Technical article
United States: If the Trustee Moves Overseas or a Foreign Relative Gets a Vote
A protector who can replace the trustee holds a substantial decision.
Picture a family trust run by a US trustee. The settlor lives in Virginia. She wants a nephew in Portugal to act as protector, who could replace the trustee. Or picture a different case: the trustee, a friend of the family, retires abroad and takes the job with him. This is an example family, not a forecast. Does either change the trust's tax status in the United States?
The sources say it can, and they say how.
The rule behind it
A trust is a US trust only if two tests are both met. A US court must be able to supervise it, and US persons must control all substantial decisions, with no veto held by anyone else. The substantial decisions include paying out, choosing beneficiaries, ending the trust, removing or replacing a trustee, and investing. A protector who can replace the trustee holds a substantial decision. A trustee's move abroad matters when it changes who counts as a US person among the people with power.
When a foreign person holds one of those powers, the control test fails. The trust is a foreign trust for US tax, even if it is administered by a US bank and holds US stocks.
A window to fix it
If a death, a resignation or a move of someone with a substantial power would change the trust's status, there are 12 months to fix it. A fix could be replacing the person, or removing the power. Fixed in time, the trust keeps its earlier status. If not, the change dates from the day of the event. The tax office can extend the time for reasonable cause.
What changes for a foreign trust
| Item | What follows |
|---|---|
| Deemed transfer | A domestic trust that becomes foreign is treated as having transferred all its assets to a foreign trust just before the change |
| Sale-style tax | A transfer to a foreign trust is treated as a sale at market value, with gain recognized, unless the exception for grantor-owned trusts applies |
| Settlor as owner | If the trust has a US beneficiary, the person who put property in is treated as its owner |
| Forms | Form 3520 for the owner, payouts and transfers; Form 3520-A for the trust's annual return |
| Throwback tax | Payouts that carry income from earlier years bear an interest charge, which is not deductible |
| Penalties | The greater of US$10,000 or 35% of the amount for missing reports; the greater of US$10,000 or 5% of the trust assets treated as owned for a missing Form 3520-A |
A US beneficiary exists unless the terms bar any payment to US persons, including when the trust ends. A US heir who receives a payout carrying older income pays the interest charge. Years when the beneficiary was not a US citizen or resident are left out of the charge, so it follows the heir's status.
Notice of a reportable event is due within 90 days. Form 3520 is due on the 15th day of the fourth month after the year, with June 15 for some US citizens abroad and October 15 with an extension. Form 3520-A is due on the 15th day of the third month.
A further US$10,000 applies for each 30 days after the tax office sends notice and 90 days pass.
You could
You could write down every person with any power over the trust: trustee, protector, adviser, person who can remove a trustee. You could mark each as a US person or not, and where each lives. You could also ask what the trust document says happens if one of them moves. The test looks at what a person can decide, not at the title.
Have you given a relative abroad a place in your plan? Share how you set it up. Someone with family in several countries may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Cornell LII 26 CFR 301.7701-7 (A)
- Cornell LII 26 USC 7701, 679, 684, 668, 672 and 6677 (A)
- IRS Instructions for Form 3520 (A)
Tell us in the comments