Setting-up a US trust is a common form to design the asset transfer after the death. However, the tax situation become complex when there is a relation to Germany, e.g. German assets, beneficiaries living in Germany; involved persons living in both countries.
Of course, there are some benefits in setting-up a foreign trust like to avoid the often time-consuming handling of an estate (e.g. US probate proceed). However, if another country is involved, the double taxation issues should be a focus as well.
Here are some basic information, you need to know:
- US trusts are unknown from a German legal point of view. As such, the trust agreement needs to be analyzed and reinterpreted for German purposes. Due to this different treatment in both countries, tax conflicts arise in most cases.
- The legal structure of the trust as well as the decisions made in the trust deeds are important for the German tax qualification. Trust could be qualified as transparent or non-transparent with different tax treatments for the involved persons.
- Although there is a US-German Double Tax Treaty in place that refers to inheritance and gift tax, US trust are still often not tax beneficial. First, the Double Tax Treaty allows both countries to tax the asset transfer to a trust. Second, on principle, double taxation is avoided by tax credit. However, due to the different rules, taxes can be paid at different times so that a tax credit might not be possible. For example, the tax payment in the USA is due all at once, while German taxes are deferred to the actual distributions of the trust.
Are you setting-up a US trust?
If you are living in Germany and you are intending to set-up a US trust, you should note that, on principle, this asset transfer is liable to German inheritance/gift tax.
Unfortunately, the transfer of the assets to a trust is taxed with the unfavorable inheritance/gift tax class in Germany. Depending on the value of assets transferred the tax rate amounts to 30% or even 50%.
The trust is the tax payer in such cases.
Note: for a German taxation certain conditions must apply to the trust. For example: if the trust settlor will still be the beneficial owner of the trust which means that he/she has a strong legal position to manage the assets in his/her sake. Then, the asset transfer to the trust is not taxable in Germany at the time of the set-up. In practical terms, this means that there is an option to design the trust set-up in a favorable way.
Are you getting payments from a US trust?
Distributions from the US trust
In case you are the beneficiary of a US trust and living in Germany, then any distributions from the trust can be subject to German inheritance/gift tax. It does not matter whether the payments are made from the trust’s income or the capital stock.
The tax rate and tax allowances depend on the relationship between the settlor and the beneficiary. Same applies for the termination of the US trust and the transfer of all assets.
Income taxation
Next to the inheritance/gift tax issue, the income received from the US trust can also be subject to income taxation. This applies to so called family trusts.
As regards the income taxation, there is a special tax regime where even with no actual payments; the income of the trust is fictitiously attributed to the beneficiary for German tax purposes.
This income is qualified as capital income taxed with the lump-sum tax rate of 25% plus solidarity surcharge. Of course, actual payments are not taxed again if taxed under the special regime.
Being taxed with German inheritance/gift tax and income tax mainly depends from the designed trust agreement. In some cases, such double taxation might arise, but this is controversial discussed in German tax literature.
My latest practical case & key points to consider
A German national living in both countries had some German assets, mostly a German property.
He set-up a US trust and the beneficiaries were his children. His children contact me for help to manage the inheritance tax return in Germany.
According to the double tax treaty, Germany had the right to tax the German property so that a German inheritance tax return had to be filed.
However, the main key point in this case was that property cannot be legally transferred to the trust so that this trust regulation was not legally accepted in Germany.
Instead, his children as the beneficiaries were qualified as direct heirs of the property. With this, we could manage to get the needed paper for the German land registry entry in the children’s names.
Of course, I shorten the work behind this case for purposes of simplicity of this post.
However, I would like to emphasize the following key points to consider:
- Keep in mind that the transfer of assets to a US trust is treated differently in Germany and German home work is required
- If you have the chance to design the trust agreement, then take this opportunity to get in contact with your German tax advisor.
- In any case, the trust deed and/or all related paperwork is needed to be able to evaluate the situation from a German tax perspective
- Even if the trust agreement can still be designed, trusts can still be unfavorable and complex from a German tax perspective. However, if other benefits are given, a trust set-up might make sense. This should be checked carefully.
For a better understanding, this article refrains from using complicated technical terms and is presented in shortened form with regard to the individual preconditions required by law. An individual examination in your case is recommended.
Disclaimer: This article does not constitute legal or tax advice but is for general information only. Every personal/company situation is unique, so that your tax situation might be different as described in this article. Therefore, I always recommend professional advice to avoid any tax disadvantages.
Last updated on November 08, 2021
