US beneficiary of a non-US trust
Many non-US trusts are created without US tax issues in mind, often because there are no US persons connected to the trust at the point of creation, or because the US tax status of all trust beneficiaries is not clear.
The way in which US settlors and US beneficiaries are taxed in respect of their interest in a non-US (i.e., foreign) trust depends on whether the trust is classified as a foreign grantor trust or foreign non-grantor trust. This classification is generally dependent upon who the economic settlor/grantor of the trust was, and the powers retained by that settlor (governed by the terms contained in the trust deed).
A US beneficiary of a foreign grantor trust can receive benefit free from US tax, albeit there are information reporting requirements.
A US beneficiary of a foreign non-grantor trust has slightly more to contend with. Any ’benefit’ (the term being widely drafted) is potentially taxable. The US beneficiary has a choice over how to subject such benefit to US tax, which is often linked to the information which might be available to them.
The ’actual’ method involves analysis of the trust’s Distributable Net Income (current year US tax basis income and gains, DNI) and Undistributed Net Income (accumulated undistributed US tax basis income and gains, UNI). Under the actual method, distributions of DNI/UNI are taxable (with UNI being subject to an onerous ’throwback’ tax regime), while distributions in excess of DNI/UNI are free from US tax. The ’default’ method is much simpler, with no knowledge of the trust’s underlying activity required, but does mean that all benefit received is subject to US tax.
What are the pitfalls?
Where a US beneficiary receives benefit from a non-US trust, a common misconception is that the benefit received is not subject to US tax, nor is reportable.
Form 3520 is used to report transactions of US persons with foreign trusts. A US beneficiary is required to report the receipt of benefit from a foreign trust, regardless of whether it is taxable. There is no de-minimus amount.
Failure to file the correct information in a timely fashion can lead to onerous penalties (minimum $10,000), in addition to penalties linked to US tax liabilities where taxable income has been omitted.
How we can help
Our Trust and Family Wealth team can help determine the US tax status of a non-US trust, assist with the required fillings and provide proactive advice around providing benefit to US beneficiaries.
If you are not a US person but are considering creating a trust where there will be US beneficiaries, we can help to set up a tax-efficient structure to ensure this works for both US and non-US beneficiaries.
We can also provide tax-efficient structuring advice to existing trusts who are looking to invest in US assets, particularly US real estate, and assist with the related US tax compliance.
Would you like to know more?
If you have any questions about the above, please get in touch with your usual Blick Rothenberg contact, Lisa Gray or Inga Sviderskiene using the details on this page.
Our expert team
US/UK Private Client
Personal tax is one of the most complex areas of wealth management and can significantly erode your wealth over time.
Blick Rothenberg is considered to be market leaders in the taxation of non-UK domiciled individuals and offshore trusts, as well as cross-border personal taxation.
We have a strong base of clients in the UK and a broad and longstanding international focus too, acting for a large number of non-UK domiciled individuals and international families. So, we understand the complexities that US citizens face when living, working and operating businesses in the UK.
Whether you are a start-up entrepreneur, a wealthy family with complex affairs, or a business executive, our dual-qualified team of tax advisers will look after your US UK personal tax affairs as well as those of your business.
If you wish us to contact you or want to discuss your situation please complete the form on this page and one of our team will be in touch.