Technical article
United States: 30% Held Back on Payments to a Grandchild Abroad, and How Treaties Change It
The trust pays her grandson, who lives in Spain and is not a US citizen, US$40,000 in a year.
Imagine a grandmother in Florida whose family trust holds US shares and a bank account. The trust pays her grandson, who lives in Spain and is not a US citizen, US$40,000 in a year. That is an example, not a forecast. What reaches his account?
The answer depends on what the US$40,000 is made of. The trustee looks at the kind of income and where it came from.
The 30% rule
US law taxes US-source income paid to a nonresident alien at 30%, and the payer must hold it back. A trustee is a payer. The rule covers dividends and similar income from US companies. It does not reach income earned outside the United States.
A trust that pays a foreign beneficiary must hold back on that person's share of the trust's income, if that income is of the kind that carries withholding. The share counts even when it has not yet been paid out.
What is exempt
| Kind of payment | Held back at 30%? |
|---|---|
| Dividends from US companies | Yes, unless a treaty lowers the rate |
| Bank deposit interest | No |
| Portfolio interest in registered form, with a statement that the owner is not a US person | No |
| US capital gains, if the person spent fewer than 183 days in the United States | No |
| Income earned outside the United States | Outside the 30% charge |
| Sale of US real estate by a foreign person | 15% held back, reported on Form 8288 |
Portfolio interest has exceptions, such as for a holder of 10% of a company and for interest that depends on the company's results. The grandson's bank interest and his share of gains might arrive in full. His share of the dividends would arrive after the 30%.
What a treaty does
A treaty between the United States and the heir's country may reduce the 30%. The heir claims the lower rate on Form W-8BEN. The rate differs by treaty and by kind of income. It is worth reading the treaty for your grandchild's own country.
The forms behind it
The trustee reports the withholding on Form 1042, due March 15, and on Form 1042-S for each person paid abroad. The payer is liable for tax that was not held back. Filing late costs 5% a month up to 25%, and paying late costs 0.5% a month up to 25%.
Why a grandchild matters
Grandchildren are what US law calls skip persons: people two or more generations below the person who set up the trust. A separate tax applies when a trust pays them, and it does not depend on where they live. Another article in this series covers it. The 30% here is a different charge, on the income itself.
You could
You could ask the trustee how much of the trust's income is dividends, how much is bank interest, and how much is gain. Those three amounts show how much of a payment faces the 30%. You could also look up whether the United States has a tax treaty with your grandchild's country.
Do you know which kinds of income your own trust holds? Tell us what you found. Someone planning for grandchildren abroad may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Cornell LII 26 USC 871 and 1441 (A)
- IRS Publication 515 (A)
- IRS Instructions for Form 1042 (A)
- IRS About Form 1042-S (A)
- IRS FIRPTA withholding page (A)
- Cornell LII 26 USC 663 and 2612 (A)
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