New foreign trust tax rules, Part 1 – overview

ByPhil Hodgen Published Latest Update
The HIRE Act is the latest tax law enacted in the United States.  The astonishing largesse of the Federal government will apparently be paid for entirely by chasing Americans who have money outside the United States. Foreign trusts are increasingly useless for normal use by normal people.  The effect of the tax legislation is to make it uneconomic for U.S. citizens to use foreign trusts in their routine estate planning.  More perniciously, the new tax legislation makes it uneconomic for non-U.S. banks to take on U.S. citizens as customers, because U.S. tax enforcement — as a job — continues to be outsourced by the government without compensation. This is a summary of the new rules.  With, of course, my patented* completely unbiased and totally objective opinion where necessary.

What’s New

The new tax laws governing foreign trusts cover the following topics:
  • They clarify the rules for when you a foreign trust does (or does not) have a beneficiary in the United States.  (This is an amendment to Internal Revenue Code Section 679).
  • They create a presumption in some cases that a foreign trust in fact has a beneficiary in the United States.  (This is another amendment to Internal Revenue Code Section 679).
  • If a beneficiary is a U.S. taxpayer and gets to use trust property without paying for it, there is income tax to pay — this is treated as a distribution to the beneficiary.  (This is an amendment to Section 643 of the Internal Revenue Code).
  • There is a new reporting requirement.  Yay, party time!  More f-ing paperwork!  (This is an amendment to Section 6048 of the Internal Revenue Code).
  • And of course, there are bigger penalties.  (This is an amendment to Section 6677 of the Internal Revenue Code).
Each of these points will be its own separate post (or maybe more than one post, depending on how much there is to bite off, chew, swallow, digest, and, well, you know. . . .).**

Footnotes

* No, I’m not a patent troll, because I actually create this stuff as compared to just sitting and sandbagging noble inventors.  Leave aside the technicality that copyright and not patent law will cover this.  “Patent troll” is so evocative, though. ** OK, MetaphorBoy, don’t push this too far.
Phil Hodgen

Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.

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One Comment

  1. Hi Phil,

    I am completing a PLR with the IRS regarding estate planning. I was told by the Chief Counsel attorney, that the IRS is considering classifying all domestic trusts in states that have adopted UPA or the UTA (which is almost all of the states & includes California) as revocable. This will make them void for estate planning.

    Currently, I am using only New Zealand trusts for PLR’s with the IRS.

    With best regards,
    Brian

Comments are closed.

Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.