Post-Mortem Considerations with Foreign Grantor Trusts After H.R. 1, Tax Cuts and Jobs Acts

For a long time, tax experts have helped families with one parent from another country and the kids in the U.S. set up trusts with a foreign corporation to save on taxes. But a new law called the Tax Cuts and Jobs Act changed the rules, and now everyone has to rethink their trust plans. If a non-U.S. person creates a trust with the power to change who owns the property, they are treated as the owner for U.S. tax purposes. This means they are responsible for any U.S. taxes on the trust during their lifetime. The only time they would have to pay U.S. taxes is on certain types of income from the trust. A U.S. person who will receive money from the trust in the future generally doesn’t have to pay taxes on it yet. If a trust was set up properly and maintained correctly, the assets in the trust should not be subject to U.S. estate tax when the person who set up the trust passes away, as long as they were held through a certain type of company. When that person dies, the trust becomes a taxable entity for U.S. tax purposes. The trust’s cost basis in its assets (like a company it owns) may be adjusted to the assets’ fair market value when the person died, which can be good if the assets had gone up in value. When someone in the U.S. inherits property from someone outside the U.S., the property’s cost basis may also get adjusted when the person dies, even if it wasn’t part of their U.S. estate. But when property passes through a trust from someone outside the U.S., the rules might be different. Assume the person who set up the trust kept the power to change it and direct income from it, so the trust gets a basis adjustment when they die. During the lifetime of the person who created the trust, they were responsible for paying taxes on the trust’s earnings. When the person passes away, the rules for how taxes are handled change. If American people own more than half of the trust’s stock, then it is considered a Controlled Foreign Corporation (CFC). A U.S. shareholder is someone who owns at least 10% of the trust’s stock. Before a new law was passed, if the trust was a CFC for at least 30 days in a year, then U.S. shareholders had to include their share of the trust’s income in their taxes. Now, they have to do that no matter how long they have owned the stock. This change could catch people off guard. Before the new law, there was a way to avoid paying taxes on certain income from a foreign company if it was liquidated less than 30 days after the owner’s death. This allowed the company to avoid paying taxes on its profits. But now, the new law says that the taxes have to be paid regardless of how long the owner’s shares are held. This means that the company may have to pay taxes on its profits even if it’s liquidated shortly after the owner’s death. Because of a new law, the old way of planning might not work well. Tax experts should think about different ways to plan. For example, they could tell their clients to use a separate company for assets in other countries. This would help avoid extra taxes. When the person who made the trust dies, there would be no extra taxes on the assets in other countries. So, the traditional planning could still work, but in a slightly different way. The problem is with investments in the U.S. If a non-U.S. person owns a company holding U.S. investments and the company is liquidated before the person dies, the U.S. investments will be considered part of their estate and could be taxed. It seems like using a foreign company is still necessary to protect these assets from U.S. taxes. The old way of planning for this can’t be used anymore without risking U.S. taxes for shareholders. When a U.S. shareholder owns a foreign company, they may have to include a portion of the company’s income in their taxes. This is called subpart F income. The amount they include depends on how long they owned the company during the year. If they owned the company for the whole year, they include the full amount of subpart F income. If they only owned it for part of the year, they include a smaller portion. This rule also applies if the owner of the company passes away or if the company goes through a special tax process. Depending on when someone dies, their taxes may be affected if they own a foreign company. If they die earlier in the year, they may owe more taxes. Also, if the owner of the company dies on December 31, there could be a tax issue with U.S. assets. If they die on January 1, they could still owe taxes on the foreign company. If someone with investments in the U.S. dies, their investments can be moved to a foreign company to avoid paying U.S. taxes. This needs to be done within 75 days of their death. The company can then be treated as if it sold all its assets to the owners, without paying taxes on any gains. This strategy can be used to avoid U.S. taxes on the investments. After a non-U.S. person dies, their assets in foreign companies will be treated differently for U.S. tax purposes. This could result in more taxes for their beneficiaries. Tax professionals will need to come up with new strategies to help their clients minimize these taxes. Non-U.S. person means someone who is not a U.S. citizen and is not living in the U.S. for tax purposes. This article talks about how income tax works for a U.S. person who is a beneficiary of a trust. It also mentions how a business entity can choose its tax classification. It assumes there are no U.S. property interests involved. It discusses how certain types of income are taxed and how certain rules apply to the situation. This text explains how the value of a deceased person’s estate in the United States is calculated and includes rules about trusts and foreign investments. It also mentions different tax laws that apply to foreign corporations. Overall, it’s about how assets and income are treated for tax purposes when someone dies. These are references to specific sections of the U.S. tax code and examples of how they might apply to foreign investment. It talks about things like disregarded entities, foreign source income, estate tax, and planning techniques.

Source: https://www.floridabar.org/the-florida-bar-journal/post-mortem-considerations-with-foreign-grantor-trusts-after-h-r-1-tax-cuts-and-jobs-acts/