10/4/2015

DistributionsfromforeigngrantortrustsandU.S.paperwork

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Distributionsfromforeign
grantortrustsandU.S.
paperwork

CATEGORIES
AmericanBusinessAbroad
AmericansLivingAbroad
Expatriation
ExpatriationChroniclesofanAccidental

ThisisaForm3520researchinaboxblogpostforyou,BP.Becauseyouasked.And
becauseyousubscribedtotheJellOShotsnewslettermailinglist.

References

American
ForeignBusinessActivitiesintheUSA
FridayEdition
JellOShots
NonresidentswithUSActivities
PFICandCFCs
Random

Forms:3520,3520A

RRSPs

Entity:ForeignGrantorTrust

Speeches,Publications,andEvents

CodeSections:6048,6677

TaxandTrusts

Administrivia:Notice9734,ifyoucare.

Uncategorized
USRealEstateInvestments

Facts
Aforeigngrantortrustexists,createdbyanonresidentalien.
Thetrustmakesadistributionof$30,000toaU.S.personwhoisnotthegrantor.We

VoluntaryDisclosure

THEEXPATRIATIONCHRONICLESOFAN
ACCIDENTALAMERICAN
A17yearoldgirlisrenouncingherU.S.
citizenship.Readaboutitasithappens.

knowbecausethetrusteetoldusthat$5,000ofthisdistributionisfromcurrent

Episode1Phil'sIntroduction

incomeofthetrust,and$25,000isfromcapital.

Episode2A'sIntroduction
Episode3WhatHappensIfYouDon't

Happily,thetrusteehasgiventheU.S.personapieceofpaperlabelledForeign
GrantorTrustBeneficiaryStatementwhichlookssuspiciouslylikeForm3520A,page
4.

HaveaSocialSecurityNumber?
Episode4WhenCanaMinorRenounce?
Episode5SSNissuesandsubmissionof
DS4079
Episode6AnupdateabouttheSSNanda

ItstaxseasonandyourepreparingtheU.S.personsincometaxreturn.

renunciationappointment
Episode7Firstrenunciationappointment
scheduled

Questions

Episode8Agoestoherfirstappointment
Episode9Secondappointmentscheduled

Therearetwoquestionsembeddedinthesefacts:

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Paperwork.Oneisareportingquestion:whatpaperworkmustthebeneficiaryfile
withtheIRSinordertoavoidgettingwhompedbyUncleSamsPenaltyStick?
TaxLiability.Theotherquestioniswhethersomeorallofthemoneywillbe
treatedastaxableincomebythebeneficiary.

ReportingRequirements
InternalRevenueCodeSection6048(c)(1)statesthegeneralreportingrequirement:

IfanyUnitedStatespersonreceives(directlyorindirectly)
duringanytaxableyearofsuchpersonanydistributionfroma
foreigntrust,suchpersonshallmakeareturnwithrespectto
suchtrustforsuchyearwhichincludes
(A)Thenameofsuchtrust,
(B)Theaggregateamountofthedistributionssoreceivedfrom
suchtrustduringsuchtaxableyear,and
(C)SuchotherinformationastheSecretarymayprescribe.1

Pleasenotetheimportantfeatureofthisprovision:itdoesnotmatterwhethertheU.S.
personreceivingthemoneyisnamedasabeneficiaryintheDeclarationofTrust.All
thatmattersisthattheU.S.personreceivedadistributionfromthetrust.2

DisregardGrantorTrustStatus
Whenyouaretryingtofigureoutwhetherthebeneficiaryinfactreceivedadistribution
fromaforeigntrustornot,youdisregardthegrantortrustrules:

Forpurposesofthissection,indeterminingwhetheraUnited
Statesperson...receivesadistributionfrom[]aforeigntrust,
thefactthataportionofsuchtrustistreatedasownedby
anotherpersonundertherulesofsubpartEofpartIof
subchapterJofchapter1shallbedisregarded.3
SubpartEofpartIofsubchapterJofchapter1containsSections671through679of
theInternalRevenueCode.Thisiswherethegrantortrustruleslive.Thefactthatthis
trustwascarefullyconstructedtobeaforeigngrantortrustundertherulesofthe
InternalRevenueCode?Notrelevant.

TypicalSituation
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Thesimplequestionthenbecomeswhetherthedistributioncamefromthetrustornot.
UsuallythisproblempopsupbecausesomeoneintheUnitedStatesistoreceiveagift.
GrandmotherlivesoutsidetheUnitedStatesandhasaforeigngrantortrust.Shewants
tosend$30,000tohergranddaughterintheUnitedStates.
Grandmothertellsthetrusteetomakeitso.Thetrusteemakesitso,andwiresmoney
tothegranddaughterintheUnitedStates.4Thegranddaughterisnowpreparingher
U.S.incometaxreturnandwonderswhattodoaboutthe$30,000shereceivedfrom
hergrandmotherintheoldcountry.
Weknowthisisadistribution.MoneycamefromthetrustandwenttotheU.S.
beneficiary,tothetuneof$30,000.5

PreparingForm3520,PartIII
Form3520istheformusedtosatisfythereportingrequirementsofSection6048.In
particular,PartIIIofForm3520iswhereaU.S.beneficiaryofaforeigntrustreports
receivingdistributions.
ThedistributionislistedonLine24ofPartIII.
IamgoingtoignoreLines25and26asbeingirrelevanttothefactpatternweare
lookingat.
ThetotalfromLine24willberepeatedonLine27.
IgnoreLine28,becausewedonthavethosefacts.
Thiscompletesthebasicreportingrequirements.Ifyoufillinallofthisinformation,
thentheU.S.personwhoreceived$30,000hasproperlyreportedthetrustdistribution.
Failingtoreportatrustdistributioncarrieswithita35%penalty.6Thatmeansthe
recipienthasdodgeda$10,500bullet.

