What Is The US Foreign Trust Tax?

What Is The US Foreign Trust Tax?

A foreign trust is a tax structure that allows the transfer of property from grantor (property owner) to another party called the trustee. The trustee is tasked to administer the property that will benefit a third party called the beneficiary. Under US law, any trust that is organized in a foreign country is still subject to foreign trust tax, although the property is managed under the local law and tax regulations. The IRS has been making an effort to increase tax compliance among US property owners who set up foreign trusts.

Grantor/ Non-Grantor

In US taxation system, foreign trusts can be viewed as non-grantor or grantor trusts. Under IRC Sec. 671-679, a person is seen as grantor if he/she retains the ownership of the property of a trust. The capital gains and income of the grantor is taxed as if grantor’s assets have never been transferred. If the grantor decides to give up any ownership over the asset, he/she is seen as a non-grantor.

In an increasingly dynamic global society, it is important for US taxpayers to fully understand the concept of foreign trust tax to avoid any unwanted financial consequences. Many of them are living for a long period in other countries, while still retaining their US citizenship and it is fairly common for them to create trusts in other countries. Trust arrangements are needed to ensure the preservation of their properties for their future generations. They can use trust arrangements as asset protection for both profit and non-profit purposes.

US taxpayers should know what’s required for reporting a foreign trust. They can use Forms 3520 and 3520-A to report annual income, expenses of, distribution from and transfer to foreign trusts if they are the owner or beneficiary. They are required to file annually, and reporting must adhere to US accounting guidelines.

Negligence Penalties And Interest Charges

As any taxpayer might expect, the US government always takes a serious look at the financial structure of foreign trusts. The IRS employs a number of methods to make sure that US taxpayers abroad remain compliant to reporting rules. Hefty negligence penalties and interest charges of the accumulated tax can be incurred if taxpayers fail to report appropriately. Given the complex nature of foreign trust reporting, it is important for them to consult with tax professionals who have knowledge and experience about the taxation of foreign trust.

Contact British American Tax

To learn more about the US Foreign Trust Tax, contact British American Tax today and consult with an expert tax advisor who can answer any questions you might have about taking a pro-active approach to your tax planning.

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