Trust Taxation: Grantor, Non-⁠Grantor and Russian Rules

Tax classification of a trust

In a trust, the settlor transfers property, the trustee manages it, the beneficiaries take the benefit, and a protector oversees its administration. The tax treatment of the same structure involves three questions.

1. Who is the taxpayer on the trust's income while it accumulates in the trust. There are four possibilities — the trust itself, the settlor, the beneficiaries, none of them.
2. What happens on distributions. A payment to a beneficiary may be classified as their current taxable income, a return of capital, or accumulated income of earlier years with a retrospective recomputation.
3. What information must be reported. Even where no tax is due, forms and notifications remain, and penalties for non-compliance are sometimes more burdensome than the tax itself.

The United States, the United Kingdom and Russia differ in the taxpayer, distribution treatment and reporting obligations arising under the same trust deed. These differences determine the complexity and opportunities of cross-border trust planning.

Tax obligations on trust income can arise for the settlor as grantor or controlling person, or for the beneficiary on distribution. CRS identifies reportable persons.

The residence of the trust itself

The trust's tax residence must be determined first. The tests differ across systems, so residence is assessed separately under each jurisdiction's rules.

The United States applies two tests at once (IRC § 7701(a)(30)(E), Treas. Reg. § 301.7701-7). The court test: a US court is able to exercise primary supervision over the administration of the trust. The control test: US persons control all substantial decisions, control being defined as the power to make every one of them, “with no other person having the power to veto any of the substantial decisions”. Failing either test makes the trust foreign. The list of substantial decisions in § 301.7701-7(d)(1)(ii) includes: distributions, the choice of beneficiary, termination of the trust, investment decisions and — items (H) and (I) — the removal of a trustee and the appointment of a successor. A non-resident protector with the power to replace trustees causes the control test to fail even where every trustee is American.

A separate restriction applies to asset-protection structures: § 301.7701-7(c)(4)(ii) treats the court test as failed if the trust deed provides for the trust to migrate should a US court attempt to assert jurisdiction over it. The standard flee clause in Cook Islands and Nevis templates turns an American trust into a foreign one automatically. The exception is narrow: migration is permitted in the event of a “foreign invasion of the United States or widespread confiscation or nationalization of property”.

Britain looks at the composition of the trustee body. ITA 2007 s. 474(1) treats the trustees as a single person; s. 475(4) sets out condition A — every trustee is UK resident; s. 475(5) sets out condition B — a mixed body plus a settlor who meets condition C in s. 476. Finance Act 2025 (Sch. 9 para. 11) struck the words “or domiciled in the United Kingdom” out of s. 476(2)(b) and (3)(b) with effect from 2025-26, while the transitional s. 476(3ZA) preserved domicile for settlements created before 6 April 2025; TCGA 1992 s. 69(2CA) does the same for CGT. A discrepancy between HMRC guidance and the statute requires checking with a British adviser: in TSEM10020 HMRC applies the new version of the test to older trusts as well where property was added after 6 April 2025, whereas the text of s. 476(3ZA) refers only to the date on which the settlement arose.

The same structure can be foreign for American purposes and UK resident for British purposes at the same time.

The United States: grantor versus non-⁠grantor

The American classification underpins any trust planning. The Code divides trusts into grantor and non-grantor; this classification determines the taxpayer, the time of payment and the forms to be filed.

Grantor trust

A grantor trust is transparent for income tax: the trust's income is treated as the settlor's and is included in their return (IRC §§ 671–679). The status arises from retained powers — the ability to revoke the trust, to change beneficiaries, to enjoy the income, to borrow assets without adequate security. For foreign trusts § 679 applies: a foreign trust with an American settlor and US beneficiaries is almost always a grantor trust.

