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Why the Book?
I'm a tax attorney dealing with US cross-border matters.
Throughout the year and particularly when tax filing season comes around, I assist colleagues with their clients' cross-border filings, many of which relate to foreign (non-US) trusts.
All too often I find that clients who have received a distribution from a non-US Family Trust are having to pay most of their distribution away to tax and penalties ... but by the time this becomes known, it's generally too late to prevent it. The sacrifice of distributions to IRS levies typically comes as a nightmare surprise, one that brings about hardship for Beneficiaries in many cases.
This Book is aimed at avoiding the excessive amounts of tax and penalties that are unnecessarily levied on these distributions. It provides Trustees and advisors the means of preventing these excessive levies on US Beneficiaries.
Table of Contents
- Foreword
- Meeting with Bill Yates
- How to use this book
Part A: Once tax-favored, Foreign Family Trusts are now tax-penalized
Part B: An overview of relevant IRS rules, filings and practice
Part C: Strategies at the time of forrming a Foreign Family Trust
Part D: Strategies at the time of distribution planning
Part E: Strategies for US Beneficiaries
Part F: Distributing interests in non-US entities
Part G: Specific situations
Appendix 1 - Extracts showing perception that Foreign Trusts are vehicles of tax abuse
Appendix 2 - Decision-tree at trust formation
Appendix 3 - Decision-tree at time of distribution planning
Appendix 4 - Template for Trustee certificate to be filed with IRS by US Beneficiary
Appendix 5 - IRS Form 3520
Meeting with Bill Yates, IRS Associate Chief Counsel (International)
I’ll never forget the time I met Willard (Bill) Yates at the Commissioner’s office in Washington DC. Bill headed up the section responsible for foreign trusts within the International Branch. I’d had numerous calls with him over the years, from which I’d learned he was approachable, well-informed, and good humored.
So when I sat in his office that morning, I felt I already had some idea of the man. The reason for the meeting was an unfathomable reporting instruction on foreign trusts that had just been released by the IRS. I asked Bill what the instruction was intended to mean. He gazed at it, then looked up: “Hell, I don’t know”, he said and chuckled. Then he leaned forward, stared at me, and suddenly became intensely serious: "You know, we hate foreign trusts".
I guess my surprise must have shown. Still staring at me, he remained silent for a few seconds then ..
Foreign Family Trusts : once tax-favored, now tax-penalized and maligned
In 1996 the IRS treatment of foreign family trusts morphed from being highly tax-favored to highly tax-penalized.
This dramatic change in treatment came about at a time when foreign family trusts were being stigmatized with the slur of tax abuse, and took place by way of some seemingly minor, but highly significant, changes to two separate sets of rules, namely: the grantor trust rules, and the accumulation distribution rules.
The combined effect of these changes was a watershed in the IRS treatment of foreign family trusts, treatment which still exists today.
The Golden Rule
“US Beneficiaries should generally not receive a distribution from a Foreign Family Trust in a year where the total distributions will exceed the Trust’s net income”.
Trustees and Planners can ensure that they keep to this rule in a variety of ways, some using strategies at the time of trust formation, others using strategies at the time of distribution planning; and frequently using both.
Significantly, all the strategies that save a US Beneficiary from excessive tax and penalties lie at the behest of the Trustee of the foreign trust.
About the Author
I'm a tax attorney based in Atlanta where, for the last number of years, I have specialised in US cross-border tax. I was fortunate to spend 10 years as a tax attorney with Arthur Andersen outside the US, before commencing my own practice as a tax attorney in the US.
As a result of this experience, I'm familiar with the approach to US tax from "the outside in", as well as from "the inside out".
Trusts outside the US frequently don't appreciate the extent of the tax and penalties typically levied on distributions received by their US Beneficiaries; nor the fact that these levies can be reduced significantly.
I enjoy assisting Trustees, Beneficiaries and colleagues in this area.
"An Immigrant's Guide to Tax in USA - What you really need to know"
Link to Immigrant's Guide on Rubinlaw.us :-
https://rubinlaw.us/an-immigrants-guide-to-tax-in-usa-what-you-really-need-to-know/
Available on Amazon.com as a paperback and kindle
For tax / legal questions or comments, contact Richard Rubin at richard.rubin@rubinlaw.us
For any other questions or comments, contact Karin Jonker at karin.jonker@rubinlaw.us