trusts

Germany–USA topic hub

U.S. Trusts from a German tax perspective

A U.S. trust is not a single tax category under German law. Its German treatment depends on the trust deed, the rights and powers of the settlor, trustees and beneficiaries, whether the trust assets have become legally and economically independent, and which German tax regime is being examined. The same trust can therefore be treated differently for German income tax, inheritance and gift tax, and attribution under Section 15 of the German Foreign Tax Act (AStG).

No automatic equivalence

Grantor, non-grantor, revocable and irrevocable are only the starting point

U.S. trust terminology is relevant for the German analysis, but it does not control the German tax result. Germany does not automatically adopt the U.S. classification. A trust treated as a grantor trust for U.S. federal income tax purposes may be classified differently in Germany; conversely, a U.S. non-grantor trust is not automatically accepted as a fully independent taxable entity under German law.

The German analysis focuses on legal rights and actual control. Who can dispose of the assets? Can the settlor revoke the trust, reclaim assets, replace trustees or control investment and distribution decisions? Do beneficiaries already have enforceable rights, or do they merely have an expectation of a discretionary distribution? These questions drive the German tax treatment.

Step 1

How is a U.S. trust classified in Germany?

German tax law first asks whether the trust assets have actually become separate from the settlor or whether the assets and income must still be attributed to another person. Only after that classification can distributions, succession, gifts and current income be analysed reliably.

1

Governing law and trust deed

The applicable foreign law and the actual trust instrument are essential. Standard U.S. labels do not replace a document-based analysis.

2

Settlor control

Reserved powers to revoke, reclaim assets, direct investments, replace trustees or otherwise control the structure may indicate that the trust assets have not become sufficiently independent from the settlor.

3

Trustee powers

The German analysis considers whether trustees genuinely exercise independent authority over the assets or remain legally or factually controlled by the settlor.

4

Beneficiary rights

A mere possibility of a discretionary distribution is different from an existing enforceable right to trust assets or income. That distinction is particularly important for German inheritance and gift tax.

U.S. terminology

Grantor trust

U.S. income-tax attribution to the grantor is relevant background, but it is not itself a German classification rule. Germany applies its own attribution and entity-classification principles.

U.S. terminology

Non-grantor trust

A trust that is treated as a separate taxpayer in the United States is not automatically regarded as a fully separate taxable entity in Germany. The legal and economic separation of the trust assets remains decisive.

Structural feature

Revocable or irrevocable

Revocability is highly relevant, but it is not the only factor. A formally irrevocable trust may still leave extensive control with the settlor, while a revocable trust usually points against a final separation of the assets.

Step 2

German inheritance and gift tax

German inheritance and gift tax law contains specific rules for foreign legal arrangements whose purpose is to hold assets in a legally bound form. For trusts, funding, distributions, termination and the settlor's death must be analysed separately.

Funding

Transfer to a separate trust structure

If assets are effectively and finally transferred to an independent foreign pool of assets, the funding itself can trigger German inheritance or gift tax. The first question is therefore whether the trust assets have genuinely become separate from the settlor.

During the trust term

Distributions and “Zwischenberechtigung”

Distributions may fall within Section 7(1) no. 9 sentence 2 of the German Inheritance and Gift Tax Act (ErbStG). Recent BFH case law places particular emphasis on whether the recipient already has an independent legal position in relation to the trust assets or income, rather than merely receiving a distribution at the trustee's discretion.

Termination

Transfer of assets on termination

For German tax purposes, an internal decision to terminate the trust is not necessarily the decisive taxable event. The timing may depend on when the legally bound assets actually pass to the person entitled to receive them.

Death of the settlor

Are the trust assets part of the estate?

If the trust assets have become legally independent, they will generally no longer form part of the settlor's estate. If the settlor retained extensive powers over the trust, however, German law may continue to attribute the assets to the settlor.

Germany–U.S. estate tax treaty

The beneficiary's treaty position can matter independently

Cross-border estates may also require analysis under the Germany–U.S. inheritance and estate tax treaty. The treaty position of a beneficiary cannot automatically be derived from the position of the decedent or the trust itself.

Double taxation

U.S. income tax is not automatically creditable against German inheritance tax

A U.S. income or withholding tax is not automatically creditable against German inheritance tax merely because both taxes economically relate to the same receipt. The tax type, domestic credit rules and treaty provisions must be analysed separately.