Tax transparency is used in planning with an IDGT. An IDGT (intentionally defective grantor trust) is “defective” on purpose: transparent for income tax, while the property transferred into it is already out of the future taxable estate for estate tax. The standard transaction is the sale of an appreciating asset to the trust in exchange for a promissory note. Since trust and settlor are one person for income tax, the sale produces no taxable gain (Rev. Rul. 85-13). The asset then grows outside the estate, the note is gradually paid down, and the settlor pays the tax on the trust's income from their own funds — economically, an annual tax-free gift to the beneficiaries. The combination of this transaction with lifetime gifting is discussed separately; the consequence — assets in such a trust usually lose the basis step-up on the settlor's death — is covered in the article on basis step-up.

Foreign non-⁠grantor trusts and throwback

A non-grantor trust is a taxpayer in its own right. Distributions are accounted for through DNI (distributable net income): current-year income paid out to beneficiaries is “carried out” to them and taxed in their hands. Income retained by a foreign trust becomes UNI (undistributed net income).

Long-term accumulation of income engages the throwback rules (IRC §§ 665–668). When a foreign non-grantor trust distributes more than current DNI to a US beneficiary, the excess is an accumulation distribution out of UNI. That income is recomputed at the rates of the years in which the trust earned it, taxed in full as ordinary income (the preferential character of capital gain disappears) and accrues an interest charge for every year of accumulation. After twenty or thirty years of accumulation, tax plus interest can swallow most of the payment. A typical example: a trust set up in the 1990s for a family with no American connection whatsoever, then a granddaughter obtains a green card — and historical rates apply to the entire accumulated UNI.

Preventing accumulation of UNI

Distributing all DNI every year prevents UNI from accumulating: § 665(b) ends with the express rule that “there shall be no accumulation distribution for such year” where the year's distributions did not exceed the year's income. No UNI arises and there is nothing to recompute. US rate tables also encourage annual distributions: under Rev. Proc. 2025-32 the top rate of 37% applies to a trust at $16,000 of income ($3,851 plus 37% of the excess).

The 65-day rule has a limited scope. § 663(b) allows a distribution made in the first 65 days of a year to be treated as made on 31 December of the previous one, but Treas. Reg. § 1.663(b)-1(a)(2)(i) sets a ceiling: the income or DNI of the year for which the election is made, less distributions already made in that year. A February 2027 payment is accounted for within the DNI of 2026; it does not eliminate twenty years of accumulated income. The election is made afresh each year and becomes irrevocable after the filing deadline. For a foreign non-grantor trust with no American filing obligations the option is formally available under § 1.663(b)-2(a)(2) — a statement instead of a return; there is no direct IRS confirmation on the point, so the mechanism remains subject to that caveat.

Conversion into a domestic trust does not remove the consequences of accumulated UNI. § 665(c)(2)(A) excludes from the qualified trust category “a foreign trust (or, except as provided in regulations, a domestic trust which at any time was a foreign trust)” — the § 665(c)(1) exemption is unavailable to a formerly foreign trust, and Treasury has issued no regulations under that proviso. On domestication, the trust becomes an American taxpayer and pays on undistributed income in the year it arises. The application of the interest charge after the move remains an open question: § 667(a)(3) says “in the case of a foreign trust” without saying at what date status is tested. The reverse move has tax consequences: § 684(a) turns the migration of a trust out of the United States into a sale or exchange at fair market value.

Loans and use of property also affect the treatment of distributions. § 643(i) treats as a distribution any loan of cash or marketable securities from the trust, and the use of any other trust property, by a US beneficiary or by a US person related to them; the trust ceases to be a simple trust (§ 643(i)(2)(D)), and any subsequent repayment of the loan or return of the property is disregarded for all purposes of the Code (§ 643(i)(3)). The exception applies on paying the trust the full market value of the use within a reasonable period. Living in a trust-owned flat is a distribution capable of affecting accumulated UNI without a decision to distribute.

