Is it a Good Idea to Name a Foreign Trustee?

I am often asked whether it is a good idea to name a foreign trustee.  While I understand the desire to name a foreign trustee, it is imperative to understand the potential disadvantages.

First, if you choose a foreign trustee, then upon your death this will result in your living trust being considered a “foreign trust” under the Internal Revenue Code (IRS 7701(a)(30)(E)(ii).  Additionally, these trusts will be subject to a 30% income tax withholding requirement, unless there is a tax treaty with the country of the foreign trustee.

Second, the trust will be subject to additional reporting requirements.  If these reporting requirements are not adhered to then there will be severe penalties imposed.  In order to avoid these problems, it is recommended that you name a U.S. trustee.