The BETE Trust for Nonresidents

The Blocking Estate Tax Exposure (BETE) Trust is for non-U.S. citizens with assets in the United States. Traditionally, a “blocker corporation” has been advised by international estate planning attorneys, but that solution has come under recent attack through the codification of the economic substance doctrine in Code section 7701(o). If someone has previously advised and employed that strategy for you, call our firm immediately. Because even a foreign corporation requires a business purpose and economic substance to withstand a challenge by the IRS, the International Estate Planning team at Castro & Co. recommends the creation of a BETE Trust, which is a trust that is administered in the United States, managed by a U.S. trustee, holds U.S. assets, but is considered a foreign trust for U.S. gift and estate tax purposes. To better understand how this is possible, allow us to explain.

A U.S. trust is a trust that any U.S. court (federal, state, or local within the 50 states) is able to exercise primary supervision over with regard to its administration and a U.S. person can control all substantial decisions. IRC § 7701(a)(30)(E). A Foreign Trust is any trust that is not a U.S. trust. Thus, by logical deduction, a foreign trust is a trust that (1) a U.S. court does not have primary supervision over or (2) a U.S. person cannot control all substantial decisions. These two prongs have become known as the “court test” and the “control test.” If either one fails, it’s a foreign trust. If a court does not have jurisdiction, it’s a foreign trust. If the trustee is not a U.S. person, it’s a foreign trust.

In the real world, this means that if the Trustee leaves the U.S., it becomes a foreign trust. Likewise, if a court lacks jurisdiction, it’s a foreign trust. Generally, it’s not possible to have a completed gift if the settlor/grantor of the trust is also the trustee; thus, the focus is exclusively on the Court Test.

An “Automatic Migration Provision” is a provision that requires a trust to migrate to another country if a U.S. court attempts to assert jurisdiction or otherwise supervise the administration of the trust directly or indirectly. Because a U.S. court would lack jurisdiction over a trust that has such a provision, the IRS automatically deems any trust that has an Automatic Migration Provision to be a foreign trust under the Code. Treas. Reg. § 301.7701-7(c)(1)(iii), (c)(4)(ii).