Estate tax for a non-⁠resident settlor

In addition to income tax, estate tax arises on the death of an NRA settlor, with separate thresholds. Form 706-NA is due where the market value of US-situs assets at the date of death exceeds $60,000. The figure derives from § 2102(b)(1): the fixed credit of $13,000 exactly cancels the tax on the first $60,000 under the § 2001(c) table (“Over $60,000 but not over $80,000 — $13,000, plus 26 percent”). The 40% rate applies above $1,000,000 ($345,800 plus 40% of the excess); between $60,000 and $1,000,000 the steps run from 26 to 39%. The $13,000 credit is written into the Code itself and has never been indexed, whereas the basic exclusion amount for an American in 2026 under Rev. Proc. 2025-32 is $15,000,000. The thresholds differ by a factor of 250.

The United States has concluded estate tax treaties with fifteen countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland and the United Kingdom. Russia, the UAE, Cyprus, Israel and the CIS states are not on that list, so the proportionate credit under § 2102(b)(3)(A) is unavailable to a Russian family.

Situs is determined by the issuer's place of incorporation. § 2104(a): shares are American property “only if issued by a domestic corporation”, and Treas. Reg. § 20.2104-1(a)(5) adds “irrespective of the location of the certificates”. A Swiss bank and a Singapore custodian do not change situs: an Apple share held by a Jersey trustee remains American property. In turn, § 20.2105-1(f) takes shares of a non-resident corporation out of the charge — that provision underpins the blocker-company structure. Deposits and portfolio debt, US treasuries included, carry a lower tax burden: they are outside situs under § 2105(b)(1) and (3), while an Irish UCITS ETF tracking the S&P 500 works as a ready-made blocker without incorporating anything.

A blocker's tax cost follows from § 881(a): a BVI or Cayman company has no treaty with the United States, so dividends on American shares are taxed at 30% at source against the 10–15% an individual would enjoy under a treaty. A blocker also leaves § 2104(b) in force: property transferred “within the meaning of sections 2035 to 2038” is treated as situated in the United States if it was there at the time of the transfer or at the date of death, so a revocable trust and powers retained under §§ 2036–2038 pull the American securities back into the gross estate. This creates an asymmetry that gives a mistaken impression of protection: § 2501(a)(2) exempts an NRA from gift tax on transfers of intangible property, the transfer into trust is exempt from that tax, while estate tax on retained powers remains.

Tax on the recipient of gifts and bequests from a covered expatriate

The third form of US taxation depends neither on the residence of the trust nor on the grantor / non-grantor divide. § 2801 shifts the transfer tax from the transferor to the recipient: the person who receives a gift or bequest from a covered expatriate pays it. The class of taxpayers is drawn by the gift and estate tax definition of residence, which turns on domicile; the income tax residence test does not apply here. Alongside individuals, the category of U.S. recipient expressly takes in a domestic trust and an electing foreign trust.

A covered gift and a covered bequest are property acquired on or after 17 June 2008, directly or indirectly, from a covered expatriate, regardless of where the property is situated and of whether the expatriate acquired it before or after expatriation. The tax is the net covered gifts and bequests of the calendar year multiplied by 40%; net means the total less the section 2801(c) amount, which equals the annual exclusion for gifts under § 2503(b) — $19,000 for 2025 and 2026, subject to annual inflation adjustment. Foreign gift and estate taxes paid on the same property reduce the result.

A non-electing foreign trust pays nothing itself: the tax is payable by the US recipient of a distribution to the extent the distribution is attributable to covered gifts and covered bequests received by the trust, computed through the section 2801 ratio.

A foreign trust may elect to be an electing foreign trust, treated as domestic solely for § 2801 purposes; the trust then becomes the taxpayer and its US distributees are relieved of liability. The price of the election is set out in the instructions: tax on all covered gifts and covered bequests received in the first year of the election, plus tax on the portion of the trust attributable to those received before it (the section 2801 ratio multiplied by the fair market value of the trust on 31 December of the immediately preceding calendar year); designation of a US agent on Form 2848; a copy of the governing instrument attached; every permissible distributee named and notified.

The election takes effect on 1 January of the applicable calendar year and continues automatically, but a failure to file or pay on time terminates it retroactively to 1 January of that year, and the liability returns to the distributees.