IncomeTaxation(Form3520,
PartIII,Line29)
Butwait!Theresmore!
Youhaveproperlyreportedthereceiptof$30,000.Butisittaxable?Ordoesthe
recipientreceivethemoneytaxfree?
Thegovernmentsbasicpositionhereisshowmestuffortheentireamountistaxable
income:

IfadequaterecordsarenotprovidedtotheSecretaryto
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determinethepropertreatmentofanydistributionfroma
foreigntrust,suchdistributionshallbetreatedasan
accumulationdistributionincludibleinthegrossincomeofthe
distributedunderchapter1.Totheextentprovidedin
regulations,theprecedingsentenceshallnotapplyiftheforeign
trustelectstobesubjecttorulessimilartotherulesofsubsection
(b)(2)(B).7
Inotherwords,theentire$30,000receivedbytheU.S.personwillbetaxableincome
unlessoneoftwofactsistrue:
AdequaterecordsareprovidedtotheSecretaryor
TheforeigntrustdoeswhatSection6048(b)(2)(B)tellsittodo.
AdequaterecordsmeansthattheU.S.persongivestheIRSaForeignGrantorTrust
BeneficiaryStatement.Thisisnormallydoneusingpage4ofForm3520A.8Doingthe
Section6048(b)(2)(B)dancemeansthattheforeigntrustappointsaU.S.agent.
SinceyouhaveaForeignGrantorTrustBeneficiaryStatementinhand,youaregolden.
AnswerForm3520,PartIII,Line29bytickingtheYesbox.Attachit.Youare
finishedwiththepreparationofForm3520.
Whathashappenedhere?
BygivingtheIRStheForeignGrantorTrustBeneficiaryStatement,youhaveprovided
sufficientinformationtothemtoconfirmthatthemoneydistributedtotheU.S.person
constitutesthetaxableincomeofsomeoneelsethegrantor.Therefore,theIRSknows
thatthemoneyreceivedbytheU.S.personcannotcontaintaxableincome.
Essentially,theCodegivestheU.S.personachoice:givetheIRSenoughinformation
aboutthetrust,orpayincometaxoneverydollarreceived.

LessonsLearned
Isetupalotofforeigngrantortrusts.A.Lot.Thissituationappearstohaveviolated
twoofofmyGoldenRules:
NevernameaU.S.personasabeneficiaryofaforeigngrantortrust.Suchaperson
hasbeneficialinterestsonlyafterthedeathofthesettlor.Thisway,thetrusteewill
notbetemptedtosendmoneytotheU.S.person:Icantgiveyoumoneyyoure
notabeneficiary!Useadministrativeimpedimentstoyouradvantage,oratleastto
makepeoplestopandthinkforasplitsecond.
WhenthesettlorsaysPleasesendmoneytomygranddaughteronmybehalf
never,ever,ever,everdothatfromthetrust.Instead,movemoneyfromtheforeign
grantortrusttothesettlorspersonalbankaccount.Thenhavethesettlormakethe
giftfromhisorherpersonalbankaccount.9

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Hint
If(nonresident)grandmotherwantstohaveagrantortrustandmaketrust
distributionstoU.S.residentgrandchild,considertheuseofadomestictrustthatisa
grantortrustastothenonresidentgrandmother.Thendistributionsfromthattrustare
reportedbytheU.S.recipientonForm3520,PartIV,asagiftnotasatrust
distribution.
1. TheauthorusedthewordsuchsixtimesinthisbrieflittleCodesnippet.Evidentlytherewasasurfeitof
suchesleftneartheendoftheFederalgovernmentsfiscalyear,andtheauthorsdepartmentneededto
usethemallinordertojustifythebudgetrequestforthenextyearssupplyofnew,shinysuches.[

2. Adistributionisdefinedinmoredetailinthe2012InstructionsforForm3520,page2.Thislargely
echoesNotice9734,19971C.B.422,SectionV.[
3. Section6048(d)(1).[

4. Letsignore,forthemoment,thefactthatforeigntrustsusuallydonothavebankaccountsinthenameof
thetrust.Rather,thegeneralcommercialpracticeforforeigntrusteesseemstobethataforeigntrustwill
holdallofitsassetsinacorporation.Thecorporationhasbankaccounts,andthemoneywouldcometo
thegranddaughterinmyexamplefromacorporatebankaccountratherthanatrustbankaccount.This
cancreateprofoundproblemsthatareworthyoftheirownblogpost.[

5. Iamassumingtherearenofactsthatmakethe$30,000paymentlooklikeapurchase/sale,ora
vendor/customerpayment,oraloan.[
6. Section6677(a)(2).[

7. Section6048(c)(2)(A).[

8. See,2012InstructionsforForm3520,page8.[

9. Therecipientreportsthisgiftifitismorethan$100,000inasingleyearonForm3520inPartIV.[
]

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