If a non-resident alien (NRA) dies leaving assets in an offshore trust to a United States beneficiary, there are burdensome tax and compliance issues. As an alternative, the establishment of a South Dakota irrevocable non-grantor NRA Dynasty Trust while the foreign parents or grandparents are alive provides a very favorable option for an international family.
If properly done, an NRA foreign citizen parent or grandparent can transfer (gift) an unlimited amount of (non-U.S.) assets onshore into a South Dakota NRA Dynasty Trust without any gift, death, or generation-skipping taxes. They are not subject to the $12.6 million gift and generation skipping transfer tax exemption limits of a United States citizen or green card holder. The unlimited gift exemption generally only applies if NRAs are gifting non-U.S. situs assets. Further, assets are not subject to state income tax if the trust is established in South Dakota, a no income tax boutique trust state. Additionally, the Trust can continue forever for the benefit of United States beneficiaries as well as provide asset protection and the many other trust, privacy, and tax benefits. Generally, cash is the most popular option to fund the South Dakota NRA Dynasty Trust. U.S. insurance bought on either the NRA grantor’s life and/or on the lives of the U.S. beneficiaries is also a popular investment for these trusts. If properly structured, the life insurance wrapper can convert the trust to a zero tax dynasty trust both for federal and state income and capital gains generated within the trust, as well as for trust distributions because they’re in the form of non-taxable life insurance policy loans. This is particularly powerful as a result of South Dakota’s low state insurance premium tax and top-rated insurance laws.
Another common scenario is when one NRA parent dies and the second NRA parent decides to move to the United States to be with the U.S. beneficiary children and become a green card holder and/or citizen. The surviving NRA parent may look to gift assets to a self-settled NRA dynasty trust and/or change the situs of a foreign trust to the United States prior to moving to the United States, while that parent has unlimited estate, gift and GST tax exemptions for non-U.S. situs assets. By using a self-settled dynasty trust, the NRA can also be a permissible discretionary beneficiary of the trust.