'Throwback' tax rules
As the trust was considered a Foreign Non-Grantor Trust, Anita needs to consider the ‘throwback’ tax rules, which can apply to distributions of accumulated income/gains within a Foreign Non-Grantor Trust with US beneficiaries. If income and gains accumulate without being distributed within the tax year in which they arise, then punitive tax rates and an interest charge will apply.
However, this can be avoided with some careful and timely planning. If distributions of income are made within 65 days of the end of the tax year in which that income arises, then they are treated as having been made within the year and therefore these punitive rules do not apply. Therefore, the trustees are advised to calculate annual Distributable Net Income (DNI) and make sure it is distributed within the 65-day period.
In some cases, it is possible to direct income to be distributed to beneficiaries who are non-US persons in order to reduce or in some cases remove altogether, the exposure to tax, while distributions of non-taxable ‘Corpus’ are made to US persons. However, in this case it was not possible to do this, so the tax liability and filing requirements for Anita could not be removed.
Working to such a short deadline can be a real challenge, so you will need to act swiftly once you are aware that these rules may apply to you. Fortunately, in this case, Buzzacott were engaged soon after the grandfather’s death, so we were able to advise the trustees in good time. We carried out the necessary calculations and informed the trust of what needed to be distributed to Anita and her siblings within the required time frame in order to keep Anita’s tax exposure to a minimum.