Pre-Immigration Planning with the Foreign Trust: The Intersection of Income and Estate Tax

If someone from another country puts money into a trust in their home country and the trust makes money, the U.S. only taxes the money from the U.S. The trust can also be set up to benefit people in the U.S., but they only pay taxes on the money they get from the trust. If they get more money than the trust made in a year, they might have to pay extra taxes. This makes sure that money made by the trust doesn’t avoid U.S. taxes. A foreign grantor trust, controlled by a non-resident non-citizen (NRNC) founder, can help U.S. beneficiaries avoid paying taxes on trust income. The trust is classified as a grantor trust for U.S. tax purposes, so the NRNC founder doesn’t have to pay U.S. taxes on foreign income or capital gains. To prevent U.S. beneficiaries from being taxed on trust distributions, the trust is generally set up as a foreign grantor trust. There are rules for when the trust loses its grantor trust status, and U.S. beneficiaries may be taxed on distributions after the NRNC founder dies. Gifts of U.S. tangible property by an NRNC are subject to U.S. gift tax, but there are strategies to avoid this tax by transferring assets through a foreign corporation. If someone from another country wants to move to the U.S. and has set up a trust for their family in the U.S., they need to be aware of tax rules. If they become a U.S. resident within five years of setting up the trust, they may have to pay U.S. income tax on the trust assets. There are ways to avoid this, such as waiting five years before becoming a U.S. resident, or making sure the trust doesn’t have any U.S. beneficiaries. If these strategies are followed, the trust can continue earning income without U.S. tax implications. If someone from another country moves to the U.S. and sets up a trust within five years of becoming a U.S. resident, they have to tell the IRS about it. This is because the IRS might consider the assets in the trust to be sold for tax purposes. Any money the trust earns before the person becomes a U.S. resident doesn’t have to be reported to the IRS. If a person from another country wants to move to the U.S., they can set up a foreign trust to protect their assets from U.S. taxes. This trust can also benefit their family in the U.S. and abroad. The person doesn’t have to pay U.S. taxes on income or capital gains from outside the U.S. With the right planning, the trust can help their family by sheltering income from outside the U.S. and avoiding U.S. estate tax. This section outlines different tax rules for foreign trusts, such as how they are taxed and when they are subject to U.S. income tax. It also mentions tax treaties that can reduce the tax on passive dividends. It explains that these rules may not apply if the trust is considered a grantor trust, and it discusses the potential consequences for individuals who transfer assets to foreign trusts. Finally, it mentions the IRS form used to report transactions with foreign trusts and gifts, as well as the relevant tax codes for estate and gift taxes. This information comes from a law called the Tax Reform Act of 1976. It was written by the government and includes rules for taxes. The law was talked about in reports from the government and also by the IRS. The people who wrote this column are lawyers who work at a law firm in Orlando. They specialize in tax and estate planning. The column was written for the Tax Section by some lawyers at the law firm.

Source: https://www.floridabar.org/the-florida-bar-journal/pre-immigration-planning-with-the-foreign-trust-the-intersection-of-income-and-estate-tax/