Foreign Grantor Trusts must be reported by the grantor if he or she is a US person (US citizen, Green Card Holder or US resident). All income and gains from the trust will pass through to the grantor and must be reported on his or her tax return on a current year basis. This can involve some complex filings, especially if the trust has interests in other entities such as companies or funds.
Foreign Non-Grantor Trusts with US beneficiaries can be even more complicated. Returns only have to be filed by the beneficiaries when distributions are made to them, but if income and gains have accrued over a number of years, the accounting and reporting when distributions are made can be very complex indeed. In addition, the accumulated income and gains may be subject to the so-called ‘throwback’ tax rules, whereby income is attributed to the year in which it arose and then subject the highest possible tax rates applicable in the relevant years and punitive interest charges.
It is usually advisable to avoid this outcome by making annual distributions of income. Distributions of income can be made after the end of the tax year in which the income arises but prompt action will be needed. Distributions must be made within 65 days of the end of the tax year to avoid the throwback tax rules applying.
How we can help
As well as the trustees, US grantors and beneficiaries of trusts will need help planning their affairs to mitigate their exposure to these punitive US tax rules and to reduce the complexity of their tax filings. We can help them with this planning and we can also assist with the filing of any forms that need to be submitted to the IRS.
The trust may also need to review its status and any obligations it may have under the Automatic Exchange of Information (AEOI) regimes. If the trust falls under the definition of a financial institution, either under the US Foreign Account Tax Compliance Act (FATCA) rules or under the Common Reporting Standard (CRS), then there may be a requirement for the trust to make a report of beneficial owners to the IRS or to the local tax authorities. If required, we can help you to understand how these rules apply to you.