William Byrnes' Tax, Wealth, and Risk Intelligence

Although trusts can be taxpayers, Sections 671 to 679 of the Internal Revenue Code contain the so-called ‘grantor trust rules’, which treat certain trust settlors (and sometimes persons other than the settlor) as the owner of a portion or all of a trust’s income, deductions and credits for US tax purposes. A trust where the settlor (or other person) is treated as the owner of the trust assets for US tax purposes is referred to as a ‘grantor trust’. The grantor trust rules apply to both foreign and domestic trusts, but in different ways.

Under the grantor trust rules, a US person who transfers property to a foreign trust is generally treated for income tax purposes as the owner of that portion of the trust attributable to the transferred property, even if the trust would not have been a grantor trust had it been domestic.

This is the result for any tax year in which any portion of the foreign trust has a US beneficiary.  A foreign trust is treated as having a US beneficiary for a tax year unless (i) under the terms of the trust, no part of the trust’s income or corpus may be paid or accumulated during the tax year to or for the benefit of a US person, and (ii) if the trust is terminated at any time during the tax year, no part of the income or corpus could be paid to or for the benefit of a US person.  The Internal Revenue Service (IRS) regulations under Section 679 of the Internal Revenue Code generally treat a foreign trust as having a US beneficiary if any current, future or contingent beneficiary of the trust is a US person.  To read this article excerpted above, please access AdvisorFYI.