Reporting Obligations of U.S. Beneficiaries of Foreign Trusts and New Form 8938

Reporting Obligations of U.S. Beneficiaries of Foreign Trusts and New Form 8938

The Foreign Account Tax Compliance Act amended the IRC to improve tax reporting and compliance with respect to foreign accounts and foreign assets. Among these changes were new reporting requirements that affect United States beneficiaries of foreign trusts. In this Analysis, Diane L. Mutolo discusses the new requirements under FATCA, new temporary and proposed regulations providing guidance on the reporting of specified foreign financial assets, and new Form 8398. She writes:

     Reporting Requirements With Respect to Foreign Trusts. The Information reporting obligations with respect to foreign trusts are found in IRC Section 6048. Section 6048(a) provides that, on or before the 90th day (or a later day as the Service may prescribe) after any reportable event, the responsible party is to provide written notice of the reportable event to the Service. The information that must be provided in the notice is information as prescribed by the Service, including: (1) the amount of money or other property (if any) transferred to the foreign trust in connection with the reportable event, and (2) the identity of the trust and of each trustee and beneficiary or class of beneficiaries of the trust.

     Reportable Event. The term "reportable event" is defined in Section 6048(a)(3) as: (1) the creation of any foreign trust by a U.S. person; (2) the transfer of any money or property, directly or indirectly, to a foreign trust by a U.S. person, including a transfer by reason of death; and (3) the death of a U.S. citizen or U.S. resident, if the decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules, or if any portion of a foreign trust was included in the decedent's gross estate.

     A reportable event, per Section 6048(a)(3)(B), does not include fair market value sales, i.e., any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. The definition of a reportable event also does not apply to deferred compensation trusts (trusts described in IRC Sections 402(b), 404(a)(4), or 404A)) or a trust determined by the Secretary to be a charitable trust (a trust described in IRC Section 501(c)(3)).

     In addition, as explained in How to Save Time & Taxes Preparing Fiduciary Income Tax Returns, a reportable event also does not include a transfer if "the U.S. transferor immediately recognizes the entire gain on the transfer and it does not have a significant interest in the transferee immediately after the transfer."

     Responsible Party. The term "responsible party" is defined in Section 6048(a)(4) as:(1) the grantor in the case of the creation of an inter vivos trust; (2) the transferor in the case of a transfer of any money or property, directly or indirectly, from a U.S. person to a foreign trust, other than a transfer by reason of death; and (3) the executor of the decedent's estate in any other case.

(footnotes omitted)

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