A trust is essentially a device under which a settlor (person creating the trust) provides assets to trustees to hold and manage for the benefit of certain named beneficiary or class of beneficiaries. The trust concept is regularly found in common law jurisdictions and others influenced by English law. For the most part trusts are not recognized in civil law jurisdictions except when in close proximity to common law jurisdictions, i.e. Louisiana. Still further, a few jurisdictions have developed approaches to deal with trusts such as becoming a party to the Hague Convention on Law Applicable to Trusts and on their Recognition.
To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress enacted several special specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore. To comply with the extensive tax and reporting rules dealing with foreign trusts, taxpayers and advisors should understand a few interacting classifications; 1) domestic or foreign, and 2) grantor or non-grantor.