When planning international estates, the question regularly arises as to whether a US American trust whether a so-called offshore trust is suitable for structuring and the long-term transfer of assets. This primarily concerns clients who, in addition to assets in Germany, also Real estate, Corporate investments, Securities accounts or other assets in the United States hold.

A trust can be a valuable tool in such cases. However, it is not suitable as a blanket standard solution and should under no circumstances be established solely with the expectation of automatically avoiding German taxes. Whether the structure is actually sensible depends on its specific design, the individuals involved, the location of the assets, and the client's personal goals.

A reliable structure therefore always requires a coordinated review under both German and US law.

The trust is a classic structuring instrument of Anglo-American law. It regularly arises through a contractual or testamentary agreement, the so-called trust agreement.

In the process, a person, referred to as a grantor, settlor, or trustor depending on the legal system, transfers assets to a trustee. The trustee receives legal ownership and administrative authority over the trust assets. However, the trustee may not use these assets at their own discretion, but must adhere to the provisions of the trust agreement and the fiduciary duties applicable to them.
Other persons, the so-called beneficiaries, are frequently favored. Depending on the structure, these can receive ongoing distributions, access the assets at a later date, or become beneficiaries only after certain conditions are met.
The trust thus typically separates formal ownership or legal administrative power from the economic beneficiary interest.

For initial classification, a trust is often compared to a German foundation. This comparison can illustrate the economic principle, but is only legally viable to a limited extent.

A German incorporated foundation is a legal entity with its own assets. By contrast, a trust is generally not a legal entity, but rather a legal relationship shaped by the respective foreign law between the settlor, the trustee, and the beneficiaries.

German civil law does not provide its own legal form of a „trust“. However, it does not follow from this that a trust validly established under foreign law is completely ignored in Germany. Rather, German authorities and courts must examine how the specific structure is to be classified under German civil and tax law.

This classification is not based solely on the designation „Trust.“ The decisive factors are the actual rights and obligations of the parties involved and the question of whether the assets have been legally and economically removed from the settlor's control effectively.

Of central importance is the distinction between revocable and irrevocable trusts.
In a revocable trust, the grantor retains the right to amend the trust, withdraw assets, or completely dissolve the structure. The settlor often remains largely in economic control of the assets. Such trusts are widely used in the US to facilitate asset management and avoid a subsequent probate proceeding.
In contrast, an irrevocable trust can no longer be unilaterally revoked or arbitrarily modified by the grantor. The transferred assets are removed from their possession to a significantly greater degree. This separation can be significant for estate planning, asset protection, and certain U.S. tax objectives. However, it also entails a substantial loss of control.
Simply labeling something as „revocable“ or „irrevocable“ is not sufficient for the German legal assessment. The decisive factor is always which rights the grantor has actually reserved and what claims the beneficiaries are entitled to.

Trusts are used for very different purposes. In international estate planning, they frequently serve to, Managing wealth over the long term and clear afterwards established rules to pass on to relatives or other beneficiaries.

However, whether an effective asset protection effect is achieved depends heavily on the applicable law, the timing of the transfer, existing creditors, and the control rights of the grantor. Assets cannot simply be placed beyond the reach of existing creditors through a retrospective transfer.

For German clients, the real difficulty usually lies less in the establishment of the trust than in its tax treatment in Germany.

German tax law may apply if there is a sufficient domestic connection. This can result, for example, from the grantor, a beneficiary, or, under certain circumstances, the trustee being a tax resident in Germany. Assets located in Germany can also trigger German tax liability.

A trust structure must therefore be examined with regard to inheritance tax, gift tax, and income tax.

If assets are transferred by a grantor subject to tax in Germany to an irrevocable trust and the grantor thereby loses their legal and economic power of disposal, the initial funding of the trust alone may constitute a taxable event under gift tax law.

The German Inheritance and Gift Tax Act explicitly covers the establishment or endowment of foreign assets whose purpose is directed at the binding of assets.

