Foreign Trustee Trap: Why Naming Non-U.S. Persons Can Make Your California Trust a Foreign Trust

Oct 23

Estate planning often begins with a simple question: “Who do I trust to manage my affairs when I’m gone?”
But for Californians with family or friends abroad, that question can quickly lead to a complex web of tax rules, residency issues, and practical challenges that most people never consider — until it’s too late.

At our law firm, we regularly meet clients who want to name a sibling in Canada, a cousin in Mexico, or a lifelong friend in Europe as their successor trustee. It’s a heartfelt choice — but one that can carry unexpected legal and tax consequences if that person isn’t a U.S. person.

1. The Basics: What Is a Trustee — and Why Residency Matters

A trustee is the person (or institution) responsible for managing your trust after you pass away or become incapacitated. Their job is to carry out your wishes, follow California law, and make distributions to your beneficiaries according to the terms of your trust.

When your trustee lives outside the United States, however, a number of problems can arise:

They may have trouble accessing U.S. bank or brokerage accounts due to regulatory, tax- and banking-compliance issues.
U.S. financial institutions may refuse to work with them without a U.S. Taxpayer Identification Number (TIN) or sufficient U.S. presence.
Communications, document signing, and court appearances can become logistically difficult.
The trust itself may be considered a “foreign trust” for U.S. tax purposes — which can trigger complex filing requirements and new tax liabilities.

2. When Does a U.S. Trust Become a “Foreign Trust”?

Here’s the key test from the Internal Revenue Service (IRS):
A trust is considered foreign if it fails either of these two tests:

The Court Test: A U.S. court must have primary supervision over the administration of the trust.
👉 26 CFR §301.7701-7 - Cornell Law
The Control Test: One or more U.S. persons must have authority to control all substantial decisions of the trust.
👉 Deloitte: Foreign Trusts Guide

If your trustee is a non-resident foreign national — and especially if they are the sole trustee — your trust could fail the Control Test. That means the IRS will treat it as a foreign trust, with all the reporting and taxation headaches that come with that designation.
👉 Taxes for Expats: What is a Foreign Trust

3. The Tax Complications: What Happens If Your Trustee Isn’t a U.S. Person

If your California revocable or irrevocable trust becomes a foreign trust, the following issues may arise:

Form 3520 and 3520-A filings: Annual IRS forms required to report transactions with foreign trusts.
👉 IRS Foreign Trust Reporting
Double taxation risk: Income may be taxed both in the U.S. and in the trustee’s home country, depending on local tax treaties.
Loss of grantor trust status: Your trust may no longer qualify for favorable U.S. tax treatment.
👉 IRS International Practice Unit on Foreign Trusts
Foreign bank reporting: The trust could fall under FATCA, requiring disclosure of accounts linked to the foreign trustee.
👉 Greenleaf Trust: Foreign Trusts Primer

4. Practical Realities: The Travel and Accessibility Problem

Even if taxes weren’t an issue, there are practical challenges:

A foreign trustee may need to travel to the U.S. to handle estate matters or court issues, which can be difficult or costly.
U.S. banks often refuse to open or maintain trust accounts when a non-resident foreign national is in control.
Death certificates, property deeds, notarizations, and other trust-administration tasks can be harder to process across borders.
If your trustee cannot enter the U.S. quickly after your death, trust administration can stall for months, leaving your beneficiaries in limbo.

5. Real-World Example

Here’s a scenario drawn from typical client situations (details changed for confidentiality):

A California resident, “Maria,” created a revocable living trust in California. She named her brother in the U.K. as successor trustee (he lived full-time in London and was not considered a U.S. person). After Maria’s death, the trustee tried to manage U.S. bank accounts and property.

The U.S. bank required a Taxpayer Identification Number and hesitated because the trustee lived abroad. Since the trust lacked U.S. court supervision and no U.S. person controlled its substantial decisions, it failed both the > court> and > control> tests — making it a > foreign trust> under IRS rules.

As a result:

The trust incurred > Form 3520/3520-A> filing obligations.
The trustee faced difficulty accessing brokerage accounts.
Distributions to U.S. beneficiaries were delayed and taxed unfavorably.

> IRS Source: Foreign Trust Classification Example

6. U.S. Citizens, Residents, and Aliens: What’s the Difference?

For estate and tax purposes, the IRS makes a clear distinction between “U.S. persons” and “foreign persons.”
👉 IRS Classification Guide

*StatusDefinition*Can Safely Serve as Trustee?**U.S. Citizen Born in the U.S. or naturalized ✅ Yes U.S. Resident Alien Green card holder or meets the substantial presence test ✅ Yes Non-Resident Alien Foreign national living abroad ⚠️ Risky – may make the trust foreign Dual Citizen Treated as a U.S. person for tax purposes ✅ Yes

7. Interesting Facts Most People Don’t Know

The U.S. has some of the strictest foreign trust reporting rules in the world — penalties can reach 35% of the value transferred to an unreported trust.
👉 IRS Foreign Trust Penalties
Even a temporary foreign trustee appointment can make the trust “foreign” for that entire year.
👉 CFR §301.7701-7
Some families use trust protectors — U.S.-based professionals ensuring compliance while allowing a loved one abroad to participate.
A trustee living abroad could accidentally violate U.S. sanctions or banking laws.
Dual tax residency can confuse banks and trigger audits if not properly documented.

8. What You Can Do Instead

If you want to include a foreign family member or friend in your estate plan, consider:

Naming them as a co-trustee with a U.S.-based professional fiduciary.
Appointing them as a trust protector or advisor rather than trustee.
Choosing a California professional trustee or corporate fiduciary to ensure compliance.
Reviewing your trust regularly if a trustee’s residency or citizenship changes.

9. The Bottom Line

Choosing a trustee isn’t just about trust — it’s about access, compliance, and peace of mind.

If your preferred trustee lives abroad, speak with an estate planning attorney who understands both California law and federal tax implications.
We can help you ensure your trust remains compliant while honoring your family’s wishes.

🕊 Schedule a Life & Legacy Planning Session

If you’re considering naming a foreign trustee, let’s make sure your plan stays compliant and your legacy secure.

DeCosimo Law