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  • 10/4/2015 DistributionsfromforeigngrantortrustsandU.S.paperwork

    http://hodgen.com/distributionsfromforeigngrantortrustsanduspaperwork/#identifier_6_4888 1/5

    NOVEMBER8,2013PHILHODGEN

    DistributionsfromforeigngrantortrustsandU.S.paperwork

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    THEEXPATRIATIONCHRONICLESOFANACCIDENTALAMERICAN

    A17yearoldgirlisrenouncingherU.S.citizenship.Readaboutitasithappens.

    Episode1Phil'sIntroduction

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    Episode4WhenCanaMinorRenounce?

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    ThisisaForm3520researchinaboxblogpostforyou,BP.Becauseyouasked.AndbecauseyousubscribedtotheJellOShotsnewslettermailinglist.

    ReferencesForms:3520,3520AEntity:ForeignGrantorTrustCodeSections:6048,6677Administrivia:Notice9734,ifyoucare.

    FactsAforeigngrantortrustexists,createdbyanonresidentalien.

    Thetrustmakesadistributionof$30,000toaU.S.personwhoisnotthegrantor.Weknowbecausethetrusteetoldusthat$5,000ofthisdistributionisfromcurrentincomeofthetrust,and$25,000isfromcapital.

    Happily,thetrusteehasgiventheU.S.personapieceofpaperlabelledForeignGrantorTrustBeneficiaryStatementwhichlookssuspiciouslylikeForm3520A,page4.

    ItstaxseasonandyourepreparingtheU.S.personsincometaxreturn.

    QuestionsTherearetwoquestionsembeddedinthesefacts:

  • 10/4/2015 DistributionsfromforeigngrantortrustsandU.S.paperwork

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    Paperwork.Oneisareportingquestion:whatpaperworkmustthebeneficiaryfilewiththeIRSinordertoavoidgettingwhompedbyUncleSamsPenaltyStick?TaxLiability.Theotherquestioniswhethersomeorallofthemoneywillbetreatedastaxableincomebythebeneficiary.

    ReportingRequirementsInternalRevenueCodeSection6048(c)(1)statesthegeneralreportingrequirement:

    IfanyUnitedStatespersonreceives(directlyorindirectly)duringanytaxableyearofsuchpersonanydistributionfromaforeigntrust,suchpersonshallmakeareturnwithrespecttosuchtrustforsuchyearwhichincludes

    (A)Thenameofsuchtrust,

    (B)Theaggregateamountofthedistributionssoreceivedfromsuchtrustduringsuchtaxableyear,and

    (C)SuchotherinformationastheSecretarymayprescribe.1

    Pleasenotetheimportantfeatureofthisprovision:itdoesnotmatterwhethertheU.S.personreceivingthemoneyisnamedasabeneficiaryintheDeclarationofTrust.All

    thatmattersisthattheU.S.personreceivedadistributionfromthetrust.2

    DisregardGrantorTrustStatusWhenyouaretryingtofigureoutwhetherthebeneficiaryinfactreceivedadistributionfromaforeigntrustornot,youdisregardthegrantortrustrules:

    Forpurposesofthissection,indeterminingwhetheraUnitedStatesperson...receivesadistributionfrom[]aforeigntrust,thefactthataportionofsuchtrustistreatedasownedbyanotherpersonundertherulesofsubpartEofpartIof

    subchapterJofchapter1shallbedisregarded.3

    SubpartEofpartIofsubchapterJofchapter1containsSections671through679oftheInternalRevenueCode.Thisiswherethegrantortrustruleslive.ThefactthatthistrustwascarefullyconstructedtobeaforeigngrantortrustundertherulesoftheInternalRevenueCode?Notrelevant.

    TypicalSituation

  • 10/4/2015 DistributionsfromforeigngrantortrustsandU.S.paperwork

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    Thesimplequestionthenbecomeswhetherthedistributioncamefromthetrustornot.UsuallythisproblempopsupbecausesomeoneintheUnitedStatesistoreceiveagift.GrandmotherlivesoutsidetheUnitedStatesandhasaforeigngrantortrust.Shewantstosend$30,000tohergranddaughterintheUnitedStates.

    Grandmothertellsthetrusteetomakeitso.Thetrusteemakesitso,andwiresmoney

    tothegranddaughterintheUnitedStates.4ThegranddaughterisnowpreparingherU.S.incometaxreturnandwonderswhattodoaboutthe$30,000shereceivedfromhergrandmotherintheoldcountry.

    Weknowthisisadistribution.MoneycamefromthetrustandwenttotheU.S.

    beneficiary,tothetuneof$30,000.5

    PreparingForm3520,PartIIIForm3520istheformusedtosatisfythereportingrequirementsofSection6048.Inparticular,PartIIIofForm3520iswhereaU.S.beneficiaryofaforeigntrustreportsreceivingdistributions.

    ThedistributionislistedonLine24ofPartIII.

    IamgoingtoignoreLines25and26asbeingirrelevanttothefactpatternwearelookingat.

    ThetotalfromLine24willberepeatedonLine27.

    IgnoreLine28,becausewedonthavethosefacts.

    Thiscompletesthebasicreportingrequirements.Ifyoufillinallofthisinformation,thentheU.S.personwhoreceived$30,000hasproperlyreportedthetrustdistribution.

    Failingtoreportatrustdistributioncarrieswithita35%penalty.6Thatmeanstherecipienthasdodgeda$10,500bullet.

