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US lifetime revocable grantor trusts

It is very common for individuals with assets in the US to establish a lifetime revocable grantor trust (sometimes called “living trusts” or “living wills”) as the centrepiece of their estate planning in place of a Will as it means that probate can be avoided on death, which is beneficial given that probate is often regarded as slow and expensive.

Lifetime revocable grantor trusts are very flexible in that the Grantor (known as the Settlor in the UK) can retain significant powers including powers to alter and revoke the trust. During the Grantor’s lifetime, trust is treated as transparent for US tax purposes so that Grantor is taxed on income and gains as if they still owned the assets outright. On the Grantor’s death, the assets are then either held on further trusts or distributed outright to beneficiaries.

UK tax treatment

Revocable grantor trusts can be problematic from a UK perspective. The UK inheritance tax treatment of such trusts depends on whether the UK treats the trust as a “settlement” for UK tax purposes or as a bare trust.

If the trust is treated as a settlement for UK tax purposes and:

  • the Grantor is UK domiciled or deemed domiciled; or
  • the trust holds UK situated assets,

the trust will be subject to the relevant property regime.

This means that there may be:

  • an immediate 20% inheritance tax charge when assets are contributed to the trust;
  • ten-year anniversary charges of 6% (subject to the trust’s nil rate band); and
  • exit charges of up to 6% on distributions of capital (not income) from the trust.

If a revocable grantor trust is treated as a bare trust for UK purposes the assets are not subject to the relevant property and are treated as the Grantor’s; it is in effect tax neutral as it is in the US.

Each revocable grantor trust is distinct and must be reviewed carefully from a UK perspective to see whether it could be argued that it is a bare trust during the Grantor’s lifetime. This requires a careful analysis of the terms of the trust, the powers that have been retained and the governing law of the trust.

Depending on the drafting it may be possible to argue that a revocable grantor trust should be regarded as a bare trust, but there remains a risk that HMRC may take a different view.

The position becomes less clear in the event the Grantor loses capacity and is unable to exercise the powers they have retained under the trust. In this situation there is a greater risk that the trust would be treated as a settlement for UK tax purposes which in turn could lead to an immediate 20% charge if the trust contains UK situated assets or the Grantor is UK domiciled or deemed domiciled.

Health check

If you think you have acquired a revocable grantor trust we recommend that you seek UK advice. We regularly review revocable grantor trusts for clients advising on UK tax issues and helping clients make amendments to their trusts where needed. If you have moved to the UK from the US or are a British expat returning to the UK from the US, we recommend that you seek advice on any trusts where you are the grantor or beneficiary.

If you have any concerns about your existing revocation trust or if you are considering creating such a trust and require assistance with your estate planning, please contact James Frampton.