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PostedNew foreign trust tax rules, Part 5 - Letters of Wishes are useless
Phil Hodgen
Attorney, Principal
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This is the fifth installment of my review of new U.S. tax laws affecting foreign trusts. Previous scintillating episodes of this saga are: Part 1 - Overview, Part 2 - Using Trust Property For Free, Part 3 - expanding the grantor trust rules, Part 4 - new presumptions for discretionary trusts.
Letters of Wishes
Routine lawyering practice outside the United States is to write a document that contains the trust itself, which is remarkably devoid of specific language that applies to you, the client, who is actually creating the trust. There are some interesting bits attached to the back end of this trust document (and incorporated by reference) in some Schedules.That's all one document. Trustees rightly look at this as their instruction manual -- the document instructs the trustee exactly what to do and not do.There is usually another document. This is viewed -- by non-U.S. trustees, their lawyers, and the clients who create the trusts -- as "nonbinding" instructions to the trustee. It expresses the Settlor's preferences. Boil away the formalities, and this Letter of Wishes says something like:Dear Trustee,I know you aren't required to do XYZ. And I know that I have absolutely no control over what happens in the administration of this trust. But gee whiz! If it were up to me, I'd really like to see XYZ happen.I'm not telling you that you have to do XYZ, and I know that you can ignore this letter if you want to. But XYZ would be cool.Love and kisses,Settlorps: I really like XYZMy experience in the real world? Trustees slavishly follow Letters of Wishes.
What the HIRE Act says
The new tax law stops all of this tomfoolery in a specific situation: where the Settlor is a U.S. person. Section 531(c) of the HIRE Act says:(c) Clarification That Certain Agreements and Understandings Are Terms of the Trust- Subsection (c) of section 679, as amended by subsection(b), is amended by adding at the end the following new paragraph:‘(5) CERTAIN AGREEMENTS AND UNDERSTANDINGS TREATED AS TERMS OF THE TRUST - For purposes of paragraph (1)(A), if any United States person who directly or indirectly transfers property to the trust is directly or indirectly involved in any agreement or understanding (whether written, oral, or otherwise) that may result in the income or corpus of the trust being paid or accumulated to or for the benefit of a United States person, such agreement or understanding shall be treated as a term of the trust.’ .