What Is A Foreign Grantor Trust
The US/UK tax treaty deliberately makes no reference to any such reporting. The US/Canada treaty is rather better in this respect than the current UK treaty. Hopefully a future UK treaty will eliminate such filing as was done for Canada; but the current treaty annoyingly does no such thing. One example of the perils of being caught unaware is outlined in the draft statement. It concerns the treatment of a distribution from a trust in Canada which was established upon the death of Cindy’s parents.
The U.S. tax rules contain a number of special provisions that are applicable to foreign trusts. Perhaps the most significant of these provisions are the "throwback rule", applicable to distributions of accumulated income from foreign nongrantor trusts, and Section 684, applicable to certain transfers to foreign trusts. Income from a foreign grantor trust is generally taxed to the trust’s individual grantor, rather than to the trust itself or to the trust’s beneficiaries.
Prior to the addition of this rule, a foreign trust established by a nonresident alien, who later became a U.S. person, was not a grantor trust under § 679, absent a post-residence transfer in trust or the inclusion of provisions that would make the trust a grantor trust under other sections. Such decisions include, for example, the amount and timing of distributions and whether to make them from income or corpus, the selection of beneficiaries, investment decisions, whether to terminate the trust, and decisions regarding trustee changes.
A grantor includes any person who creates a trust or directly or indirectly makes a gratuitous transfer of cash or other property to a trust. A grantor includes any person treated as the owner of any part of a foreign trust's assets under sections 671 through 679, excluding section 678. A distribution for section 6048 reporting purposes is any gratuitous transfer of money or other property from a trust, whether or not the trust is treated as a grantor trust under the grantor trust rules , and without regard to whether the recipient is designated as a beneficiary by the terms of the trust. A distribution includes the receipt of trust corpus and the receipt of a gift or bequest described in section 663.
For a U.S. owner, this means that the trust’s worldwide income would be subject to U.S. tax as if the owner himself earned such income. owner, this generally means that only the trust’s U.S. source "FDAP" income and income effectively connected with a U.S. trade or business will be subject to U.S. tax in the hands of the trust owner. The U.S. federal income taxation of foreign trusts and their owners and beneficiaries depends upon whether they are classified as "grantor" or "nongrantor" trusts (and further, if the non-grantor trust is a "simple" or "complex" trust).
Foreign-situs trust is also used as a means of asset protection as the creditors cannot easily reach the foreign trust's assets. There are various different forms a person may have to use to report a foreign trust.
In the event Cindy cannot obtain adequate records, the distribution will likely be treated as taxable. In addition to the foregoing filings, FinCen Form 114 , commonly referred to as the "FBAR," must be filed annually to report interests in foreign bank and financial accounts if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year being reported. If the asset protection trust is a foreign trust , the form is only filed by the grantor of the trust; if the trust is a U.S. trust holding such accounts, the form is filed by the trust . If the trust is a U.S. trust, its income tax return is Form 1041, with the "grantor trust" box in the upper left corner checked. If the trust is a foreign trust, its income tax return is form 1040NR, with the "estate or trust" box checked in the upper right corner .
Foreign-situs trust refers to a trust created under foreign law. Such trusts are treated as a non-resident individual for federal tax purposes and therefore has no significant income-tax benefits. They are usually subject to greater reporting requirements than a domestic trust.
The most common IRS International Wealth Tax Advisors reporting form for foreign trusts is Form 3520-A. A little-known related compliance issue is the reporting of foreign inheritance or gift.
The difference in the filing dates between the Form 3520 and Form 3520-A is confusing and a common trap for the unwary. The IRS has been particularly aggressive in imposing penalties for the late filing of these forms in recent years. The reporting of these transactions by grantors, transferors, owners and beneficiaries is done principally on theForm 3520, which if due from a taxpayer, is required to be filed on or before the due date for a taxpayer’s income tax return.
The treaty has NO bearing at all on foreign grantor trust reporting. Most US persons with SIPPs would reduce risk by filing annual 3520s and 3520-A forms.
In the case of a nonresident alien being the economic grantor, the grantor trust rules substantially limit the ability of the trust to be treated as a grantor trust. It must be a foreign revocable trust; or the NRA and/or their spouse are the only persons who are able and do receive distributions during the grantor’s lifetime.
