Diane L. Mutolo on New Reporting Requirements for U.S. Owners and Grantors of Foreign Trusts

Diane L. Mutolo on New Reporting Requirements for U.S. Owners and Grantors of Foreign Trusts

Subtitle A of Title V of the Hiring Incentives to Restore Employment Act, enacted in 2010, made significant changes to the Internal Revenue Code with the goal of improving tax compliance with respect to foreign accounts and foreign assets. These changes included new reporting requirements for United States owners and United States grantors of foreign trusts. In this Analysis, Diane L. Mutolo discusses the new requirements. She writes:

New Reporting Requirements for U.S. Owners of Foreign Trusts

     Foreign Trusts. As explained in How to Save Time & Taxes Preparing Fiduciary Income Tax Returns, generally, a foreign nonresident trust is treated for tax purposes in the same way as a nonresident alien individual and is, therefore, required to file a U.S. income tax return if the foreign nonresident trust has U.S.-sourced income or income that is effectively connected with the conduct of a U.S. trade or business.

     The definition of a "foreign trust" is found in IRC Section 7701, which states that a foreign trust is any trust other than a trust described in IRC Section 7701(a)(30)(E). IRC Section 7701(a)(30)(E) essentially provides the definition of a domestic trust and states that the definition of a U.S. person includes any trust if: (1) a court within the U.S. is able to exercise primary supervision over the administration of the trust, and (2) one or more U.S. persons have the authority to control all substantial decisions of the trust.

     Reporting Requirements With Respect to Foreign Trusts. The Information reporting obligations with respect to foreign trusts are provided for in IRC Section 6048. Under IRC Section 6048(a), 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. 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.

     The term "reportable event" is defined in IRC Section 6038(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 citizen or resident of the U.S., 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.

(footnotes omitted)

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