Introduction Accountants for the US and the UK who advise on trust structuring understand one painful reality: a trust that works perfectly for UK IHT purposes may be a nightmare for US federal tax purposes — because the UK and the US have fundamentally different trust taxation models. A UK discretionary trust that shields assets […]
Accountants for the US and the UK who advise on trust structuring understand one painful reality: a trust that works perfectly for UK IHT purposes may be a nightmare for US federal tax purposes — because the UK and the US have fundamentally different trust taxation models. A UK discretionary trust that shields assets from UK IHT after ten years may also be a US grantor trust — meaning the trust’s income is taxed in the hands of the grantor (the US citizen who established the trust) as if they owned the assets directly. An offshore trust established with the best UK intentions becomes a US filing nightmare if the grantor trust rules inadvertently catch it.
This guide explains how to structure a cross-border trust that works for both UK IHT and US federal tax purposes — identifying the grantor trust traps, avoiding the unintended consequences, and ensuring that the trust’s UK tax efficiency is not completely offset by unexpected US tax exposure. Visit our advisory service:
https://www.jungletax.co.uk/services/us-uk-tax/
Accountants for US and UK for trust structuring understand both the UK trust taxation framework — the tenth anniversary charge, the exit charge on distributions, the trustee tax on trust income — and the US grantor trust framework — the retained powers that cause a trust to be treated as owned by the grantor for US federal tax purposes, the pass-through taxation model, and the Form 3520 and Form 3520-A reporting obligations.
The IRS guidance on trusts and the grantor trust rules is at:
https://www.irs.gov/businesses/small-businesses-self-employed/grantor-trusts
A UK tax adviser can structure a trust that achieves the UK IHT objectives — sheltering assets from the tenth anniversary charge or the exit charge. They cannot advise whether the trust will be a US grantor trust or what US reporting obligations will arise. A US tax adviser can identify whether a trust is a grantor trust — but cannot advise whether the grantor trust treatment is consistent with the UK trust structure or whether the UK tax plan is being undermined. Only Accountants for the US and UK who understand both systems simultaneously can structure a trust that works for both purposes.
A trust is a grantor trust for US federal tax purposes if the grantor retains any of several specific powers — the power to revoke the trust, the power to control the beneficial enjoyment of the trust income or principal, the power to approve or withhold approval for distributions, or the power to vest trust corpus in themselves. These powers are retained for many reasons: to give the grantor some control over trust assets for personal or business purposes, to preserve flexibility, or to ensure the trust can be managed if circumstances change. But each of these powers triggers grantor trust treatment, making the trust’s income taxable in the hands of the grantor, not in the hands of the trust or its beneficiaries.
A UK discretionary trust — where the trustees have discretion over which beneficiaries receive distributions, and the grantor retains no specified rights — is a common UK IHT planning vehicle. Yet if the grantor retained the power to remove the trustees or replace them with other trustees, the grantor has retained the power to ‘control’ the beneficial enjoyment of the trust income. The grantor trust rules are triggered. The same grantor who has achieved their UK IHT planning goal is now deemed to own all the trust’s income for US federal tax purposes.
Our guide to cross-border trust structuring for US citizens in the UK is at:
https://www.jungletax.co.uk/jungle-tax-news-updates/accountants-us-uk-cross-border-trust-structures/
Where a grantor trust exists, the US regime permits a Qualified Subchapter S Trust (QSST) election, which converts the grantor trust’s pass-through taxation into a more transparent structure. However, the QSST election requires that all trust income be distributed to a single current beneficiary. This requirement makes the QSST inappropriate for most UK discretionary trusts (which benefit multiple beneficiaries). For a UK trust with multiple beneficiaries, the QSST election is not available.
The first step is defining the UK IHT goal: shielding assets from the estate on death, deferring the tenth anniversary charge, removing assets from the deemed domicile scope, or protecting assets from beneficiary creditors. Each goal suggests a specific UK trust structure — potentially a bare trust, a discretionary trust, a life interest trust, or a trust with a non-resident beneficiary.
The second step is to identify every power the grantor intends to retain — the power to revoke, the power to change beneficiaries, the power to remove trustees, and the power to approve distributions. Each power should be explicitly listed. Once listed, each power must be tested against the US grantor trust rules to confirm whether it triggers grantor trust status.
The third step is to model the US tax treatment of the trust under the grantor trust rules — if retained powers exist — and to calculate the impact. If the trust is a grantor trust, the grantor’s US federal tax position changes: the grantor pays US federal tax on the trust’s income, the trust’s UK trust tax is creditable as a foreign tax, and the Form 3520 annual filing obligation arises.
The fourth step is optimizing the trust structure to work for both the UK IHT plan and the US tax treatment. This may mean: accepting grantor trust status and modeling the US tax cost as part of the overall planning; eliminating certain retained powers to avoid grantor trust status and accepting reduced UK control; or restructuring the trust to use a QSST election if a single primary beneficiary exists.
David is a US citizen based in London. He established a UK discretionary trust in 2020 with his US-citizen wife as a joint settlor. The trust holds UK and US investment assets worth approximately £2.8 million. The trust deed gave David the power to remove and replace trustees at his discretion. David believed this power was necessary to maintain control over trust administration.
