~ Immigration Tax Planning ~
Lookback Rule Applies to Foreign Trusts
In August 1996, President Clinton signed a bill which made significant changes to the U.S. federal income taxation of foreign trusts and their beneficiaries. These changes include a lookback rules under which any transfers to foreign trusts which take place within 5 years of the transferor becoming a U.S. resident will be treated as if they were made on the first day the transferor becomes a U.S. resident. The rules regarding foreign trusts were again updated in 1997 and 1998. This can have the following consequences:
- If the trust has any U.S. beneficiaries, it will be a grantor trust under Section 679 and the U.S. transferor will be taxed on all of the trust's income in future years regardless of whether that income is (or could be) distributed to the transferor.
- The trust, the grantor and the US beneficiaries have significant reporting requirements with respect to transfers to, income of and distributions from any foreign trust.
- The penalties for failure to comply with the reporting and tax paying rules have been increased.
These rules generally apply to transfers made after February 6, 1995. Therefore, transfers which were made in 1995 and 1996 - prior to the enactment of this legislation - are subject to the new rules.
These rules make it much more difficult for a wealthy foreigner, or the children of a wealthy foreigner, to create trusts shortly before moving to the U.S. and have those trusts shield the assets from U.S. taxes. Now, planning must be done earlier or other more complicated structures need to be used. I can guide clients through the maze of these new rules and provide structures which achieve the clients objectives without being unworkable.