms 1042 and 1042-S for payments abroad | Those that apply, plus Form 3520 and Form 3520-A |
| Penalty for a missed or late foreign-trust form | These forms do not apply | The greater of US$10,000 or 35% of the amount reported (the greater of US$10,000 or 5% of the trust assets treated as owned, for Form 3520-A) |
| Income kept in the trust | Taxed to the trust, up to 37% plus 3.8% | US stock gains generally not taxed; US real estate sales have 15% withheld |
| Government charges | A state fee only if a family trust company is used | No government fee is listed; one trustee's 2014 schedule shows US$610 a year in registration costs (tier C) |
| Trustee minimum | About US$5,500 to US$7,500 a year at one South Dakota trustee (tier C) | US$5,000 a year up to US$10 million at one Cayman trustee, negotiable above (tier C, schedule dated 2014) |
A US adviser who prepares foreign-trust returns charges US$2,000 to US$3,000 a year, according to one law firm (tier C). A domestic trust files only the standard US trust returns.
One more point sits outside the table. Turning a domestic trust into a foreign one counts as a transfer, treated like a sale at market value.
For a UK settlor
The answer is different. A UK-run discretionary trust pays 45% on income, and 39.35% on dividends, even when it pays the income out. The first GBP 500 is free. The 45% already paid goes to the heir as a credit, which an heir outside the UK may not be able to use.
For a trust created from 6 April 2025, having no UK trustee makes it non-UK resident. Its foreign income is outside UK tax. Jersey usually does not tax a trust when no beneficiary lives there (tier B). Then three things still apply.
- A settlor, or a spouse, who can benefit is taxed on the trust income as it arises.
- Foreign assets stay outside UK inheritance tax only while the settlor is not a long-term UK resident, meaning resident for 10 of the last 20 years. The charge at each ten-year anniversary, up to 6% above the GBP 325,000 allowance, stays while the settlor is one.
- If UK trustees are replaced so the trust becomes non-UK resident, the trustees are treated as selling every asset at market value, with capital gains tax at 24%.
Jersey fees run from GBP 4,250 a year for a sole corporate trustee, GBP 5,125 to set up and GBP 4,615 to leave (tier C).
Who it touches
Grandchildren abroad, who may meet withholding. The trustee, who files. The settlor's own tax preparer, who handles the extra forms. A UK settlor's spouse, who counts if they can benefit.
If your family has a trust run from one place and heirs in another, which part cost you the most time, the filings or the fees? Share it here. It may help the next family.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Internal Revenue Code ss.871, 1441, 679, 684, 668 and 6677 (A)
- IRS Forms 3520, 3520-A and FinCEN Form 114 pages (A)
- Cayman tax guide (B)
- Trident Trust Cayman fee schedule (C)
- JTC South Dakota Trust Company fees (C), law-firm fee note on foreign-trust tax preparers (C)
- GOV.UK trust income tax and capital gains rates (A)
- HMRC guidance on trust residence (A)
- HMRC manual IHTM47001 (A)
- Jersey tax guidance and Concession M1 (B)
- Stonehage Fleming Jersey fee schedule 2026 (C)
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