🇷🇺Trust Taxation: Grantor, Non-Grantor and the Russian View

The concept

Legally a trust is a simple thing: the settlor transfers property, the trustee manages it, the beneficiaries take the benefit, and a protector keeps an eye on the process. To a tax system the same structure breaks down into three questions.

The first: who is the taxpayer on the trust's income while it accumulates inside. There are four candidates — the trust itself, the settlor, the beneficiaries, none of them.

The second: what happens on distributions. A payment to a beneficiary may turn out to be their current taxable income, a return of capital, or accumulated income of earlier years with a retrospective recomputation.

The third: what the reporting regime sees. Even where no tax is due, forms and notifications remain, and the penalties for silence are sometimes more painful than the tax itself.

The United States, the United Kingdom and Russia each answer these three questions in their own way, so one and the same trust deed lives three different lives in the three systems. Hence all the difficulty of cross-border work with trusts — and all of its opportunities.

The residence of the trust itself

Ahead of those three questions sits a zeroth one: which jurisdiction treats the trust as its own. The tests do not coincide across systems, so the answer has to be assembled afresh for each.

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) closes off the workarounds: 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 breaks the control test even where every trustee is American.

A separate trap for 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. One discrepancy worth 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) knows only the date on which the settlement arose.

One and the same structure can comfortably 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 is the foundation on which any trust planning rests. The Code divides trusts into grantor and non-grantor, and everything downstream turns on that fork: who pays, when they pay and which forms they file.

Grantor trust

A grantor trust is transparent for income tax: the trust's income is treated as the settlor's and lands directly on their return (IRC §§ 671–679). The status is switched on by 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 does the work: a foreign trust with an American settlor and US beneficiaries is almost always a grantor trust.

Here transparency turns into a tool. 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 textbook manoeuvre 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 out of their own pocket — economically, an annual tax-free gift to the beneficiaries. How the manoeuvre dovetails with lifetime gifting is a topic of its own; the flip side — assets in such a trust usually lose the basis step-up on the settlor's death — is covered in upstream-basis-step-up.

Foreign non-grantor trusts and throwback

A non-grantor trust is a taxpayer in its own right. Distributions work through DNI (distributable net income): current-year income paid out to beneficiaries is “carried out” to them and taxed in their hands. Everything a foreign trust keeps inside turns into UNI (undistributed net income).

This is where the trap of decades lives — 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. The standard storyline: a trust set up in the 1990s for a family with no American connection whatsoever, then a granddaughter obtains a green card — and the entire accumulated UNI greets her at historical rates.

Discipline against throwback

Distributing all DNI every year removes the problem at the root: § 665(b) ends with the flat 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. The rate tables push in the same direction inside the United States: under Rev. Proc. 2025-32 the top rate of 37% bites on a trust at $16,000 of income ($3,851 plus 37% of the excess).

The 65-day rule works more narrowly than it is usually taken to. § 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 consumes the DNI of 2026 and stops there; twenty years of accumulation it leaves exactly where they are. 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 route is formally open through § 1.663(b)-2(a)(2) — a statement instead of a return; there is no direct IRS confirmation on the point, so the mechanism comes with a caveat.

Conversion into a domestic trust does not forgive accumulated UNI, contrary to widespread advice. § 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. Domestication achieves something else: the trust becomes an American taxpayer and pays on undistributed income in the year it arises. The fate 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 is expensive: § 684(a) turns the migration of a trust out of the United States into a sale or exchange at fair market value.

An inconspicuous provision wrecks that distribution discipline. § 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 cure is paying the trust the full market value of the use within a reasonable period. “Staying in the trust's flat for a while” is a distribution, and one capable of breaking into accumulated UNI without any decision to distribute at all.

Estate tax for a non-resident settlor

Income tax is only half of the American story. The other half is triggered by the death of an NRA settlor and runs on thresholds of its own. 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 switches on 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. A 250-fold gap.

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. The mirror-image § 20.2105-1(f) takes shares of a non-resident corporation out of the charge — the whole blocker-company construction rests on that one line. Deposits and portfolio debt, US treasuries included, come cheaper: 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.

The price of a blocker is § 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. Hence the asymmetry that creates an illusion of safety: § 2501(a)(2) exempts an NRA from gift tax on transfers of intangible property, entry into the trust is free of charge, and the estate tax on retained powers stays exactly where it was.

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 us-foreign-trusts-form-3520.

Recent news: 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. The context is telling: between 2018 and 2021 the IRS itself abated 67% of the penalties it had automatically assessed on these forms. Lateness has become less fatal; the obligation to file survives in full.

The United Kingdom: the relevant property regime

Britain looks at trusts first and foremost through the eyes of 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. Add the entry charge: 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; it is worth comparing against the genuine wealth taxes on wealth-tax-map.

For decades the lifebelt was excluded property: 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 trails behind 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 caught by the reform along with everybody else. A detailed analysis is in uk-fig-regime; the general landscape of inheritance taxes is in inheritance-tax-map.

Continental Europe: three answers to one question

The divergence between the continental models grows out of 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 bitten more narrowly than is generally assumed: 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 wealth-tax-map. 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 recent development: 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 is still sitting in BOI-PAT-IFI-20-20-30-20 § 140, in the version of 30 March 2022.

The main French trap for a Russian who has relocated lies 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.