A separate case is the migrated foreign trust: a foreign trust that has become domestic reports covered gifts and covered bequests received in the applicable calendar year and in every previous year as well.

Three dates must be distinguished in applying these rules. The final regulations TD 10027 were published and took effect on 14 January 2025 (90 FR 3376). The substantive rules cover receipts from 17 June 2008 — nearly two decades of receipts. Reporting has a separate timetable: Form 708 is an annual return due on the 15th day of the eighteenth month following the close of the calendar year, so the first return, for the 2025 calendar year, is due on or before 15 June 2027 (Instructions for Form 708 (12-2025)).

Reporting: Form 3520 / 3520-⁠A

A US person who has created a foreign trust, transferred property to it or received a distribution files Form 3520; the American owner of a foreign grantor trust is additionally answerable for Form 3520-A. Penalties under § 6677 are tied to amounts: up to 35% of the gross value of the property transferred or received; for 3520-A, the greater of $10,000 and 5% of the gross value of that portion of the trust's assets attributed to the US owner; for large gifts from foreign persons, up to 25%. A step-by-step walk-through of the forms and deadlines is in the guide to foreign-trust Form 3520 reporting.

Since October 2024 the IRS has stopped assessing penalties automatically for late-filed 3520 and 3520-A. A reasonable cause statement attached to the filing is now considered before any penalty is issued. Between 2018 and 2021 the IRS itself abated 67% of the penalties it had automatically assessed on these forms. The consequences of late filing have eased; the filing obligation remains in full. The December 2025 revision of the Form 3520 instructions carries a single substantive change — new guidance under § 2801, a reference to a tax not collected through this form.

The United Kingdom: the relevant property regime

In Britain, trust taxation is primarily associated with inheritance tax. Most trusts — discretionary ones almost always — fall into the relevant property regime: up to 6% of the value of the trust fund above the nil-rate band every ten years (the ten-year anniversary charge), plus exit charges when property leaves between anniversaries, pro-rated by completed quarters. An entry charge also applies: a lifetime transfer into trust above the nil-rate band is a chargeable lifetime transfer at 20%. Six per cent a decade works as a capital tax paid by instalments; a comparison with wealth taxes is provided in the overview of wealth taxes.

For decades protection came from excluded property status: non-UK assets settled by a non-dom settlor before acquiring deemed domicile stayed outside IHT for ever. On 6 April 2025 that permanent protection disappeared. The FIG reform replaced domicile with a long-term residence test: a settlor who has been UK resident for 10 of the last 20 tax years is a long-term resident, and for as long as the status holds, the non-UK assets of their trusts sit inside the relevant property regime. The test is dynamic: excluded property status is examined at the date of each IHT event, and after departure the status continues for anything from three to ten years depending on the length of residence. Trusts of the “old non-doms”, built for the previous rules, were also brought within the reform. A detailed analysis is in the article on the UK FIG regime; a broader comparison is in the inheritance-tax overview.

The cap on charges and the disapplied exemptions

Finance Act 2026 (2026 c. 11, Royal Assent 18 March 2026) introduced two changes.

The first change is a cap. New IHTA 1984 s. 75B limits the tax charged under s. 64 and s. 65 by reference to the value of property that became comprised in the settlement before 30 October 2024, was excluded property by virtue of s. 48(3) or (3A) as it had effect at that time immediately before that date, and immediately before the occasion of the charge is either situated outside the United Kingdom and not property to which paragraph 2 or 3 of Schedule A1 applies, or is a holding in an authorised unit trust or a share in an open-ended investment company.

The applicable cap for the first relevant period — from 6 April 2025 to the first ten-year anniversary falling after that date — is £125,000 multiplied by the number of whole successive quarters in the period; for each subsequent ten-year period it is £5 million. The amendment is treated as having come into force on 6 April 2025 (FA 2026 s. 74).

