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Citizenship of Beneficiaries and Trustees in DC Estate Planning

The naming of beneficiaries and trustees is a crucial step in the creation of a trust for estate planning purposes. The beneficiary is the person for whose benefit the trust is created, and so the choice of beneficiary is essential to the creation of the trust. This decision, as well as the choice of trustee, should only be made with the advice and counsel of an experienced local attorney.

The Beneficiary and the Trustee

A beneficiary is the person that is entitled to receive distributions for whom the trust is being managed. The trustee is a fiduciary, whose obligation is to manage the trust, on behalf of the beneficiary.

In some cases, an individual can both be a trustee and a beneficiary. One of the more common types of estate planning is the creation of a revocable living trust. A revocable living trust is a document that is created and funded during a seller’s lifetime and often, the seller will serve as the initial trustee of the revocable living trust. During the seller’s lifetime, the seller may also be the beneficiary of the trust and the trust could be managed for his or her health, education, maintenance, and support. As a beneficiary here, he or she may be able to receive distributions of income, principal, or all of the principal, pursuant to the terms of the trust.

Naming a Non-US Citizen as Beneficiary

There could be consequences for naming a non-US citizen as a beneficiary of a trust and for that reason, an experienced DC lawyer will request that all of their clients indicate if a beneficiary is a non-US citizen. The consequence could be either inheritance-related or income tax-related. Naming a non-US citizen as a beneficiary of a trust can expose the trust to increased tax liability or could result in double taxation. In addition, there may be complexities of transferring or making distributions to a non-US trustee depending on the country of citizenship. The result could be the additional incurrence of expenses for the trust.

Differences From Naming a US Citizen

The process for creating a trust that benefits a US citizen versus a non-US citizen is the same. It is helpful for an individual to speak with an estate planning attorney, who can help them to understand or explain to the, the consequences of naming a non-US beneficiary. Although the inclusion of a non-US citizen as beneficiary in a document is the same, the results from both an inheritance and an income tax perspective can be very different for both the beneficiary and the trust itself.

Non-US Citizen Trustees

Naming a non-US citizen as a trustee may result in the trust being considered a foreign trust. The designation of a foreign trust can cause increased income tax liability for the trust and increased income tax exposure.

The process for naming a non-US citizen trustee and a US citizen trustee is the same; however, the consequences may be different. A US citizen trustee will not likely incur additional income tax consequences because the trust will be likely be considered a domestic trust and taxed accordingly.