In the case of a revocable trust, the assessment may differ if the grantor retains comprehensive disposition over the assets. Here, too, however, the specific trust agreement is decisive rather than the designation of the structure alone.

The Federal Fiscal Court has dealt several times with payments from US-American trusts to beneficiaries resident in Germany.

Under statutory regulations, what a so-called intermediate beneficiary receives during the existence of a foreign asset pool can be subject to German gift tax. Both distributions from the asset substance and paid-out income can be covered.

However, the earlier, very broad statement that any person receiving payments during the existence of a trust is automatically an intermediate beneficiary has been nuanced by recent case law. Decisive factors include, inter alia, the legal status the beneficiary holds under the applicable foreign law and the trust agreement.

Therefore, it cannot be said generally that every trust distribution is automatically subject to German gift tax. Rather, a precise examination of the legal basis, the power of disposal, the origin of the payment, and the specific position of the recipient is required.

In addition to gift tax, Section 15 of the Foreign Tax Act can also play a role.

This provision concerns foreign family foundations as well as comparable foreign special-purpose funds and assets. Under certain conditions, the assets and income of a trust can be attributed to a grantor with unlimited tax liability in Germany or to a beneficiary entitled to receive distributions or assets.

This can lead to income that is already accruing in Germany being taxed, even though it has not actually been distributed to the beneficiary yet.

The law now contains provisions according to which subsequent allocations are not to be subjected to income tax again, provided that the underlying income has demonstrably already been allocated and taxed. However, a potential gift tax burden must be assessed separately from this.

In practice, therefore, income tax and gift tax can become relevant alongside one another. The documentation of income that has already been attributed and taxed is of great importance for a later distribution.

If a trust is dissolved and the remaining assets are distributed to beneficiaries or so-called remainder beneficiaries, this process can also be subject to German inheritance or gift tax.

The Inheritance Tax Act explicitly treats the acquisition upon the dissolution of a foreign asset pool as a taxable event. Which tax class and which allowances apply depend, among other things, on the legal attribution of the donor and the family relationship to the beneficiary.

Early planning must therefore account not only for ongoing distributions, but also for the termination of the trust structure.

Between Germany and the United States, there is an income tax treaty as well as a separate Double Taxation Treaty in the field of estate, inheritance, and gift tax.

These agreements can be significant for trust structures, but they do not automatically lead to tax exemption in Germany. Rather, they allocate taxation rights, regulate crediting options, and contain special provisions for estates and trust assets.

Which treaty provision is applicable depends on the tax in question, the residency of the parties involved, the location of the assets, and the specific transfer.

The previous blanket reference to Article 11, paragraph 3, letter b of the Inheritance Tax Treaty is insufficient for all trust-related issues. In addition to the general allocation and credit provisions, the special provision regarding estates and trusts in particular can be significant.

From a German perspective, a US trust should not be understood as a simple tax-saving model.

The establishment can already trigger gift tax in Germany. Ongoing income can be attributed to the grantor or the beneficiaries, and subsequent distributions or the termination of the trust can represent further taxable events.

This does not mean that a trust is always disadvantageous from a tax perspective. In the case of US assets, it can play a useful role in US probate and estate tax planning in individual cases. This applies, for example, to certain US real estate, larger corporate holdings, or clients who may themselves be subject to US estate tax.

However, a structure that is advantageous under US law can trigger undesirable consequences in Germany. Tax planning must therefore always take place in both countries simultaneously.

Under the right circumstances, an irrevocable trust can help protect assets from future risks. Such protection requires that the grantor actually relinquish control and that the trustee act independently in accordance with the terms of the trust agreement.

If the grantor economically remains the master of the assets or can freely access them at any time, the desired protection is often weaker.

The timing of the construction is also crucial. If assets are transferred only after specific claims have arisen or a legal dispute is foreseeable, creditor protection and insolvency avoidance rules may apply.

Asset protection therefore requires long-term and legally sound planning. It must not be confused with the retroactive thwarting of legitimate creditor claims.