The second change increases the burden on a settlor who has already left. s. 73 inserted s. 65(8B)–(8C) into IHTA: the exemptions from exit charges in ss. 65(7), (7A) and (8) do not apply where a “long-term residence change” occurred before the relevant occasion, did not itself give rise to an exit charge, and would have done had the property been situated outside the United Kingdom. Under the definition in (8C), the settlor was not a long-term UK resident at the start of the tax year 2025-26, or ceased to be a long-term UK resident at the start of any later tax year. In force from 26 November 2025 (FA 2026 s. 73). Taken together, the two provisions mean that the cap lowers the running cost of old offshore trusts, while the disapplied exemptions raise the price of taking property out of them once the settlor has gone.

Income tax and CGT protections were not dismantled wholesale. FA 2026 s. 44 amended s. 643C ITTOIA 2005 (available protected income) and s. 733 ITA 2007 (the benefits charge) and introduced transitional protection — new paragraph 70A of Schedule 12 to FA 2025: where untaxed benefits exceeded available protected income for the tax year 2024-25, benefits from 2024-25 or earlier years are disregarded in computing untaxed benefits from 2025-26 onwards. The amendments in subsections (2)–(4) are treated as having come into force on 6 April 2025; those in subsection (1) take effect from 6 April 2026 (FA 2026 s. 44).

Agricultural and business property relief inside a trust

From 6 April 2026 agricultural property relief and business property relief are no longer 100% by default: the base rate of both reliefs is now 50% (IHTA ss. 104(1), 116(1) as amended by Schedule 12), and 100% remains available only within an allowance. For charges under s. 64 and s. 65 a separate figure applies — the 100% trust relief allowance (new ss. 124G–124I).

Its size turns on when the settlement commenced. A settlement that commenced before 30 October 2024 and meets the condition in s. 124I(2) is a qualifying pre-commencement settlement, and its trust maximum allowance is the full £2.5 million, separately from the other trusts of the same settlor.

For settlements commencing on or after 30 October 2024 the allowance accrues transfer by transfer: the settlement acquires a transferred allowance amount on each chargeable transfer of qualifying relievable property into it, and every acquisition is capped at £2.5 million less the sum of transferred allowance amounts previously acquired “by the relevant settlement, or any other settlement made by the settlor of the relevant settlement” (s. 124H(4)).

One settlor who spreads assets across five new trusts shares a single allowance between them; five trusts established before 30 October 2024 carry five full allowances. The rules apply to transfers of value made, and charges arising, on or after 6 April 2026, though for the purpose of determining the trust maximum allowance s. 124H is treated as having come into force on 30 October 2024 (FA 2026 Sch. 12).

Continental Europe: three answers to one question

The divergence between the continental models arises from the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. Italy ratified it and the convention has been in force there since 1 January 1992; France signed it and never ratified; Spain is not a party at all. Hence three different constructions.

Since the 2018 reform the French prélèvement has had a limited tax base: the base under art. 990 J is the “actifs mentionnés à l'article 965 du CGI”, that is, real estate and the real-estate element of shareholdings. A securities portfolio held in trust falls outside it altogether. The rate equals the top band of the IFI scale — 1.5% on the portion above €10,000,000 (art. 977 CGI); the scale itself is set out in the overview of wealth taxes. BOFiP states expressly that the prélèvement “n'est pas couvert par les stipulations des conventions fiscales”: a tax treaty is no protection against it. A change in case law: by decision no. 511615 of 7 May 2026 the Conseil d'État annulled the doctrine that individual pension plans remain within the scope of 990 J; as at 9 August 2026 the annulled sentence remains in BOI-PAT-IFI-20-20-30-20 § 140, in the version of 30 March 2022.

The principal French tax restriction for a settlor who has relocated is set out in art. 792-0 bis, II, 3 CGI: a trust created after 11 May 2011 by a constituant who was a French tax resident at the moment of its establishment is taxed at 60% when property leaves it, regardless of kinship. The settlor's own children are charged at the same rate as strangers. The same rate applies where the trust is administered from a non-cooperative state or territory (ETNC) within the meaning of art. 238-0 A CGI.

