I am drafting a vulnerable person discretionary trust eligible under IHTA 1984, s 89 as the (autistic) child receives DLA at the medium level.
I do not get involved in such matters unless they involve cross-border tax and nationality issues. In this case the mother has U.S. and British nationality; the child is British only. (Parenthetically if the child had been born after 12 June 2017 he would also have U.S. citizenship under Justice Ginsburg’s “prospective only” rule in Sessions v. Morales-Santana, 582 US ___ (2017), relating to discriminatory effects of the Immigration and Nationality Act as it relates to non-marital offspring.)
I have drafted many U.S. trusts and a few simple English trust deeds (“trusts of land”). I have bought the excellent Kessler treatise and have ordered the (5x more expensive) Underwood treatise from Ballston Spa and will have access to it Monday at the British Library.
The value of the trust would be just under the NRB. The bulk of the money (supplied by a grandparent, the “settlor”) would be used to buy the freehold in the mother’s family home (freeholds of all the 30-odd flats are being bought for the individual owners as a common project).
So far so good. With a trust of land we can have the child’s trust owning (say) 1/3 of the equity in the family home.
While as a non-“U.S. Person” the child is exempt from PFIC (“Private Foreign Investment Company” with draconian tax implications) and FATCA and IRS trust reporting (Form 3520 etc.) the mother is not, but a single declaration to the IRS, to a different purpose but effectively comparable to the HMRC Vulnerable Person Election will suffice. Annual FBARs will be needed for the mother’s signatory power but that’s easy. Also annual HMRC declarations.
I need to envisage the possibility that at some point in the future the mother might bring the child to the USA, either on a F1 visa (child in private school: this has the advantage of certain tax exemptions) or a green card (this could create long-term expatriation-tax issues if the child later gives up US residence).
While the child is never going to be a public charge (leaving aside child benefit, child tax credit and DLA while UK-resident), it is still prudent to allow the trust to qualify as a “special needs trust” in the U.S.A.
Ideally I would like to finesse the clauses “This Trust shall be governed by English law” to the extent (and only to the extent) that the trustee (or a “protector” (per Kessler, Para. 6.47) could change the situs and applicable law of the trust and/or that it could be decanted into a U.S. trust in a favourable jurisdiction.
But if the family emigrates I can plausibly argue that the mother’s New York domicile of origin (she was born in England while her father was a student here on a tourist visa, and never left) is restored and perhaps with it, her son’s.
The American side of these legal issue are well covered on the (American Bar Association) ABA-PTL discussion forum. But as the Kessler treatise (and the paucity of other treatises) suggests, ignorant and self-defeating taxation of trusts in recent years has diminished the base of expertise in the land that invented the trust. I have no doubt that using the model paragraphs in Kessler, the Society of Trust and Estate Practitioners standard provisions and my own inventiveness I can get any otherwise PFIC-liable money to the USA. The worst would be to have funds taxed both in England and in California, which doesn’t recognise federal tax treaties and which fully taxes trusts based (as England does except for professional trustees) based on situs of settlor, trustee(s) or beneficiary.
So: does anyone think I can reasonably, consistent with our vulnerable person trust claim, include a provision for change of applicable law to a U.S. state that allows decanting or otherwise (as via a protector) achieve that goal? An ABA memo addresses this: https://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/nclcf/2011_12/rpte_nclcf_2011_dec_g_agenda_situs_selection_and_change_of_situs.authcheckdam.pdf
Perhaps a clause like this: “There is hereby appointed as Protector of this Trust ___ of ___, California, with the power to appoint a replacement or additional trustee should the Original Trustee die, resign or become incapable of acting. The Protector shall also have the power to change the situs and applicable law of this Trust if and only if the Original Beneficiary emigrates from the United Kingdom to the United States of America in order to establish and maintain the status of this Trust as a ’special needs trust’ under U.S. federal and state law so as to further its purpose.”
Andrew Grossman