Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Cross-Border Trusts for Estate Planning
Transcript
- Lucas: So, we've talked a lot about domestic strategies — valuation discounts, freeze partnerships, donor-advised funds. But one of the most intricate areas in high-net-worth planning is when the family itself crosses borders. I'm talking about cross-border trusts. Luna: And this isn't just for families who live in two countries. It's also for families with assets in multiple jurisdictions, or kids who've moved abroad. Lucas: Exactly. And the reason it's so complicated is that trusts don't exist in a legal vacuum. Different countries treat them differently — as taxpayers, as legal entities, as grantor-controlled vehicles. You can end up double-taxed or, worse, with a trust that's invalid in one jurisdiction. Luna: So let's ground this. What's a typical scenario that triggers this need? Lucas: Think of a Canadian-U.S. family. Say the parents are Canadian citizens, but they've been living in the U.S. for twenty years. They have a Canadian holding company, a Florida condo, and a trust they set up in the Cayman Islands years ago for privacy. They're worth maybe fifty million dollars. Luna: And they assume their estate plan is fine because they've had lawyers on both sides. Lucas: Right. But here's where it gets tricky. The U.S. taxes worldwide assets of its residents, including trusts. Canada also taxes worldwide assets of its residents. But the U.S. also has something called Section 2044 of the Internal Revenue Code, which says that if you're a grantor of a trust and retain certain powers, the trust assets are included in your estate for U.S. estate tax purposes. Luna: So that Cayman trust—if the parents are U.S. residents—is potentially subject to U.S. estate tax at rates up to forty percent on anything above the exemption. Lucas: Bingo. And the exemption is around twelve million per person in 2026, but it's set to drop in 2026 unless Congress acts. So for a fifty-million-dollar estate, you're looking at over fifteen million dollars in U.S. estate tax if the trust is improperly structured. Meanwhile, Canada has no estate tax — but it has a deemed disposition at death, meaning you're taxed on capital gains as if you sold everything. Luna: So two different tax systems, two different triggers, and the trust is caught in the middle. Lucas: The solution often involves something called a cross-border trust with a 'situs' election. You can structure the trust so that its situs — its legal home — is in Canada for Canadian tax purposes, but it's designed as a non-grantor trust for U.S. purposes. That way, it avoids inclusion in the U.S. estate, and Canadian deemed disposition is managed through a corporate structure inside the trust. Luna: So the trust itself is Canadian-resident, but the grantor gives up enough control that the IRS doesn't treat it as theirs. Lucas: Exactly. Now, the trade-off is that a non-grantor trust pays its own U.S. income tax, and the rates can be compressed — the highest bracket kicks in at around thirteen thousand dollars of income. So you have to be careful about what assets are inside it. Dividend-paying stocks, for example, become very tax-inefficient in a non-grantor trust. Luna: Which is why you often see cross-border trusts holding mainly capital-gain assets — real estate, private equity, growth stocks — and leaving income-producing assets outside. Lucas: Right. And there's another layer: the Canadian 21-year deemed disposition rule. Under Canadian law, most trusts are deemed to have disposed of their assets every 21 years, triggering capital gains tax. So if you set up a Canadian-resident trust, you have to plan for that every two decades. Luna: And you can't just avoid it by moving the trust's situs after the fact — that itself can trigger a deemed disposition in Canada. Lucas: Yeah, exactly. So the planning has to be done upfront. And this is where some families use a 'spousal trust' combined with a 'testamentary trust' — one trust for the surviving spouse that defers both Canadian and U.S. tax, and then a separate trust for the kids that's structured for the 21-year rule. Luna: That sounds like a lot of moving parts. How many families actually do this well? Lucas: Honestly? Not many. Most cross-border families I've seen — and I've seen this in the data — have at least one structural mismatch. Either the trust is included in the U.S. estate when it shouldn't be, or the Canadian 21-year rule catches them off guard, or they have a trust that's considered a 'foreign trust' in both countries and then they have to file two separate sets of complex tax returns. Luna: And with the IRS, a foreign trust filing is no joke. Form 3520, Form 3520-A — those carry huge penalties for mistakes. Lucas: Up to thirty-five percent of the gross value of the trust for a late filing. So a fifty-million-dollar trust with a late form — that's seventeen and a half million dollars in penalties. And that's not tax, that's penalty. Luna: So the compliance risk alone is a reason to get the situs and structure right from the start. Lucas: Absolutely. And I think that's the key takeaway: cross-border trust planning isn't just about tax efficiency — it's about legal and regulatory coherence. You need a trust that's valid and recognised in both countries, and that requires understanding how each jurisdiction defines control, benefit, and residence. Luna: And that's why the best plans often involve a 'dual-qualified' trustee — someone who understands both legal systems and can manage the trust's compliance in real time. Lucas: Yeah, a bank or trust company with offices in both countries, or a specialist family office that does cross-border work. It's not cheap — you're looking at maybe fifty to a hundred thousand a year in fees — but compared to the potential tax and penalty exposure, it's often a good investment. Luna: And if our money conversations have helped you think about a decision differently, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. So back to the cross-border trust — one other structure worth mentioning is the 'foreign grantor trust' for non-resident aliens who become U.S. residents. That's a whole other category where the trust can remain a foreign grantor trust for a period after the grantor moves to the U.S., but then it flips to a domestic trust after a certain number of years. Luna: So there's a transition period built in. That seems prudent. Lucas: Exactly. The key is to plan the transition before it happens. If you're a French family moving to New York, you want to restructure your French trusts before you become a U.S. resident. Once you're a resident, the U.S. will tax the trust's worldwide income from day one, regardless of where the trust is located. Luna: And that's a trap many European families fall into — they set up a 'fiducie' or a 'Stiftung' under their home country's law, and then they move to the U.S. and discover the IRS treats it as a trust with onerous rules. Lucas: Right. In many civil law countries, trusts don't exist in the same way, so the IRS might recharacterise the entity. That creates uncertainty. For example, a Liechtenstein 'Stiftung' — a foundation — might be treated as a trust, a corporation, or a partnership, depending on its features. That can lead to double taxation if not coordinated. Luna: So the lesson is: anyone with a cross-border dimension to their wealth should have a dedicated cross-border trust review, especially if they're planning a move or have assets in multiple countries. Lucas: Yeah. And it's not a once and done thing. Tax laws change, families move, children change residency. A trust that worked in 2015 might be a ticking time bomb in 2026. So periodic reviews — every three to five years — are essential. Luna: And with the potential estate tax exemption sunset coming, this is a particularly good time for cross-border families to revisit their structures. Lucas: Absolutely. So that's the cross-border trust in a nutshell — complex, but incredibly powerful when done right. Next time, we'll look at how ultra-wealthy families use 'direct primary' investments in sports teams as a passion asset with tax advantages. Luna: Looking forward to that.