Important: Section 15 AStG does not replace inheritance and gift tax Section 15 AStG is an income-tax attribution rule. German inheritance and gift tax must be analysed separately. Current law expressly separates attribution under Section 15 AStG from the inheritance-tax treatment.

Step 3

German income tax

In addition to inheritance and gift tax, Germany must determine who is taxed on the trust's current income and how actual distributions are treated. General attribution principles and Section 15 AStG can overlap.

Current income

Interest, dividends and capital gains

The German analysis begins with the question of who is treated as earning the underlying income. In a transparent structure, income may be attributed directly to the settlor or another person even without a distribution.

Attribution taxation

Section 15 AStG can apply without a distribution

For a foreign family foundation or a comparable foreign pool of assets, current German law can attribute assets and income to a German-resident settlor or beneficiary even where no cash or property has actually been distributed.

Later distributions

Document income that has already been attributed

Section 15 AStG contains relief mechanisms for later payments to the extent that the underlying income can be shown to have already been attributed. Year-by-year documentation is therefore critical.

Section 15 AStG

Current law and proposed reform must be kept separate

As of September 2026, the current version of Section 15 AStG remains the law in force. The Federal Ministry of Finance draft dated 18 November 2025 is a reform proposal, not enacted law. This distinction is particularly important for U.S. trusts because the draft would materially change third-country relief and the scope of relevant beneficiaries.

Current law

Section 15 AStG de lege lata

  • Assets and income of a foreign family foundation are generally attributed to the German-resident founder or, if applicable, German-resident persons entitled to benefits or the remaining assets.
  • Other purpose-bound pools of assets and comparable legal arrangements can be treated in a similar way. U.S. trusts may therefore fall within the scope of Section 15 AStG depending on their legal structure.
  • Attribution can arise even where no distribution has been made.
  • U.S. grantor or non-grantor status does not determine the German result.
  • The statutory relief rule in Section 15(6) AStG is currently framed for EU/EEA structures and therefore does not generally provide direct relief for a U.S. trust.
  • Section 15(9) and (10) AStG contain special rules for lower-tier foreign companies and other foreign foundations.
  • Later distributions can be relieved to the extent the relevant income has already been attributed and can be documented.
Draft law · not in force

Federal Ministry of Finance draft of 18 November 2025

  • The draft places greater emphasis on low-taxed income and proposes a 15-percent low-tax threshold.
  • The proposed attribution rules would expressly extend to persons with direct and indirect rights to benefits or remaining assets.
  • The relevant family and beneficiary concepts would be broadened and indirect interests would receive greater attention.
  • The relief rule would be redesigned and extended to third countries. This could create an express statutory route to relief for U.S. structures.
  • The proposed relief would depend in particular on showing that the foreign family foundation or comparable arrangement is not an artificial arrangement and that adequate exchange of information is available.
  • Rules for lower-tier foreign companies and other foreign foundations would be reorganised.
  • Previously attributed income and later payments would be coordinated through revised rules intended to reduce multiple taxation.
Do not apply draft law as if it were current law The proposed third-country relief is highly relevant for U.S. trusts, but it cannot be relied on in current filings unless and until the reform is enacted and becomes effective.
Issue Current law Draft of 18 November 2025
Object of attribution Assets and income of the foreign family foundation or comparable arrangement Greater focus on low-taxed income
Relevant persons Founder and persons entitled to benefits or remaining assets under current rules Express inclusion of direct and indirect beneficiaries and remaindermen
Relief Statutory relief focused on EU/EEA structures Proposed extension to third countries
U.S. trust Potentially a comparable foreign pool of assets; third-country relief problem Potential express relief where anti-abuse and information-exchange requirements are met
Lower-tier entities Special rules in Section 15(9) and (10) AStG Reorganised rules for companies and other foreign foundations

German case law

Key Federal Fiscal Court decisions on foreign trusts

The BFH decisions show why a trust cannot be analysed by label alone. The court focuses on whether assets are genuinely separated, the settlor's retained powers, the beneficiary's legal rights and the point at which assets actually pass.

BFH 27 September 2012 II R 45/10

Distributions from a U.S. trust

The BFH considered distributions from a U.S. trust under the German inheritance and gift tax rules for foreign asset pools. The decision became an important starting point for the later case law on the meaning of “Zwischenberechtigter”.