The loi de finances pour 2026 (LOI no. 2026-103 of 19 February 2026, published in the JO on 20 February; the Conseil constitutionnel held articles 7 and 8 constitutional in decision 2026-901 DC) added two developments that reach trusts directly.

The first is article 7, which restored section X and created art. 235 ter C CGI: a 20% tax on the assets of holding companies that are not allocated to an operating business. The conditions are cumulative and tested at the close of the accounting period for which the tax is due: the market value of all the assets held by the company is €5 million or more; at least one individual holds 50% or more of the voting or financial rights, or in fact exercises the power of decision; and passive income exceeds 50% of the combined operating and financial income of the period.

The base is a closed list — assets used for hunting and for fishing, vehicles not allocated to a business and véhicules de tourisme, yachts, pleasure craft and aircraft, jewellery and precious metals, racehorses and competition horses, wines and spirits, and dwellings the individual reserves for their own enjoyment. Securities and cash are not on the list. The tax is due for accounting periods ending on or after 31 December 2026.

That article contains a specific provision on ownership through a trust. The condition of holding by an individual is presumed satisfied where all or part of the voting or financial rights are held, directly or indirectly, by a trust within the meaning of art. 792-0 bis CGI or by a legal entity established in an ETNC under art. 238-0 A (art. 235 ter C, I, B, 1; the same construction is repeated for the control test in II, B). The presumption is rebuttable, but the statute expressly limits the evidence: the proof “ne pouvant toutefois résulter uniquement du caractère irrévocable du trust ou du pouvoir discrétionnaire de gestion de son administrateur”. Irrevocability and the administrator’s discretionary powers, standing alone, do not rebut the presumption.

The second development is article 8, which tightened the Pacte Dutreil. The individual undertaking in art. 787 B, c is extended from four years to six, so that together with the two-year collective undertaking the minimum horizon rises from six years to eight; the same substitution is made in art. 787 C, b for sole traders.

The 75% exemption no longer covers the fraction of the value of the shares attributable to assets that the company has not used exclusively in an industrial, commercial, artisanal, agricultural or professional activity for at least three years before the transfer (or since their acquisition) and until the end of the undertaking: hunting and fishing assets, véhicules de tourisme, yachts, pleasure craft and aircraft, jewellery, precious metals, works of art, collectors’ items and antiques, racehorses and competition horses, wines and spirits, dwellings and residences.

The exclusion also applies to the same assets held by controlled subsidiaries. Article 8 carries no commencement provision of its own, so the general rule applies to transfers made from 21 February 2026, the day after publication in the JO (the final text of articles 7 and 8).

Italian “opacity” encompasses several regimes, only one of which creates a tax risk. A foreign opaque trust in a non-privileged jurisdiction pays Italian tax on Italian-source income only, and payments to an Italian resident pass through untaxed. From a privileged jurisdiction, art. 44, comma 1, lett. g-sexies) TUIR, introduced by D.L. 124/2019, applies: payments are taxed as redditi di capitale on a cash basis, even where the recipient is not a beneficiario individuato. The privileged-regime threshold in art. 47-bis is a nominal burden below 50% of the Italian one; for a trust holding a portfolio in Jersey or the Cayman Islands that is met automatically. An additional rule is art. 45, comma 4-quater TUIR: without analytical accounting separating patrimonio from reddito, the whole sum received counts as income — an analogue of the American default calculation on Schedule A of Form 3520.

Spanish transparency offers no protection. It removes the intermediate events — settlement into trust, accumulation — and concentrates the entire tax burden at a single moment, the settlor's death, treated as a direct transfer from the deceased to the beneficiaries. A Spanish resident pays ISD on worldwide property, “con independencia de dónde se encuentren situados los bienes” (Ley 29/1987, art. 6.1); a non-resident pays on Spanish property (art. 7). Irrevocability and discretion, which work as a carve-out in Russia and as protection in Britain, provide no protection in Spain.

