Latin American families who own real estate in Miami, brokerage accounts at U.S. custodians, or interests in U.S. businesses face a structural problem that many do not discover until it is too late: U.S. tax law imposes estate tax on U.S.-situs assets owned by non-U.S. persons at death, with a federal exemption of only $60,000. A family that has invested $3 million in a Miami condominium and $2 million in a U.S. brokerage account owns $5 million in U.S. assets against a $60,000 exemption. At the top estate tax rate of 40%, the potential exposure is substantial — and it arises simply from owning U.S. assets, regardless of where the family lives.
Trusts are among the most established tools for restructuring how U.S. assets are held by non-U.S. families. Understanding how they work — and how they interact with U.S. income tax, estate tax, and reporting rules — requires careful analysis by qualified legal and tax professionals. This article describes the structural framework; it is not tax advice, and outcomes depend entirely on individual facts and applicable law as interpreted by your tax adviser.
The Foreign Grantor Trust: The Starting Point
When a non-U.S. individual (the settlor or grantor) establishes a trust, the first classification question is whether the trust is treated as a "grantor trust" for U.S. tax purposes — meaning whether the grantor is treated as the owner of the trust's assets and income for income tax purposes. Under Sections 671 through 679 of the Internal Revenue Code, a trust is treated as a grantor trust if the grantor retains certain powers or interests in the trust, including the power to revoke, certain retained income interests, or the ability to control beneficial enjoyment of the trust assets.
For a non-U.S. settlor, a foreign grantor trust has a specific and useful characteristic: the U.S. income tax rules that would otherwise tax distributions to U.S. beneficiaries are structured differently than they are for non-grantor trusts. As long as the trust is classified as a foreign grantor trust — a classification that depends on both the residency of the grantor and the terms of the trust — distributions to U.S. beneficiaries from the trust's current-year income are generally treated as gifts, not as taxable distributions subject to the punitive "throwback" rules that apply to accumulation distributions from foreign non-grantor trusts.
This distinction matters enormously for families who have U.S. children or beneficiaries. A foreign non-grantor trust that accumulates income for years and then distributes it to a U.S. beneficiary subjects that distribution to a complex throwback calculation that includes an interest charge designed to approximate the tax that would have been paid had the income been distributed in the year it was earned. The practical effect can be to eliminate much of the benefit that trust accumulation was intended to provide. A foreign grantor trust, by contrast, avoids this regime as long as the grantor is living and the trust retains its grantor trust status.
Foreign Grantor Trust vs. Non-Grantor Trust: When Each Applies
The distinction between grantor and non-grantor status is not a matter of drafting choice alone — it is determined by the substantive terms of the trust and the status of the grantor. A foreign grantor trust is one where a non-U.S. grantor (a non-resident alien) retains sufficient powers to be treated as the owner for U.S. income tax purposes. A foreign non-grantor trust is one where no such powers are retained and the trust itself is treated as a separate taxpayer.
For LATAM families, the foreign grantor trust structure is often the starting point — particularly when the settlor is still living, has retained some control over the trust assets or income, and has U.S. beneficiaries (children studying or working in the United States, for example). The grantor trust classification provides a simpler tax reporting framework and avoids the throwback rules during the grantor's lifetime.
The foreign non-grantor trust is more commonly used in estate planning contexts where the goal is to remove assets from the settlor's estate while the settlor is still living — because a trust where the grantor retains sufficient powers to be treated as owner for income tax purposes may also be includable in the grantor's estate for estate tax purposes. The trade-off between grantor trust status (simpler income tax treatment) and estate tax inclusion is one of the central tensions in trust planning for non-U.S. families, and it must be analyzed with both U.S. tax counsel and, where applicable, home-country advisers.
How a U.S. Trust Holds U.S. Assets for a Non-U.S. Settlor
A trust can be organized under the laws of a U.S. state — Florida, Delaware, Nevada, and South Dakota are common choices — and can hold U.S. real estate, U.S. brokerage accounts, shares of U.S. corporations, and interests in U.S. LLCs or partnerships. The trust holds legal title to the assets; the settlor transfers ownership of the assets to the trust, and the trustee administers the assets for the benefit of the named beneficiaries according to the trust instrument.
For a non-U.S. settlor, the classification of the trust as "domestic" or "foreign" for U.S. tax purposes is determined under a two-part test: the court test (whether a U.S. court has primary supervisory jurisdiction over the trust administration) and the control test (whether one or more U.S. persons have the authority to control all substantial decisions of the trust). A trust that fails either test is classified as a foreign trust for U.S. tax purposes, regardless of whether it was organized under U.S. state law. This creates an important planning consideration: a trust organized under Florida law but administered by a foreign trustee, or whose substantial decisions are controlled by a non-U.S. person, may nonetheless be classified as a foreign trust, triggering the foreign trust reporting regime.
