U.S. Tax for Trusts & Estates

Bottom line A structure does not have to be called a “trust” locally to create U.S. trust reporting obligations.

A trust is generally treated as foreign if it fails either the U.S. court test or the U.S. control test. This can include trusts established outside the United States, as well as certain arrangements that are not called trusts under local law. Some foreign pension, savings and insurance arrangements may also require a closer U.S. tax analysis to determine whether they are treated as trusts for U.S. purposes.

Bottom line A large foreign gift or inheritance may not be taxable income, but it can still create a U.S. reporting requirement.

If you are a U.S. person, certain gifts or bequests from foreign individuals or estates must be reported on Form 3520. For gifts or bequests from a nonresident alien or foreign estate, the reporting threshold is generally more than US$100,000 in a tax year, with certain aggregation rules for related parties. The gift or inheritance is generally not itself subject to U.S. income tax simply because it is received, but the reporting requirement can still apply. Failure to report can result in significant penalties.

Bottom line Whether a trust is grantor or non-grantor affects who reports the income and how distributions are taxed.

In a grantor trust, an individual is treated as the owner of some or all of the trust assets for U.S. tax purposes, so the trust’s income may be reported by that owner. In a non-grantor trust, the trust is generally treated as a separate taxpayer, with the U.S. tax treatment of income and distributions depending on the applicable rules. For foreign trusts, distributions can also involve the throwback rules and additional tax and interest charges.

Bottom line A trustee’s lack of cooperation does not necessarily prevent a U.S. owner from filing, but the available information needs to be carefully documented.

There may still be a filing path. Where a foreign grantor trust has a U.S. owner and the foreign trustee does not file Form 3520-A, the U.S. owner may generally need to attach a substitute Form 3520-A to Form 3520. The filing is prepared using the information that can be obtained, with unavailable information documented appropriately. A lack of cooperation from the trustee does not automatically eliminate the U.S. reporting requirement.

Bottom line Non-U.S. citizens can have U.S. estate tax exposure even if they have never lived in the United States.

It can be. For U.S. estate tax purposes, a person who is neither a U.S. citizen nor domiciled in the United States at death can be subject to U.S. estate tax on certain U.S.-situated assets. U.S. real estate and stock of U.S. corporations are examples of assets that can fall within the U.S. estate tax rules. The Form 706-NA filing threshold is generally US$60,000 of U.S.-situated assets, subject to additional rules for adjusted taxable gifts and applicable treaties. Estate tax treaties can modify the result, so the relevant treaty should be reviewed rather than assuming the domestic rules apply on their own.

Bottom line Your local advisers can handle the local side while we coordinate the U.S. tax and reporting position.

Yes. Trust and estate matters often involve several advisers, and the U.S. tax position needs to work alongside the overall estate plan and local tax treatment. We can work with your estate planning lawyer and local accountant to coordinate the U.S. classification, tax treatment and reporting with the structure being implemented in the other jurisdiction.