Last updated: 7 Nov 2025

Germany–US: Trusts & Foundations in Cross-Border Inheritance

How US trusts are classified under German law, when to prefer a foundation (Stiftung), how to fund and distribute cross-border, and how this interacts with treaty allocation and § 21 ErbStG. Includes governance tips and evidence packs for filings.

1) German classification of US trusts

• Look-through approach: Substance over form—who has control and economic entitlement?
• Revocable grantor trust: Often treated as transparent (no true transfer until irrevocable/settlor’s death).
• Irrevocable discretionary trust: Analyze whether/when beneficiaries acquire a specific right (claim) vs. mere expectation.
• Fixed interest trust: Where rights are sufficiently determined, Germany may see an acquisition at vesting.
• Executor vs. trustee role: Distinguish administration of the decedent’s estate (probate) from ongoing trust property.

2) Taxable events: funding, vesting, distributions

• Funding during life: May be treated akin to a gift if beneficiaries acquire economically.
• At death: If the trust becomes effective or rights vest, this can be an acquisition event for German inheritance tax.
• Distributions: If beneficiaries only acquire upon payout, the distribution may be the relevant taxable event.
• Per-beneficiary basis: Remember German inheritance tax assesses each recipient individually (allowances, classes, rates).
• Evidence: Trust deed, amendments, letters of wishes, distribution minutes, and control mechanics are decisive.

3) Treaty & §21 ErbStG interaction

• Treaty allocation: Determine domicile/tie-breaker and asset situs first (see Treaty page).
• Foreign death taxes: If US estate tax (or state inheritance/estate tax) applies on the same foreign slice, Germany may grant a §21 credit up to the German tax attributable to that slice.
• Trust context: Clarify whether the US levy is on the estate or on a separate trust and which assets were taxed abroad to match the German slice correctly.

4) Foundations (Stiftungen): when they fit

• Use cases: Long-term family governance, multi-jurisdiction portfolios, philanthropy, and controlled distributions.
• Predictability: Recognized legal personality in Germany & many EU states; clearer entry/exit taxation than many trust setups.
• Design levers: Statutes (purpose, beneficiaries, distribution rules), board/Protektor, succession of governance, investment policy.
• Cross-border: Domestic vs. foreign foundations (e.g., Liechtenstein). Ensure recognition and coordinated tax treatment before funding.

Implementation: Foundation structuring · Foundation management

5) Governance & asset protection

• Control mapping: Avoid retained powers that undermine transfers (revocation, broad appointment powers without checks).
• Distribution policy: Define objective criteria; avoid ad-hoc patterns that imply de-facto control.
• Separation of roles: Settlor/board/protector with checks & balances; minutes for all key decisions.
• Liquidity: Pre-fund liquidity for taxes (US federal/state, German), forced-share cash claims, and administration.

6) Documentation & evidence for filings

7) Common pitfalls & risk controls

• Mis-timed acquisition: Treating a mere expectation as vested right (or vice versa) → wrong filing/timing.
• Unclear situs mapping: Asset location not matched to foreign tax → §21 credit denied or reduced.
• Retained control: Broad settlor powers may trigger re-characterization at death.
• Missing evidence: No appraisals or incomplete payment proofs → prolonged audits, interest exposure.

Next steps & services

Also see: Foundation management · Executor services