Russia: a trust is a foreign structure without a legal entity

The Russian Tax Code contains no word for “trust”. What it has is the foreign structure without formation of a legal entity (ISBOYuL) — a category that captures trusts, foundations, partnerships and unincorporated associations. The regime is set out in Chapter 3.4 of the Tax Code alongside the CFC rules; the basic rules, deadlines and penalties are set out in the article on CFC rules.

The founder of a foreign structure is by default treated as its controlling person, and the only real exit is a genuinely irrevocable discretionary trust: no right to the profit, no power to dispose of it, no ability to recover the property and no de facto control — a settlor’s letter of wishes or a protector following the settlor's instructions is read by inspectors as control and prevents the carve-out from applying. A discretionary beneficiary with no element of control bears no CFC obligations, though distributions to a Russian resident remain subject to personal income tax. The detailed rules for a Russian resident — notifications, penalties, CFC profit, distribution classification and the fixed-profit election — are set out in Trusts and CFC Rules.

CRS: transparency

CRS first requires classification of the trust as a Financial Institution or NFE: a bank account alone does not make it a passive NFE. A Reporting Financial Institution reports reportable financial accounts; for a passive NFE the bank identifies controlling persons and their reportable status. Non-reporting FI rules and the exchange relationships in force also matter. OECD CRS handbook §§235–268

A trust’s controlling persons include the settlor, trustee, protector, beneficiaries and other natural persons exercising ultimate effective control. Identification does not automatically mean transmission to every country: reportable status, tax residence and the applicable exchange relationship must be checked. For discretionary beneficiaries of a passive NFE, jurisdictions may opt for reporting only in a distribution year; this is not a universal rule for every trust. OECD CRS handbook §§235–268 The operation of the standard and the exchange participants are in the article on automatic exchange.

Settlor control and tax classification

The reforms of 2025 and 2026 shifted the burden of proof, and France was the first to enact that shift. Holding shares through a trust creates a presumption of control by an individual for the purposes of art. 235 ter C, and the statute forbids rebutting it by pointing to the irrevocability of the trust and the discretionary powers of its administrator. The argument that has been standard for a decade is no longer sufficient on its own in France; in Italy the presunzione of a trust interposto arrives at the same place, and in Russia de facto instructions to the trustee prevent the Chapter 3.4 carve-out from applying.

Loans in place of distributions are assessed in the same way in three systems. § 643(i) treats a loan of cash or marketable securities, and the use of any other trust property, as a distribution. In Britain the benefits charge under s. 732 ITA 2007 has an analogous function, and FA 2026 brought s. 732 income within the scope of the TRF — the legislator recognising that value leaves a trust otherwise than through formal payments; s. 44 of the same Act adjusted s. 643C ITTOIA 2005 and s. 733 ITA 2007. A Russian inspector sees in the same facts a right to dispose of the profit of the structure.

A real distribution — a dated trustee decision with reasons, a transfer from the trust account to the beneficiary’s own account without intermediate payments made on their behalf, and the amount declared on the beneficiary’s return — remains the one act that demonstrates the trust operating in accordance with its purpose. To it has been added a regular review of the structure itself: in two years Britain replaced domicile with the long-term residence test, introduced the s. 75B cap and a divisible allowance for trusts commencing on or after 30 October 2024, the United States brought into operation § 2801, and France enacted art. 235 ter C. A trust designed against the thresholds of 2024 is now assessed against different ones.

Risks

Common errors

“A revocable trust for asset protection”. The client wants a trust with the right to take everything back: “protection from creditors plus full control”. The tax and legal consequences: for the IRS this is a textbook grantor trust and all the income stays on the settlor's return; for creditors the retained power of revocation means the property is within reach, and a transfer made on the eve of a claim is unwound by the court as a fraudulent conveyance; for a Russian settlor it is a foreign structure carrying the full set of CFC obligations — irrevocability was not part of the structure. Protection and tax savings are absent, while three sets of filings are required.

