Calculating Foreign Trust DNI and UNI: Avoiding Throwback Tax on Undistributed Net Income

Calculation of trust accounting income and the tax concept of distributable net income (DNI) in domestic trusts is one of the more complicated tasks in both fiduciary and tax accounting and can be even more daunting with foreign trusts involving U.S. persons. In general, a U.S. taxpayer who either creates a foreign trust, transfers or receives money or property from a foreign trust, or is the U.S. owner of a foreign trust, is subject to tax requirements.

While foreign non-grantor trusts are not usually subject to U.S. income tax on non-U.S.-sourced or effectively connected income, U.S. beneficiaries are subject to income tax on distributions made out of the trust’s DNI.

IRC 643 provides that all income earned by a complex foreign non-grantor trust is DNI. However, the throwback rules require that, unless current DNI is distributed within 65 days of the tax year’s end, the DNI must be reclassified as UNI rather than being treated as an addition to trust corpus.

U.S. beneficiaries receiving distributions from foreign trusts more than DNI in a given year must pay an “accumulation” or throwback tax, plus interest, on that portion of the distribution classified as UNI. This throwback tax can equal the entire amount of the accumulation distribution. Given the steep tax consequences to both trusts and U.S. beneficiaries of having UNI, tax advisers need to thoroughly understand the special rules involving DNI calculations on foreign trusts.

Listen as our expert panel provides practical guidance for navigating rules on calculating DNI and UNI in foreign trusts.

1. Default U.S. tax treatment of foreign non-grantor trusts with U.S. beneficiaries
2. Trust accounting income vs. DNI
3. Calculation of DNI under various income scenarios
4. Identifying UNI
5. Interest charges and penalties on UNI accumulation
6. Strategies to access principal and avoid or defer accumulation tax on distributions from UNI
7. Structuring foreign sub-trusts to receive distributions
8. Planning opportunities and the “65-day rule”

The panel will review these and other priority issues:

• Identifying income that must be treated as UNI
• Tax treatment of distributions made out of UNI to a U.S. beneficiary
• Structuring foreign sub-trusts to serve as beneficiaries to make trust-to-trust transfers to avoid triggering of accumulation/throwback tax
• Tax and other risks involved in using foreign sub-trusts to remove UNI from a primary foreign trust

Learning Objectives

After completing this course, you will be able to:

• Determine how to identify and calculate UNI in foreign trusts
• Recognize the income tax treatment of distributions by foreign trusts out of UNI to U.S. beneficiaries
• Discern how structuring foreign sub-trusts to act as beneficiaries of a larger foreign trust can enable U.S. beneficiaries to avoid or defer throwback tax and interest on distributions from UNI
• Identify the risks in operating foreign sub-trusts as beneficiaries of main foreign trusts

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, completing complex trust tax returns and trust documents, supervising other accountants or attorneys. The webinar presumes the attendee has foundational knowledge of international tax planning, and specific knowledge of US taxation of foreign trusts, domestic DNI calculations and trust taxation rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).