BFH 25 June 2021 II R 31/19

An independent legal position is required

The BFH clarified that a person is not treated as an intermediate beneficiary merely because a trustee can make a discretionary distribution. The analysis turns on whether the person has an independent proprietary or contractual right relating to the trust assets or income.

BFH 25 June 2021 II R 13/19

Separation of trust assets from the settlor

Where the settlor retains such extensive powers that the foreign asset pool cannot dispose of the assets freely and independently, the assets may remain attributable to the settlor. They can therefore still form part of the settlor's estate for German inheritance tax purposes.

BFH 25 June 2021 II R 40/18

Termination and transfer of assets

For a terminating foreign asset pool, the taxable acquisition may occur only when the bound assets are legally transferred to the person entitled to receive them. An internal termination decision does not necessarily determine the German tax date.

BFH 15 June 2016 II R 51/14

U.S. income tax is not automatically creditable against German inheritance tax

The BFH held in a U.S.-related inheritance-tax case that U.S. federal income tax was not automatically creditable against German inheritance tax. For trust cases, this illustrates the need to separate income-tax and inheritance-tax analysis.

BFH 20 September 2022 II B 2/22

Germany–U.S. treaty and the beneficiary's own position

The BFH confirmed that the treaty position of an individual beneficiary must be analysed independently. A treaty rule applicable to another person is not automatically extended to a beneficiary merely because Germany's taxing right is based on that beneficiary's residence.

Common cross-border scenario

Moving to Germany with an existing U.S. trust

The most important German tax event is often not the creation of the trust but the later move of a settlor or beneficiary to Germany. From that point onward, Germany may apply its tax rules to a structure that has existed for many years and whose historical records were never prepared with German tax requirements in mind.

1

Collect the documents before the move

Trust deed, amendments, letters of wishes, trustee resolutions, account and brokerage statements, tax returns, distribution statements and records of contributions should be available in full.

2

Reconstruct historical movements

Principal, current income, realised gains and previous tax attributions should be traceable year by year. Without this history, later German taxation of distributions can become unnecessarily difficult.

3

Determine beneficiary rights

Vested, contingent and discretionary interests are not equivalent. The exact legal rights under the trust deed and governing law are central to the German analysis.

4

Analyse Section 15 AStG before the first German return

Potential annual attribution should be addressed when the person becomes German tax resident, rather than only when a later distribution occurs.

Pre-move planning is particularly valuable for trusts A trust administered for years solely under U.S. tax assumptions can create new German tax and documentation obligations once a settlor or beneficiary moves to Germany. Changes to trust rights immediately before or after the move should be coordinated from both the German and U.S. sides.

Germany–U.S. estate planning

A trust does not automatically solve the cross-border estate problem

Trusts are a standard tool in U.S. estate planning. Once a settlor, trustee, beneficiary or asset has a German connection, however, the U.S. structure must also be tested against German inheritance and gift tax, income tax and foreign tax rules.

Lifetime planning

Trust in place before German residence

Before a move to Germany, it should be determined whether changes to the trust are useful at all, which rights would arise or disappear, and whether those changes themselves can trigger German or U.S. tax consequences.

Succession

Trust as an estate-planning structure

A testamentary trust or existing living trust can create German inheritance tax consequences at more than one stage. Avoiding U.S. probate does not determine the German tax treatment of the underlying transfer.

German-resident beneficiaries

Distributions to beneficiaries in Germany

Before material distributions are made, the beneficiary's legal position, historic attribution, trust principal and accumulated income should be documented. The German tax position is best determined before payment.

U.S. compliance

Forms 3520 and 3520-A matter, but they do not determine German classification

U.S. trust reporting, including Forms 3520 and 3520-A, belongs to the U.S. tax side of the case. These filings can provide useful evidence about grantor status, contributions and distributions, but they do not automatically determine the German tax treatment.

In a coordinated cross-border review, U.S. compliance and German classification should therefore be analysed in parallel. The same documents are often needed, but the legal consequences arise under two different tax systems.

Germany–U.S. tax advice

Do you have a U.S. trust and a German connection?

We analyse the German classification of the trust, the legal position of the settlor, trustees and beneficiaries, potential German inheritance and gift tax, German income tax and possible attribution under Section 15 AStG, and coordinate these issues with the U.S. tax side.

Arrange an initial consultation