“A distribution from grandmother's trust without a 3520”. A US beneficiary receives $400,000 from a family trust in Jersey and learns about Form 3520 two years later, from an IRS letter. The consequences: a penalty of 25–35% of the distribution plus years of correspondence with the service centre. Since October 2024 the odds on reasonable cause have improved — the statement is considered before the penalty is assessed; a strategy cannot be built on that, and the throwback recomputation of accumulated UNI also remains. The only low-cost option is a calendar of deadlines drawn up before the first distribution.

Tax treatment in the country of residence

A family with a settlor in Geneva, a trustee in Jersey and children in Lisbon, Milan and Tel Aviv needs a comparative calculation: the cost of the structure is the sum of the tax burdens, rather than the largest individual burden. Thirteen residence jurisdictions are compared on five criteria: how the system classifies the trust, what happens when property goes in, what happens when it comes out, whether income is attributed to the settlor while nothing comes out at all, and what has to be filed.

The tax regimes fall into three groups. The first group attributes income to the settlor while nothing is distributed at all: the United States through the grantor-trust code, the United Kingdom where the settlement is settlor-interested, Germany under § 15 AStG, Switzerland where the settlor was resident at the moment of settlement, Russia through the controlling-person test. The second does not account for the structure until funds move — an Italian opaque trust in a non-privileged jurisdiction, Portugal, a qualifying Israeli relatives trust under the 30% distributed foreign-income regime — making distribution timing one planning factor. ITO §§75F, 75H1. The third does not treat the trust separately and taxes the underlying transfer: Spain on the settlor's death, France on the way out. For Cyprus, Singapore and the UAE, the trust's location alone does not establish a zero result: income type, participant status and the particular regime must be checked.

The material tax asymmetry concerns the taxable event rather than the rate. Germany taxes settlement into trust, Italy taxes distributions, and Spain applies tax on the settlor's death. A settlement made by a German resident and distributed to an Italian beneficiary is taxed on both settlement and distribution, and no treaty credit arises, because a gift under § 7 ErbStG and a transfer under art. 4-bis TUS are not the same taxable event for anyone's treaty. The same trust deed therefore has a different price depending on which branch of the family receives from it, and a trustee resolution cannot eliminate those differences.

A zero-tax residence is not the same thing as zero attribution. The trust's location alone does not establish a zero charge. Singapore generally taxes trustee income at 17%, with beneficiary assessment and exemptions where their conditions are met; the UAE and Cyprus likewise require the relevant regime to be identified. Reporting can also survive: CRS reporting depends on the trust's classification, the reportable accounts and persons, domestic implementation and an applicable exchange relationship; it is not an automatic report about every beneficiary to every country of residence. Continuing obligations to the former country are assessed separately — long-term residence for British IHT, citizenship for the United States. Recognition of a trust in the civil law of the place where the assets and heirs are located is discussed in Recognition of Foreign Trusts, while the choice of the trust jurisdiction itself is discussed in Trust Jurisdictions. (Sources: OECD: CRS handbook; OECD: CRS FAQ; IRAS: trust income).

Family members' residences and planning constraints

A single distribution policy does not account for differences in the recipients' tax regimes. An irrevocable discretionary trust in Jersey holds a portfolio of €12,000,000; the trustee resolves to pay €300,000 to each of three children. The child in Lisbon receives investment income under art. 5 (2) (t) CIRS: €84,000 at 28%, or €105,000 if the trustee's jurisdiction is on the Portuguese list. The child in Milan takes the payment under art. 44, c. 1, g-sexies TUIR as capital income, and without analytical accounts separating patrimonio from reddito art. 45, c. 4-quater treats the whole €300,000 as income rather than part return of capital. For the Tel Aviv branch, 30% applies to distributed foreign-source income only if the relatives-trust conditions are met; the trustee may instead make a timely irrevocable election for annual 25% on foreign-source income designated for Israeli beneficiaries. Capital returns and exemptions require separate checks. ITO §§75F, 75H1. The same deed, resolution and payment amount result in three rates; the Israeli alternative depends on trust qualification and a valid election.