U.S. Taxation of Foreign Estates, Trusts and Beneficiaries (Portfolio 854)

Description

Bloomberg Tax Portfolio, U.S. Taxation of Foreign Estates, Trusts and Beneficiaries, No. 854, gives a survey of the history of trusts, explains in detail the U.S. federal income, estate, and gift taxation of foreign trusts and estates and their grantors and beneficiaries. The Portfolio also provides a secondary discussion of select U.S. state taxation analogues. An entity is subject to U.S. income taxation as a “foreign trust” or “foreign estate” if it is classified respectively as such under several U.S. tax code sections.

Congress continues to perceive abuses of the Internal Revenue Code through the use of foreign trusts. Therefore foreign trusts, their grantors and their beneficiaries are subject to a number of special substantive and reporting provisions of the Internal Revenue Code and the Bank Secrecy Act. For example, §679 imposes a look-through for income tax purposes, taxing a U.S. grantor of a foreign trust that has a U.S. beneficiary or potential U.S. beneficiary as the deemed owner of the trust assets. Also, §684 causes a U.S. grantor to recognize gain on the transfer of appreciated property to a foreign trust. As well, §672(f) denies look-through, grantor trust status to the extent that it would cause a foreign trust to be taxed as owned by a non-U.S. person, and may make any U.S. beneficiaries of such a trust taxable as the deemed owners to the extent such beneficiary has made transfers to the trust.

The U.S. beneficiaries of a nongrantor foreign trust are generally taxable on the current (in the year experienced) and distributed income of the trust in the same manner as the beneficiaries of domestic trusts. Taxation of U.S. beneficiaries on accumulation distributions from a foreign trust, however, is different. For example, the “throwback rules,” now largely repealed for domestic trusts, still apply generally in the context of foreign trusts. The “throwback rules” impose an augmented scheme of taxation on the nongrantor foreign trust’s distributed, accumulated trust income, amounting to lost value of the offshore accumulation through the devices of interest charges and lost gain treatment.

Absent treaty obligations or proper planning, U.S. estate taxes are imposed upon the transfer of U.S. situs property of a nonresident noncitizen decedent, and on the transfer of any property, without regard to situs, of a U.S. resident noncitizen. Although most of the usual deductions are allowed, the marital deduction is not unless the surviving spouse is a U.S. citizen. The foreign estate of a nonresident noncitizen is also subject to a greatly reduced unified credit. The foreign estate is generally subject to the same income tax rules as a nonresident alien individual, but with an additional deduction for distributions to beneficiaries. In the case of a nonresident noncitizen, U.S. federal gift taxes only apply to gifts of U.S. situs tangible personal property and U.S. situs realty. Finally, the generation-skipping transfer tax only applies to a nonresident noncitizen to the extent the initial transfer was subject to U.S. estate or gift tax.

This Portfolio may be cited as Heimos, 854 T.M., U.S. Taxation of Foreign Estates, Trusts and Beneficiaries.

Table of Contents

I. Introduction and General History of Trusts
II. Foreign Trusts and U.S. Taxation: A Brief History
III. What Constitutes a Foreign Trust (§7701)
IV. Outbound Foreign Trusts (§679 and §684)
V. Inbound Transfers and Taxation of U.S. Income of Nongrantor Foreign Trusts
VI. U.S. Wealth Transfer Taxes on Foreign Transfers to Foreign Trusts
VII. Reporting Requirements for Foreign Trusts
VIII. The Situs of Foreign Trusts
IX. Drafting, Executing, and Administering Foreign Trusts
X. Special Planning Uses of Foreign Trusts
XI. Investments by Foreign Trusts
XII. Foreign Estates
XIII. Collection and Enforcement