There are several solutions to this potential problem that can improve the potential UK tax position:
- The grantor may be happy to revoke the living trust in favour of direct ownership of their assets. Instead, they would leave their wealth directly to their family under a will. However, this usually means accepting that the estate will pass through the US probate process. Even if the cost and complexity of that process would be outweighed by the UK tax consequences in the alternative, the perception is often that this plan is simply unviable to many Americans.
- While the grantor is alive, they often retain the ability to amend the trust provisions. Amending the least favourable provisions is frequently a balanced way to mitigate the risk of unfavourable UK tax treatment without affecting the US planning.
- If the grantor has just died, consider winding up the trust in favour of the US and UK heirs at the same time, so as to minimise any potential UK capital gains tax.
- If a UK beneficiary is about to return to the US, consider deferring the distribution until they have left the UK. However, watch for potential UK tax if the individual returns to the UK too quickly. The same guidance can work in reverse for a US beneficiary about to arrive in the UK.
UK inheritance tax protection
Drafted correctly and depending on the level of wealth, a US parent leaving a trust for the benefit of the UK family can still be highly UK tax efficient, particularly if the parent can use their very generous US federal estate tax exemption – currently around $13mn (£10.3mn) per person – significant wealth can be placed perpetually outside the scope of UK inheritance tax and similarly outside the US estate tax net.
Whether it would be preferable for the grantor to create this trust during their lifetime or on their death under their will depends on the circumstances.
Contrast this to a direct inheritance of $13mn received by the UK child, which may then suffer UK inheritance tax on the child’s later death at 40 per cent on assets above their UK allowance of only £325,000 per person.
Thus, the well-advised US parent may save their UK family say $5.2mn in future inheritance tax, or $10.4mn for wealthy US spouses.
Trustee residency
Where there is a US trust, whether a living trust or not, the family must take care over the trustees’ tax residency status.
Trustee residency has a significant impact on when US or UK tax falls due, and on whose shoulders (the grantor, the trustees and/or a recipient beneficiary) that tax burden falls.
