Probate & Trust Law Section Conference Manual ... - Minnesota CLE

In every other case, a foreign trust is created. If the trust fails to make required filings, the US
beneficiary can face penalties starting at the greater of $10,000 or 5% of the gross value of the portion
of the trust's assets treated as owned by the U.S. person and up to 35% of the gross value of the
distributions received from a foreign trust for failure by a U.S. person to report receipt of the
distribution.
While foreign trust rules were enacted mainly to undermine off‐shore tax shelters, the rules catch up to
benign minor trusts. Consider, for example, a will which names a non‐resident guardian, establishes a
minor’s trust for the benefit of a US citizen child and names a non‐resident guardian as trustee. This
minor’s trust will be treated as a foreign trust. Again from the IRS website, “[r]egardless of your
motivation, failure to meet these reporting and filing requirements can result in very significant
penalties.”
If your clients want to name a non‐resident as a trustee, they should be counseled into considering a US
individual or corporate trustee to serve as a co‐trustee. You should provide a detailed explanation, in
writing, of the risks of naming a non‐resident trustee under the IRS foreign trust rules.
11. A trust established in Minnesota will be recognized everywhere.
Nope.
The notion of trusts, and the separation of the right to control and the right to benefit from property, is
a long standing notion in common‐law countries. But, this is not a universal concept. Many civil law
countries do not recognize trusts. This can be problematic for transferring real property located in such
a jurisdiction. This can also be problematic for the foreign trustee. For example, if a German national is
named as a trustee, the German Tax authority has been known to tax the trustee on the income.
Back in the 1980’s, the Hague Convention on the Law Applicable to Trusts and on Their Recognition
sought to resolve the issue by making jurisdictions, who do not recognize trusts, at least recognize those
established in other jurisdictions. This convention can be of assistance in those jurisdictions who are
signatories. However, not all countries are signatories. Germany, for example, is not one. See the Hauge
website, http://www.hcch.net/index_en.php?act=conventions.status&cid=59 for signatory status.
For those of us in Minnesota confronting possible non‐recognition, we should evaluate the need for
recognition in a foreign jurisdiction, treatment of trusts in foreign jurisdictions, and whether
alternatives, like business entities, resolves possible issues. Again, conferring with foreign counsel on
these issues may be necessary depending on the needs of your client.
12. If I want a document recognized in a foreign country, I need to go to a consulate.
Not necessarily.
In order to provide conformity in recognizing and certifying legal documents, the Hague Convention
Abolishing the Requirement of Legalization for Foreign Public Documents provides an “Apostille”
system, which gives certain public documents the ability to be recognized in signatory countries. Public
documents include, “documents emanating from an authority or an official connected with the courts
or tribunals of the State”, administrative documents, notarial acts, “official certificates which are placed
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