In advising German clients with international assets, especially in relation to the US, the question regularly arises as to whether a so-called US-Trust or also one Offshore Trust can be a suitable instrument for estate planning or asset protection. The answer is nuanced: A trust can be very useful, but not for the reasons many initially suspect.

A trust is a widespread concept in Anglo-American law Legal structure. Simply put, it is not a legal entity (like an LLC or a German foundation), but rather a legal relationship between several parties:

The legal basis is the so-called „Trust Agreement,“ which details how the assets are to be managed and distributed.

Important difference from German law: The trust itself is no legal personality, but rather a construction of rights and obligations between the parties involved.

The trust is often compared to a German foundation. While this comparison aids initial understanding, it is insufficient. There are crucial differences between a trust and a foundation.

A German foundation is a distinct legal entity. A trust, on the other hand, is merely a legal structure without its own legal personality. Control and flexibility are often significantly greater with a trust. It is precisely this flexibility that makes the trust attractive in practice, but also leads to legal uncertainties in Germany.

Particularly relevant is the distinction between:

• Revocable Trust The grantor can amend or revoke the trust at any time. It offers maximum control but less protection from creditors, and it is often less tax-efficient.
• Irrevocable Trust (unrevocable): The trust can generally no longer be unilaterally amended. This offers stronger asset protection and some tax effects. The disadvantage is a loss of control.

In practice, many clients underestimate that real tax or asset protection effects usually only occur with irrevocable structures.

Trusts are used in international contexts, particularly for the following purposes:

• Estate Planning
• Avoiding or simplifying probate in the USA
• Asset Protection
• Structuring Complex Family Assets

Just at US assets (e.g., real estate or equity interests) A trust can offer significant practical benefits.

Herein lies the central challenge: German law does not recognize the trust. This leads to several consequences:

• A trust is in Germany not recognized as a distinct legal form
• This is a so-called Tax and legal „classification“ from an economic perspective
• The treatment can be complex and sometimes inconsistent on a case-by-case basis.

Once a sufficient connection to Germany is established, German tax law. Such a connection can exist through the grantor's place of residence, the trustee's place of residence, the beneficiaries' place of residence, and the location of assets in Germany.

Many clients assume that a trust automatically brings tax benefits, which is regularly not the case.

German case law has developed clear guidelines here. The Federal Fiscal Court (BFH) has ruled that Ongoing distributions from a U.S. trust to beneficiaries residing in Germany German gift tax subject to. Distributions upon termination of the trust will also be taxed, with gift or inheritance tax.

Even if the trust was established abroad, significant tax liabilities can arise in Germany.

The German-American double taxation treaty in the area of inheritance tax is generally applicable. It can help to avoid double taxation and to divide taxing rights between Germany and the USA. However, its application is rather complex and requires careful examination of individual cases.

From a legal perspective, a clear differentiation is important.

Less suitable for:

• Pure tax optimization in Germany
• „Tax-saving models“ without substance

Well suited for:

• Structuring U.S. Assets
• Avoiding U.S. Probate Proceedings
• Long-term asset planning across generations
• Asset protection in specific constellations

In US real estate, a trust can help, Efficiently structuring US inheritance tax.

A US trust or offshore trust is not a „cure-all,“ but a highly effective instrument, when used correctly.

The decisive success factors are the precise Vote between German and US law, a clear Goal Definition (Taxes, control, protection) as well as professional Structuring and ongoing consultation. Without this coordination, there is a risk of tax disadvantages, unexpected legal consequences, and a significant administrative burden.

We advise German clients comprehensively on the structuring of international estate solutions, the review and implementation of trust structures, tax classification in Germany and the USA, and the long-term management of complex asset structures.