Whether you are receiving distributions from a US trust as a beneficiary or you or your family are considering estate planning in the US; UK resident individuals carefully need to consider the impact of such events. For UK/US individuals the tools that work in the US may not necessarily be tax-efficient in the UK. It is important therefore that any US estate plan that involves UK individuals is sensitive to UK tax rules.
Why Trusts Can Be Beneficial
In simple terms leaving assets in a US Trust by US person, may mean the assets are outside the scope of UK Inheritance tax (IHT)whereas making the gifts directly to a UK domiciled beneficiary will mean the assets come into the UK IHT tax net.
Due to the fact that, currently a US person has approximately $12m ($24m between husband and wife) of lifetime allowance for estate tax purposes, there is a significant mismatch between UK and US death taxes. The UK the nil rate IHT band is £325k per individual, although the UK effectively has an unlimited gift allowance.
Structured carefully, that trust may largely avoid double exposure to US and UK tax, from which multiple generations could benefit.
Potential Issues with Trusts
There are various forms of US trust, US trusts can often be more rigid, requiring monies only to be distributed at certain ages, or otherwise assets might flow through a ‘waterfall’ of trusts upon the occurrence of various life events.
For UK tax purposes, UK individuals inheriting via certain types of US trusts may be problematic. One such example is with US living trusts. If an individual inherits assets via a living trust, then the precise wording of that trust is critical to whether the individual pays significant UK tax on their inheritance.
It is possible for living trusts to be characterised as bare trusts for UK purposes, which can avoid some of these issues. However, if that treatment is not obtained, you may be exposed to a potential UK capital gains tax of charge of up to 32 percent on undistributed gains, for example.
If you are the beneficiary of a US Trust or are about to receive an inheritance, I would advise that a review of the current structure and planning is carried out.