What US tax issues are there for US taxpayers with foreign trusts?

Reporting requirements 

In certain circumstance, there are yearly reporting forms which must be filed by the trustees of a foreign grantor or foreign non-grantor trust. Failure to file these reports can lead to substantial penalties, with penalties assessable on the US owner. If there is not a US owner of the trust, penalties can be assessable on the trustees.

Action:  For non-compliant trusts there are various disclosure routes that trustees can follow to bring a trust up to date with its US obligations. If you are unsure about which disclosure route applies to your trusts, please get in contact. We can prepare the filings needed in both of these situations.

Taxation for owners and beneficiaries

A US owner of a foreign grantor trust is subject to US Income Tax on the portion of trust income that they are considered to own. The trustees must report this income on a foreign informational report provided to the Internal Revenue Service (IRS).

A US beneficiary of a foreign non-grantor trust should receive a statement from the foreign trust determining the taxability of any distribution; however the trustees do not need to provide this to the IRS. Calculations need to be undertaken to determine how much of the distribution will be comprised of current year income, prior year income and trust corpus (capital). There are complicated “throwback tax rules” which assess an interest charge on distributions from prior year accumulated income. If this statement is not provided to beneficiaries the default position can lead to the entire distribution being taxable as accumulated income on the beneficiary’s US tax return.

Action: Significant savings can be achieved if a distribution is split into taxable and non-taxable elements, rather than being taxed as 100% taxable income. We are experienced with preparing these calculations (UNI/DNI calculations).

How we can help

Our team of dual-qualified US and UK tax advisors can guide you in making decisions that work in both the short- and long-term, while avoiding pitfalls and unexpected consequences. We can provide assistance with determining if a foreign or non-US trust has any US compliance obligations. From there we can help to calculate the taxability of any future distributions from the trust and prepare the necessary annual reporting forms.

For further guidance and advice tailored to your situation, please reach out to your usual Buzzacott contact. Alternatively, please complete the form below and a member of our team will be in touch.