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Funding Trusts with US Situs Assets: Key Takeaways

The transfer by Non Resident Aliens (NRAs) of US situs property to revocable trusts, or trusts over which the grantor retains certain powers, exposes the US property to inclusion in the NRAs US gross estate, and US estate tax.

Criteria for US Situs Property

Property is considered to be US situs property includable in the NRA’s US gross estate under 26 US Code §2104(b), where (1) the property was transferred to a trust subject to 26 US Code §§ 2035 – 2038; and (2) the property was situated in the US at the time of transfer or death of the NRA.

Three Years Rule

§2035 governs transfers made within 3 years of death, and §§2036-2038 governs transfers subject to retained powers, but exclude transfers made for adequate consideration.

Impact of Retained Powers

The retained powers include the power to benefit from the trust, powers of appointment, powers to add or remove beneficiaries, the retention of voting rights over corporations, reversionary interests, and powers to amend, revoke or terminate the trust.

Transfers with Adequate Consideration

Therefore, transfers to a revocable trust, or a trust over which the settlor holds §§ 2036-2038 powers, would not be subject to §2104 where the transfer was made for adequate consideration.

Gifts to Irrevocable Trusts

In addition, a completed gift of US-situs property to an irrevocable trust over which the settlor retains no incidents of ownership under 2036-2038, would not trigger §2104(b) upon death.

Gift Tax Exemption for NRAs

There would also be no gift tax because NRAs are not subject to gift tax on gifts of US securities as they are intangibles.

Three-Year Rule and Trust Transfers

However, if that transfer was made within three years prior to death, §2035 could cause an inclusion under §2104(b) even if the trust is irrevocable and the settlor retains no 2036-2038 powers.

Steps to Avoid US Estate Tax Inclusion

To avoid the US estate tax inclusion of US situs property, the following steps should be observed: (1) the NRA settlor should first form the foreign company or partnership; (2) the NRA should then fund the entity with the US situs assets, in exchange for the shares of the company; and (3), the NRA should then contribute the shares of the entity to the trust.

Alternative Strategy: Liquidation 

Alternatively, the US securities could be liquidated and cash from a foreign bank account could be transferred.

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