~ Immigration Tax Planning ~
Recent Changes to Foreign Trust Tax Rules
In 1996, 1997 and 1998, Congress made significant changes to the U.S. federal income taxation of foreign trusts and their beneficiaries. These changes include the following:
- The grantor trust rules generally will not operate to attribute a trust's income to a non-U.S. person. This reduces the availability of a long-standing technique in which a foreign trust would be drafted in a way that the trust's income would be attributed to a non-U.S. person who was not subject to U.S. federal income tax on that income.
- Any transfers to trust which take place within 5 years of the transferor becoming a U.S. resident will be treated as if they occurred on the first day the transferor became a U.S. resident. This will often cause the transferor to be taxed on the trust's income in future years, and may cause immediate income or excise tax in the year of the deemed transfer with respect to all of the appreciation inherent in the assets transferred to the trust.
- There are additional reporting and recordkeeping requirements imposed on foreign trusts and on U.S. beneficiaries of foreign trusts.
- The penalties for failing to comply with the recordkeeping and reporting requirements have been significantly increased.
These rules make it far more difficult to defer or avoid U.S. tax on income generated by assets placed into a foreign trust prior to becoming a U.S. resident. Of course, there are several useful exceptions to these rules which, through careful planning, can preserve the benefits of using a foreign trust in the usual immigration situation. I can help you take advantage of these exceptions.