For families who want the trust to be classified as a domestic trust, the structure must satisfy both the court test and the control test. This typically means that the trustee — or at least a controlling co-trustee — is a U.S. trust company or U.S. individual, and that the trust is administered in the United States. Whether a domestic or foreign trust classification is preferable depends on the family's specific facts, including where the beneficiaries live, what assets are in the trust, and whether the settlor intends to become a U.S. resident in the future.
The Estate Tax Exposure Problem
Non-U.S. persons who are not domiciled in the United States are subject to U.S. estate tax only on U.S.-situs assets — but with a federal estate tax exemption of only $60,000, compared to the approximately $13.99 million available to U.S. domiciliaries in 2025. U.S. real property is U.S.-situs. Stock of U.S. corporations is U.S.-situs. Deposits in U.S. bank accounts may be U.S.-situs depending on circumstances. The estate tax rate on amounts above the exemption reaches 40% at the upper brackets.
A trust structure can alter how U.S.-situs assets appear in the estate at death — depending on how the trust is structured, what powers the settlor retained, and whether the assets were transferred during the settlor's lifetime. A properly structured irrevocable trust where the settlor does not retain prohibited powers may mean that the trust assets are not included in the settlor's taxable estate. But this is a legal and factual determination that depends on the specific trust terms, the nature of the assets, and the application of Sections 2033 through 2044 of the Internal Revenue Code to the particular arrangement. We do not describe this as eliminating estate tax — the outcome depends on the structure and must be confirmed by qualified tax counsel.
Trust Migration: When the Settlor Becomes a U.S. Tax Resident
One of the most frequently overlooked planning issues for LATAM families is what happens to an existing trust when the settlor becomes a U.S. tax resident. A foreign grantor trust that was established by a non-U.S. person before they moved to the United States does not simply maintain its status unchanged — the trust's classification and the tax treatment of its income and distributions may shift in important ways once the grantor becomes a U.S. person.
Under Section 679 of the Code, a U.S. person who transfers property to a foreign trust with U.S. beneficiaries is generally treated as the grantor of the trust for U.S. income tax purposes, and all of the trust's income is taxed to the U.S. grantor on a current basis. This can be a significant change from the pre-immigration regime, where a foreign grantor trust held by a non-U.S. settlor did not carry the same current income attribution rules.
Pre-immigration planning for families with existing trusts must therefore address the trust's status after the move. Options include converting the trust structure before the settlor becomes a U.S. person, adjusting the terms of the trust, or modifying how distributions are timed and structured. The right answer depends on what the trust holds, who the beneficiaries are, and what the settlor's long-term intentions are. This is precisely the kind of planning that must be completed before, not after, the immigration event.
Trust vs. LLC, LP, or Insurance Wrapper
Trusts are not the only structural option for LATAM families holding U.S. assets. LLCs and limited partnerships organized under U.S. law can hold U.S. real estate and other assets, and in some cases provide charging order protection and other structural benefits. Insurance wrappers — including PPLI and PPVA — provide an alternative framework for holding investment assets with distinct tax characteristics. Each structure has different implications for income tax, estate tax, asset protection, and reporting, and the optimal approach for a given family may involve a combination of structures rather than a single vehicle.
An LLC that holds U.S. real estate owned by a non-U.S. person does not, by itself, resolve the estate tax problem — the LLC interest may itself be U.S.-situs property if the LLC holds U.S. real estate or U.S. business assets. The analysis is fact-specific, and the perceived simplicity of an LLC structure should not lead families to assume that it addresses the estate tax exposure that a trust may be designed to address.
The Role of Legal Counsel
Trust formation for LATAM families with U.S. assets requires coordination among multiple professionals: U.S. legal counsel to draft and review the trust instrument, advise on the domestic/foreign classification analysis, and counsel on the interaction with U.S. estate and income tax rules; home-country legal counsel to address any transfer tax, capital gains, or succession law implications under the laws of the family's home jurisdiction; and a U.S. tax accountant or international tax adviser to handle the ongoing reporting obligations that apply to both the trust and the U.S.-resident beneficiaries.
The reporting obligations alone are significant. A U.S. person who is treated as the owner of a foreign trust under the grantor trust rules must file Form 3520 annually. The foreign trust must file Form 3520-A. Distributions from foreign trusts to U.S. beneficiaries trigger reporting on Form 3520 regardless of the amount. Penalties for failure to file these forms are substantial — the greater of $10,000 or a percentage of the assets involved.
For families who are navigating these requirements for the first time, the complexity can be daunting. But the alternative — holding U.S. assets outright in a non-U.S. individual's name with no planning in place — leaves the family exposed to an estate tax regime that was not designed to be generous to non-resident investors. The structures available under U.S. law are well-established; the challenge is implementing them correctly and maintaining them over time as the family's circumstances evolve.