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).