Italian “opacity” splits into several regimes, and only one of them is dangerous. 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, switches on: 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. On top of that comes art. 45, comma 4-quater TUIR: without analytical accounting separating patrimonio from reddito, the whole sum received counts as income — a close relative 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 drops the entire burden on 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, buy nothing at all 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 built into Chapter 3.4 of the Tax Code alongside the CFC rules; the basic rules, deadlines and penalties are set out in kik, and what follows here is the trust-specific part.

The obligations come in two layers. The information layer: a Russian resident who has established such a structure, or acquired control over one, notifies the tax authority within three months (penalty RUB 50,000 per structure); a controlling person files an annual CFC notification — individuals by 30 April of the year following the reporting year (penalty RUB 500,000, and the notification is due even for a loss-making year). The tax layer: the structure's undistributed profit is attributed to the controlling person.

The founder of a foreign structure is by default treated as its controlling person. Control, in the logic of Chapter 3.4, means the right to receive or demand the structure's profit directly or indirectly, the right to dispose of that profit, a right to the property transferred to the structure, and influence over distribution decisions; for individuals, control is assessed taking into account its exercise in the interests of a spouse and minor children (art. 25.13 of the Tax Code).

The carve-out is available to a genuinely irrevocable discretionary trust. The founder ceases to be a controlling person where all of the conditions hold at once: they have no right to receive or demand the structure's profit, directly or indirectly; no right to dispose of that profit; no legal ability to recover the transferred property for themselves (irrevocability fixed in the trust documents); and no de facto control over the structure. Retaining any of these rights — or the ability to recover them in the future — restores controlling-person status. A discretionary beneficiary with no element of control bears no CFC obligations, though the distribution itself remains income subject to Russian personal income tax in the hands of a Russian resident. A practical caveat: a settlor's letter of wishes, an obliging protector with the power to replace the trustee, and correspondence along the lines of “what shall we do with the portfolio” all read to inspectors as de facto control — and the carve-out falls apart.

CRS: transparency

The era of invisible trusts ended with the first automatic exchanges of 2017–2018. CRS sees a trust from two sides. A trust that itself qualifies as a Financial Institution (a professional trustee, investment management for a fee) reports its own account holders. A trust with a bank account, classified as a passive NFE, is reported by the bank, which is obliged to identify its controlling persons.

The controlling persons of a trust are the full cast: the settlor, the trustee, the protector, the beneficiaries (discretionary ones at least in a year in which they received a distribution) and any other person exercising effective control. Account data goes to the jurisdiction of tax residence of every one of them. Discretion hides nobody any more: the settlor is reported throughout the life of the structure, whether or not any rights were retained. The mechanics of the standard and the geography of the exchanges are in crs-overview.

Risks

Popular, and it ends badly

“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 denouement: 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 never featured in the design at all. Result: zero protection, zero saving, three sets of filings.

“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 denouement: 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 has not gone anywhere either. There is exactly one cheap outcome here: a calendar of deadlines drawn up before the first distribution.

Sources

1. IRS — Instructions for Form 3520: https://www.irs.gov/instructions/i3520
2. GOV.⁠UK — Trusts and Inheritance Tax: https://www.gov.uk/guidance/trusts-and-inheritance-tax
3. Russian Tax Code, Part One, Chapter 3.4 (arts. 25.13–25.15): https://www.consultant.ru/document/cons_doc_LAW_19671/
4. OECD — Common Reporting Standard: https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/
5. Greenberg Traurig — IRS Ends Automatic Penalties for Late-Filed Forms 3520 and 3520-A (October 2024): https://www.gtlaw.com/en/insights/2024/10/irs-ends-automatic-penalties-for-latefiled-forms-3520-and-3520a
6. eCFR — 26 CFR § 301.7701-7, Trusts — domestic and foreign (court test and control test): https://www.ecfr.gov/current/title-26/section-301.7701-7
7. UK Legislation — ITA 2007, s. 476 as amended by Finance Act 2025, Sch. 9: https://www.legislation.gov.uk/ukpga/2007/3/section/476
8. HMRC — TSEM10020, Trust residence: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem10020
9. IRS — Some nonresidents with U.S. assets must file estate tax returns (Form 706-NA): https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-us-assets-must-file-estate-tax-returns
10. IRS — Rev. Proc. 2025-32 (basic exclusion amount for 2026, rate table for trusts): https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
11. IRS — Estate & gift tax treaties (international): https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international
12. HCCH — Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, status table: https://www.hcch.net/en/instruments/conventions/status-table/?cid=59
13. BOFiP — BOI-DJC-TRUST: obligations of the trust administrator (art. 1649 AB CGI): https://bofip.impots.gouv.fr/bofip/7886-PGP.html
14. BOFiP — BOI-PAT-IFI-20-20-30-20: prélèvement sui generis (art. 990 J CGI): https://bofip.impots.gouv.fr/bofip/11317-PGP.html
15. BOFiP — BOI-ENR-DMTG-30: DMTG on transfers through a trust: https://bofip.impots.gouv.fr/bofip/7855-PGP.html
16. Conseil d'État, 7 May 2026, no. 511615: https://www.conseil-etat.fr/fr/arianeweb/CE/decision/2026-05-07/511615
17. BOE — Ley 29/1987, de 18 de diciembre, del Impuesto sobre Sucesiones y Donaciones: https://www.boe.es/buscar/act.php?id=BOE-A-1987-28141

Last reviewed: August 2026