In 2026, Jungle Tax reviewed the trust structure for tax compliance. The review identified that David’s power to remove and replace trustees triggered the US grantor trust rules — specifically, the power to ‘control the beneficial enjoyment’ of the trust income. The trust was a US grantor trust. David was deemed to own all the trust’s income for US federal tax purposes. The trust’s UK tax — approximately £18,000 per year — was a creditable foreign tax. But David’s US federal tax on the trust’s income was approximately £28,000 per year. The total annual cost to David was approximately £46,000 per year (after FTC). David had believed the trust was an IHT-planning structure — he had not realized it was also a US grantor trust.
Jungle Tax recommended eliminating David’s power to remove and replace trustees. Instead, a corporate trustee — a professional trust company — was appointed, with David given the power to remove and replace it only for cause (e.g., bankruptcy, breach of trust). This narrower power did not constitute control over beneficial enjoyment. The restructured trust was no longer a grantor trust. David’s US federal tax on the trust’s income fell to approximately £12,000 per year—an annual saving of approximately £16,000. The restructuring was executed through a trust amendment and trust protector replacement.
Many US citizens establish UK trusts without understanding the implications for US grantor trusts. The trust deed is drafted for UK tax purposes without considering the US federal tax treatment. Only after the trust is established — and years of incorrect filings have occurred — does the grantor trust problem become apparent. The adviser must model the US grantor trust treatment before the trust is established.
A UK trust adviser may describe a trust as a ‘discretionary trust’ — which, in the UK context, means a trust in which the trustees have discretion over distributions. A US tax adviser hearing ‘discretionary trust’ may assume it is not a grantor trust. The two meanings are not equivalent. A UK discretionary trust with a grantor-retained power is both a discretionary trust in the UK sense and a grantor trust in the US sense.
Where a US citizen establishes or funds a trust, the Form 3520 reporting obligation arises in the year of establishment or funding, and Form 3520-A must be filed every year the trust exists. Missing these filings or understating the trust assets in the filings triggers substantial penalties. The Accountants for the US and the UK ensure that both forms are filed correctly from the first year the trust exists.
A UK discretionary trust pays trust tax at the additional rate (45 percent) on trust income. For a US citizen who is also subject to US federal tax on the trust’s income (as a grantor trust), the UK tax is creditable against US federal tax, reducing the US federal tax liability. The adviser models the FTC position before finalizing the trust structure to confirm that the UK trust is optimally structured to generate FTC.
The IRS guidance on Form 3520 is at:
https://www.irs.gov/forms-pubs/about-form-3520
Jungle Tax is a specialist US-UK cross-border tax advisory firm with Accountants for the US and UK who include US-qualified tax practitioners and UK-qualified tax advisers experienced in cross-border trust structuring. We review the UK trust structure and identify any retained powers that trigger grantor trust status. We model the US grantor trust tax treatment and calculate the annual US federal tax cost. We optimize the trust structure to meet both UK IHT and US federal tax requirements. We ensure all Form 3520 and Form 3520-A filings are completed correctly from the first year the trust exists.
Read our guide to cross-border trust structuring:
https://www.jungletax.co.uk/jungle-tax-news-updates/accountants-us-uk-cross-border-trust-structures/
Cross-border trust structuring requires Accountants for the US and UK who model both the UK IHT treatment and the US grantor trust treatment before the trust is established, because a structure that solves the UK IHT problem may create a US federal tax problem if not carefully managed.
Three points matter most. First, every retained power in a UK trust must be tested against the US grantor trust rules — powers to revoke, approve distributions, or control beneficial enjoyment trigger grantor trust status. Second, a grantor trust may be appropriate if the US federal tax cost is acceptable for the overall plan, but the cost must be modeled before the trust is established. Third, Form 3520 and Form 3520-A filings must be completed correctly from the first year the trust exists — missing or inaccurate filings trigger substantial penalties.
Jungle Tax | mailto:hello@jungletax.co.uk | 0333-8807974 | https://www.jungletax.co.uk
A grantor trust is a trust where the grantor has retained certain powers — to revoke, approve distributions, or control beneficial enjoyment. Where those powers exist, the grantor’s income is taxed in the grantor’s hands, not in the trust or beneficiaries’ hands.
Yes — if you do not retain any powers over the trust. If you retain the power to remove trustees, approve distributions, or revoke the trust, you trigger grantor trust status. Eliminate these powers to avoid grantor trust treatment.
Not necessarily — but the cost must be understood. A grantor trust incurs US federal income tax on the trust’s income annually. Model the costs and confirm they are acceptable before establishing trust.
Yes — if you are a US citizen. Form 3520 (or Form 3520-A if you are a beneficiary receiving distributions) must be filed every year. Missing filings trigger penalties of up to 35% of the trust corpus.
Yes — by removing the retained powers that trigger grantor trust status. A trust amendment that eliminates your power to remove trustees (or limits it to removal for cause) can eliminate grantor trust status.
It depends on the trust’s income and your US federal marginal tax rate. A trust with a £50,000 annual income, taxed at 45% in the UK and 37% at the US federal level, levies approximately £15,000–£18,000 per year in combined UK and US tax.
