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US Year-End Planning for Foreign Trusts

Trust, Estate and Family - 29 Oct 2015

As the 2015 tax year draws to a close, it is important to consider the US tax system’s impact on the international trust world. FATCA (the Foreign Account Tax Compliance Act) continues to bring IRS attention into many situations where the US was previously not a direct concern.

In spite of this, well-established income tax planning considerations should be reviewed before year-end where a trust does have a US connection either at the settlor or beneficiary level.

Areas For Consideration Include:

Distributions Of Current Year Income To Non-US Beneficiaries

  • If a beneficiary receives a distribution from a foreign non-grantor trust [1], the distribution is deemed to carry out a proportion of the trust’s current year net income and capital gains [2] with it.
  • Any DNI (Distributed Net Income) not distributed in the current tax year to any beneficiary, US or non-US, is accumulated within an Undistributed Net Income (UNI) pool.
  • Any distributions in excess of DNI and UNI are deemed to be a tax free return of capital.
  • Where a trust has both US and non-US beneficiaries, the trustees may initially make a distribution to a non-US beneficiary, which would be matched to 2015 DNI, and then UNI before 31 December 2015.
  • To the extent that the DNI and UNI of the trust has been cleared, or at least reduced by first distributing to non-US persons, any distributions to US beneficiaries in a subsequent calendar year may be received at a much smaller tax cost.

This does require careful planning in terms of timing and review of the trust accounting, but is certainly worth considering where the fact pattern is helpful.

Payment Of Foreign Taxes

  • In order to allow US grantors [3] and US beneficiaries [4] to claim credit for foreign taxes suffered on trust income attributable to them at the earliest opportunity, we recommend any outstanding, or anticipated, foreign tax liabilities in respect of income and gains received in calendar year 2015 be settled on or before 31 December 2015.
  • The need to potentially pre-pay non-US taxes will be dependent upon the activity within the trust during the year.

Capital Gains Position For Foreign Non-Grantor Trusts

  • Where a foreign non-grantor trust has realised capital losses during 2015, the trustees may wish to consider selling any investments sitting at a gain to utilise the current year capital losses at the earliest opportunity.
  • It is important to consider capital gains and losses as calculated on a US tax basis.
  • This is of course subject to the investment strategy of the trustees.

The above planning opportunities are very much dependent upon the specific circumstances of each trust and certainly do not cover all possibilities.

Foreign Account Tax Compliance Act

  • Trustees should ensure all appropriate registrations are in place at the trustee and trust level, particularly if there have been any changes during the year which may affect FATCA status.
  • Any new US connections should be identified to ensure all potential US reportable persons are known.

Should the trustees obtain new information regarding US connections this may have an impact on the income tax reporting requirements in the US, as well as consideration of the year-end planning options discussed above.

To discuss this matter in more detail, please contact your usual Frank Hirth adviser.  Connect with us by email, Twitter or LinkedIn.

[1] i.e. The settlor is not considered to be the owner of the trust assets
[2] i.e. Distributable Net Income
[3] In the case of foreign grantor trusts
[4] In the case of foreign non-grantor trusts

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