Triggering capital gains with offshore trusts

Full transcript

0:11 Hi, I’m Max Dilendorf, a New York-based attorney. We advise tech founders and cross-border families on estate planning and international structuring strategies.

0:22 Today, I want to point out a costly mistake that I see lot: and that is U.S. clients accidentally trigger capital gains taxes when transferring appreciated assets into a foreign trust without realizing the tax consequences. Let’s say you’re transferring appreciated assets—like a stock portfolio or crypto to a non-grantor trust for estate planning.

0:49 If the trust is domestic—such as a Wyoming DAPT—there’s no immediate tax consequence.

0:55 The transfer is treated as a gift, the trust inherits your cost basis, and no capital gains are triggered at the time of transfer. But if the trust is foreign—like a Cook Islands or Cayman STAR Trust—you’ve just stepped into IRS Section 684 territory. This provision states: “In the case of any transfer of property by a United States person to a foreign estate or trust, gain shall be recognized to the transferor as if such property were sold to the trust at its fair market value.” That means the IRS treats your transfer as a taxable sale, even though there was no actual transaction.

1:37 So if you transfer a $5 million crypto wallet or a stock portfolio with a $500,000 basis to an offshore trust, you’ve just triggered a $4.5 million gain—and a massive tax bill in the same year. There’s no easy fix once the transfer is made. The gain is recognized in full, and you’re liable for the tax.

1:59 This rule does not apply if the trust is domestic, if it’s a foreigner grantor trust which makes no sense if you need asset protection as part of your estate plan, or if you’re transferring cash into the trust. Bottom line: the structure matters. Transferring appreciated assets to a foreign trust without proper planning can cost you hundreds of thousands—or even millions—in unnecessary capital gains tax.

2:25 At Dilendorf Law, we help assist clients to structure both domestic and offshore trusts properly, ensuring tax efficiency and compliance.

2:35 Before you move appreciated assets offshore, schedule a proper risk and tax review.

2:42 Thank you for watching, and I will see you in the next episode.

A transcript of the recording, so it reads as speech rather than as prose. It explains the law in general terms and is not advice on your own situation, which turns on facts this video cannot know.