    IncomeTaxation(Form3520,PartIII,Line29)Butwait!Theresmore!

    Youhaveproperlyreportedthereceiptof$30,000.Butisittaxable?Ordoestherecipientreceivethemoneytaxfree?

    Thegovernmentsbasicpositionhereisshowmestuffortheentireamountistaxableincome:

    IfadequaterecordsarenotprovidedtotheSecretaryto

  • 10/4/2015 DistributionsfromforeigngrantortrustsandU.S.paperwork

    http://hodgen.com/distributionsfromforeigngrantortrustsanduspaperwork/#identifier_6_4888 4/5

    determinethepropertreatmentofanydistributionfromaforeigntrust,suchdistributionshallbetreatedasanaccumulationdistributionincludibleinthegrossincomeofthedistributedunderchapter1.Totheextentprovidedinregulations,theprecedingsentenceshallnotapplyiftheforeigntrustelectstobesubjecttorulessimilartotherulesofsubsection

    (b)(2)(B).7

    Inotherwords,theentire$30,000receivedbytheU.S.personwillbetaxableincomeunlessoneoftwofactsistrue:

    AdequaterecordsareprovidedtotheSecretaryorTheforeigntrustdoeswhatSection6048(b)(2)(B)tellsittodo.

    AdequaterecordsmeansthattheU.S.persongivestheIRSaForeignGrantorTrust

    BeneficiaryStatement.Thisisnormallydoneusingpage4ofForm3520A.8DoingtheSection6048(b)(2)(B)dancemeansthattheforeigntrustappointsaU.S.agent.

    SinceyouhaveaForeignGrantorTrustBeneficiaryStatementinhand,youaregolden.AnswerForm3520,PartIII,Line29bytickingtheYesbox.Attachit.YouarefinishedwiththepreparationofForm3520.

    Whathashappenedhere?

    BygivingtheIRStheForeignGrantorTrustBeneficiaryStatement,youhaveprovidedsufficientinformationtothemtoconfirmthatthemoneydistributedtotheU.S.personconstitutesthetaxableincomeofsomeoneelsethegrantor.Therefore,theIRSknowsthatthemoneyreceivedbytheU.S.personcannotcontaintaxableincome.

    Essentially,theCodegivestheU.S.personachoice:givetheIRSenoughinformationaboutthetrust,orpayincometaxoneverydollarreceived.

    LessonsLearnedIsetupalotofforeigngrantortrusts.A.Lot.ThissituationappearstohaveviolatedtwoofofmyGoldenRules:

    NevernameaU.S.personasabeneficiaryofaforeigngrantortrust.Suchapersonhasbeneficialinterestsonlyafterthedeathofthesettlor.Thisway,thetrusteewillnotbetemptedtosendmoneytotheU.S.person:Icantgiveyoumoneyyourenotabeneficiary!Useadministrativeimpedimentstoyouradvantage,oratleasttomakepeoplestopandthinkforasplitsecond.WhenthesettlorsaysPleasesendmoneytomygranddaughteronmybehalfnever,ever,ever,everdothatfromthetrust.Instead,movemoneyfromtheforeigngrantortrusttothesettlorspersonalbankaccount.Thenhavethesettlormakethe

    giftfromhisorherpersonalbankaccount.9

  • 10/4/2015 DistributionsfromforeigngrantortrustsandU.S.paperwork

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    TermsofUse

    RSS

    RETURNTOTOPOFPAGE COPYRIGHT2015BALANCETHEMEONGENESISFRAMEWORKWORDPRESSLOGIN

    HintIf(nonresident)grandmotherwantstohaveagrantortrustandmaketrustdistributionstoU.S.residentgrandchild,considertheuseofadomestictrustthatisagrantortrustastothenonresidentgrandmother.ThendistributionsfromthattrustarereportedbytheU.S.recipientonForm3520,PartIV,asagiftnotasatrustdistribution.

    1. TheauthorusedthewordsuchsixtimesinthisbrieflittleCodesnippet.EvidentlytherewasasurfeitofsuchesleftneartheendoftheFederalgovernmentsfiscalyear,andtheauthorsdepartmentneededtousethemallinordertojustifythebudgetrequestforthenextyearssupplyofnew,shinysuches.[ ]

    2. Adistributionisdefinedinmoredetailinthe2012InstructionsforForm3520,page2.ThislargelyechoesNotice9734,19971C.B.422,SectionV.[ ]

    3. Section6048(d)(1).[ ]4. Letsignore,forthemoment,thefactthatforeigntrustsusuallydonothavebankaccountsinthenameof

    thetrust.Rather,thegeneralcommercialpracticeforforeigntrusteesseemstobethataforeigntrustwillholdallofitsassetsinacorporation.Thecorporationhasbankaccounts,andthemoneywouldcometothegranddaughterinmyexamplefromacorporatebankaccountratherthanatrustbankaccount.Thiscancreateprofoundproblemsthatareworthyoftheirownblogpost.[ ]

    5. Iamassumingtherearenofactsthatmakethe$30,000paymentlooklikeapurchase/sale,oravendor/customerpayment,oraloan.[ ]

    6. Section6677(a)(2).[ ]7. Section6048(c)(2)(A).[ ]8. See,2012InstructionsforForm3520,page8.[ ]9. Therecipientreportsthisgiftifitismorethan$100,000inasingleyearonForm3520inPartIV.[

    ]

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