Clients often ask for “a living trust and an LLC” because a friend has one. For a nonresident alien (NRA), the combination can be useful — mainly to avoid probate and to keep things organized — but it does not do what many people expect for estate tax. Here is what it actually changes.
What does the structure look like?
The NRA signs a U.S. revocable trust, usually naming himself as trustee or a U.S. co-trustee, and the trust owns a U.S. LLC. The LLC holds the investments: a rental property, a brokerage account, sometimes shares of a foreign company.
Does funding the trust trigger gift tax?
No. Because the NRA can revoke the trust, the transfer is not a completed gift. And because the trust is revocable by the grantor, it is a grantor trust even for a foreign grantor under IRC §672(f)(2)(A)(i). For income tax purposes the trust is invisible; the NRA is treated as owning what it owns.
How is the income taxed?
It depends on how the LLC is classified.
- Single-member LLC (disregarded). The LLC is also invisible for income tax. The NRA is taxed only on U.S.-source income and income connected with a U.S. business (IRC §§871, 872). Rent from a U.S. property is U.S.-source; rent from a property in China or dividends from a foreign company are generally foreign-source and not taxed by the U.S. The LLC must still file Form 5472 with a pro forma Form 1120 each year as a foreign-owned disregarded entity (Treas. Reg. §1.6038A-1(c)); the penalty for missing it starts at $25,000.
- LLC taxed as a partnership (two or more members). Each partner is taxed on its share. On the foreign partner’s share of business income, the LLC must withhold at the highest rate — 37% for individuals — under IRC §1446 and file Forms 8804/8805.
- LLC taxed as a corporation. It is a U.S. corporation: 21% tax on its worldwide income, including income from foreign assets it holds. Dividends to the NRA are then subject to 30% withholding, or 10% under the U.S.–China treaty (IRC §§871(a), 1441). The branch profits tax does not apply — that is for foreign corporations only. Putting foreign investments inside a U.S. corporation therefore usually adds U.S. tax that would not otherwise exist.
Will the trust keep the property out of U.S. estate tax?
No. This is the most common misunderstanding. Because the NRA can revoke the trust, everything in it is treated as still his at death (IRC §§2038, 2104(b)). U.S.-situs assets — U.S. real estate, and stock of U.S. corporations — are subject to U.S. estate tax at rates up to 40%, with only a $13,000 credit (IRC §2102(b)(1)). Foreign assets are outside U.S. estate tax whether or not they are in the trust.
The situs of an LLC interest is not settled for estate tax. A disregarded LLC is commonly analyzed by looking through to its assets; for a multi-member LLC the answer is less certain. A U.S. LLC taxed as a corporation is treated like U.S. stock — U.S.-situs.
Then what is the trust good for?
- Avoiding California probate. Real estate held in a trust passes under the trust document, without a court case that can take a year or more and carries statutory fees.
- Continuity if the NRA becomes incapacitated, through a successor trustee.
- Privacy and simple management for heirs who may live in several countries.
What about gifts to children during life?
An NRA pays no U.S. gift tax on gifts of intangible property — including LLC interests and stock, U.S. or foreign (IRC §2501(a)(2)). Gifts of U.S. real estate or other U.S. tangible property are taxed, with no lifetime exemption. If a U.S. child receives more than $100,000 in a year from a foreign parent, the child reports it on Form 3520 (IRC §6039F). Be careful with gifts of cash held in a U.S. bank account; the safer course is to give from a foreign account.
What would reduce U.S. estate tax?
Generally, a completed transfer of foreign assets to an irrevocable trust before buying U.S. property, or holding U.S. property through a foreign corporation. Each comes with income tax cost and loss of control, so the choice depends on the family. See our article on estate planning for nonresident aliens who own U.S. real estate.
Who should manage the LLC?
Name a manager who can act day to day, sign leases and deal with banks. A U.S.-based manager or co-manager is practical, because banks, title companies and property managers prefer to deal with someone they can reach. The operating agreement should say who can sell or borrow against the property and whether the trustee’s consent is needed.
Do we need to file anything each year?
Yes. A foreign-owned single-member LLC must file Form 5472 with a pro forma Form 1120, even if it is disregarded, or face a $25,000 penalty. The nonresident owner reports U.S. rental income on Form 1040-NR, usually electing to be taxed on net income (§871(d)) so that expenses and depreciation reduce the tax. California requires the LLC’s $800 annual tax and, above certain gross receipts, an LLC fee. Property tax and local business licenses also apply.
What happens when the parent dies?
The trust becomes irrevocable and the successor trustee takes over without probate, which is the main practical benefit. The successor trustee then pays any U.S. estate tax, files Form 706-NA if the U.S.-situs assets exceed $60,000, obtains a transfer certificate from the IRS so title companies will close sales, and distributes or holds assets as the trust directs.
A note on banking and documents from China
U.S. banks will ask for passports, proof of address, the trust certificate and the LLC’s formation documents. Documents signed in mainland China can now be authenticated with an apostille, since China joined the Hague Apostille Convention in November 2023, which saves time compared with consular legalization.
Is this structure still worth it?
For many nonresident families, yes, because it avoids California probate, simplifies management and keeps liability inside the LLC. It does not, by itself, reduce U.S. estate tax. If estate tax exposure is significant, the plan should add a structure designed for that purpose, which usually involves a foreign corporation or an irrevocable trust, each with its own trade-offs.
How much does it cost to set up and maintain?
Setup involves drafting the trust and LLC documents, transferring title and opening accounts. Ongoing costs include the California $800 annual tax, Form 5472 and income tax filings, registered agent fees and bookkeeping. These should be weighed against probate costs, which in California are set by statute and based on the gross value of the estate.
Sources: IRC §§672(f), 871, 872, 1441, 1446, 2038, 2102(b)(1), 2104, 2501(a)(2), 6039F, 6038A; Treas. Reg. §1.6038A-1(c); U.S.–China Income Tax Treaty, art. 9. As of November 2026.
