U.S. Taxation of Foreign Estates, Trusts and Beneficiaries (Portfolio 6500)


Michael Heimos


Michael A Heimos PC

At a glance

I. Introduction
II. Foreign Trusts: A Brief Historical Look
III. What Constitutes a Foreign Trust (§ 7701)
IV. Outbound Foreign Trusts (§ § 679 and 684)
V. Inbound Transfers (§ § 643(h), 651-652, 661-662, 665-668, 672(f), 679(a)(4), 871, 897, 1441)
VI. U.S. Wealth Transfer Taxes on Foreign Transfers to Foreign Trusts
VII. Reporting Requirements for Foreign Trusts (§ § 6048, 6677)
VIII. Selecting the Situs of Foreign Trusts
IX. Changing the Situs of Foreign Trusts
X. Drafting, Executing, and Administering Foreign Trusts
XI. Special Planning Uses of Foreign Trusts
XII. Investments by a Foreign Trust
XIII. Foreign Estates
XIV. Collection and Enforcement


Bloomberg Tax Portfolio, U. S. Taxation of Foreign Estates, Trusts and Beneficiaries, explains the federal income, estate and gift taxation of foreign trusts and estates and their grantors and beneficiaries.

In order to prevent perceived abuses, foreign trusts, their grantors and beneficiaries are subject to a number of special provisions of the Internal Revenue Code. Section 679 taxes a U.S. grantor of a foreign trust that has a U.S. beneficiary as the deemed owner of the trust. Section 684 causes a U.S. grantor to recognize gain on the transfer of appreciated property to a foreign trust. Section 672(f) denies grantor trust status to the extent that it would cause a trust to be taxed as owned by a non-U.S. person, and makes any U.S. beneficiaries of such a trust taxable as the deemed owners.

The U.S. beneficiaries of a nongrantor foreign trust are generally taxable on the currently distributed income of the trust in the same manner as the beneficiaries of domestic trusts. Taxation of U.S. and foreign beneficiaries on accumulation distributions from a foreign trust, however, is different. Since the undistributed capital gains of a foreign trust are part of distributable net income, a distribution of those gains in subsequent years will be taxable to the beneficiaries. In addition, all accumulation distributions are subject to an interest charge.

Absent treaty obligations, U.S. estate taxes are imposed upon U.S. property of a foreign decedent. 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 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.

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