A.
GENERAL
The advantages of a trust include: acting as a substitute for a last will and testament by eliminating a probate for the trust assets; insulation from third party creditors’ claims; professional asset management and administration; support of family members after the grantor’s death; removal of assets from the home country for protection in the event of a monetary devaluation; and the trust may also act as a will substitute for people from flight-capital countries.
B.
REVOCABILITY OR IRREVOCABILITY
A trust may allow the settlor to reserve the right to amend or revoke the trust agreement. The settlor’s rights may also include the right to withdraw part or all of the trust property at any time, to direct and control the management and investment of the trust property, to change provisions of the trust, including the names of the beneficiaries, or to terminate the trust. This type of trust is known as a revocable trust. A trust agreement may also be irrevocable, meaning that the terms of the trust agreement are unchangeable by anyone, including the settlor. The choice of the type of trust depends on the desires of the settlor and the facts and circumstances of the particular situation.
C.
GRANTOR TRUSTS FOR NONRESIDENTS
The settlor or settlors of a trust may retain such control over the trust property so that the trust would be considered a grantor trust for United States income tax purposes. Grantor trusts are not considered separate entities for United States income tax purposes. In other words, the existence of the trust would be ignored for United States income tax purposes, and a nonresident alien (NRA) settlor would continue to be taxed or not taxed, as the case may be, on the trust income as if the trust were never created. Nevertheless, all of the other advantages of the trust would remain. To the extent that the current tax treatment of certificates of deposit and stock holdings of the settlor are to be retained, drafting a trust to be treated as a grantor trust would not change the result.
D.
FIXED OR DISCRETIONARY
Trusts can also be classified as either fixed or discretionary. In a fixed trust, the trustee’s obligations regarding the trust property are specifically spelled out in terms of the trust agreement. Here, there is no flexibility as to how the trust property is managed. By way of contrast, the discretionary trust has an emphasis on flexibility, thus the trustee has complete discretion as to whom, when and how much of the trust property is distributed. Trusts can also be classified as either domestic (United States) or foreign, depending on the residence of the trustee and the situs of the assets of the trust. The tax consequences of whether a trust is domestic or foreign may vary, depending upon the type of income earned by the trust, as well as whether the income is distributed currently to the trust beneficiaries or accumulated.