A foreign trust , which is not taxed to a U.S. owner as a grantor trust, may be obligated to file a Form 1040-NR to pay U.S. tax on certain U.S. sourced income. Tax Guide for Aliens and the instructions for Form 1040-NR for additional information.
For a start, nonexempt employees’ trusts and employee grantor trusts are treated differently for U.S. tax purposes. (And, yes, a foreign pension plan can be a combination of both.) Most taxpayers, however, would have difficulty identifying these trusts, let alone applying the correct tax treatments. For taxpayers who look to bilateral income tax treaties for protection, these agreements with comprehensive terms customized for each convention’s partner add another dynamic to the complexity of international tax compliance. The Department of Treasury and the IRS intend to issue proposed regulations that would exclude eligible individuals’ transactions with, or ownership of, these applicable tax-favored foreign trusts from information reporting.
This rule, for so-called "pre-immigration trusts," was added to the Code by the 1996 Small Business Act. It is effective for transfers of property occurring after February 6, 1995.
All this needs to be provided to the IRD within 30 days of the establishment of the trust. International agreements guarantee that the information you receive from your foreign trust is also received by the IRS. At some point in time the Internal Revenue Service receives electronic or written notification of your worldwide taxable income – including foreign trusts. As such, it’s imperative that you report your foreign trust account accurately to avoid failure to file penalties and other forms of penalties and interest. For example, U.S. persons who are beneficiaries of, or grantors to, foreign trusts often need to file a Form 3520.
The terms of the will provide for discretionary trusts to be established for the benefit of Cindy and her family. The trustees agree to make a distribution to Cindy’s daughter to pay for university fees and funds it by selling some shares in New Zealand. However as it is a foreign trust , the ordering rules will need to be applied.
Once it is deemed a foreign trust, the next question is whether it is a grantor trust for non-grantor trust. That is because the different types of trusts have different reporting and tax requirements.
Specifically, all foreign trusts now need to go through a registration process with the New Zealand IRD which sees details such as a copy of the trust deed, contact and identification details of settlors, trustees and holders of the power to appoint and remove trustees provided to the IRD. Further, details of beneficiaries and settlements on the trust are also to be provided.
( C.B. 326) (See § 601.601 of this chapter) consisting of trusts that are parts of qualified retirement plans and individual retirement accounts are not required to file Form 1041. Also, a domestic trust whose gross income for the taxable year is less than the amount required for filing an income tax return and that has no taxable income is not required to file a Form 1041. Except as otherwise provided in part I, subchapter J, chapter 1 of the Code, the taxable income of a foreign trust is computed in the same manner as the taxable income of a nonresident alien individual who is not present in the United States at any time. Section 7701 is not applicable to trusts because it only applies to individuals. In addition, a foreign trust is not considered to be present in the United States at any time for purposes of section 871, which deals with capital gains of nonresident aliens present in the United States for 183 days or more.
Under I.R.C. 6039F, the receipt of a gift or inheritance by a U.S. person from a nonresident alien individual in excess of $100,000 is required to be reported to the IRS. Congress, in its infinite wisdom, required this information to be reported on Form 3520, the same form used to report transactions with foreign trusts. Form 3520, Annual Return to Report Transactions with Foreign Trusts. Form 3520 is due on the date your income tax return is due, including extensions. The penalty for failure to file a Form 3520 is equal to the greater of $10,000 or 25% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust.
Schedule B, Interest and Ordinary Dividends, of the Form 1040 has a question whether the taxpayer received a distribution from, or was a grantor of, or transferor to, a foreign trust. For those not well versed in U.S. income taxation of trusts, those rules are quite difficult to apply. And in the international context they are even more complicated because Sec. 672 narrows the application of the grantor trust rules significantly when the grantor is a foreign person. A trust’s return on Form 3520-A is required in the case of a foreign grantor trust with a U.S. owner. This form must be filed on or before March 15 of each year for the preceding year, unless a request for an extension is submitted by such date.
Forms 3520-A and 3520 are separate filings and are not attached to the Form 1040, U.S. Form 8938, Statement of Specified Foreign Financial Assets, may report foreign trusts, and that form is attached to Form 1040.