Form 1040NR for Foreign Trusts: Income Tax Reporting for Foreign Non-Grantor Trusts

A complex challenge for U.S. tax advisers is navigating the tax reporting requirements involved when a foreign trust has a U.S. owner, U.S. beneficiaries, or U.S. investments. Filing obligations vary depending on the U.S. tax classification of the foreign trust, classification of investments and income, and any distributions made or attributed to U.S. beneficiaries. As a result, tax advisers must be able to navigate a complex matrix of tax rules to ensure full compliance and avoid costly penalties.

While U.S. beneficiaries of foreign trusts must file a Form 3520 to report trust distributions or other foreign gifts, foreign trusts with U.S. nexus must also file an income tax return to report the trust's U.S.-source income (unless fully withheld at source) and any income effectively connected with a U.S. trade or business (ECI) including allocations from partnerships. Foreign trusts generally file a Form 1040NR, as modified to conform to trust accounting rules. Moreover, trustees of a foreign trust with a U.S. grantor must also file a Form 3520-A, and there may be additional income and information reporting obligations imposed on U.S. grantors and beneficiaries related to interests in foreign companies and foreign bank accounts.

U.S. tax treatment of foreign trusts have several significant distinctions from taxation of domestic trusts: DNI calculation rules are different for foreign trusts, and U.S. tax rules distinguish the taxation of distributions made from DNI vs. UNI with the latter distributions being subject to harsh tax consequences in the hands of beneficiaries. Moreover, the trust’s ownership in certain foreign companies (CFCs and PFICs) may be attributed to the U.S. beneficiaries, resulting in deemed inclusions and reporting obligations.

Listen as our experienced panel provides a thorough and practical guide to the rules for determining when a foreign trust triggers U.S. tax filing obligations and the adjustments necessary to accurately report foreign trust income.

1. Residence and classification rules for foreign trusts
   1. Residence based on ”control test” and “court test”
   2. Classification as grantor vs. non-grantor trust
2. Form 1040NR reporting for foreign trusts
   1. U.S. income taxation of foreign trusts  B.
   2. Reporting on Form 1040NR
   3. Adjustments to Form 1040NR
3. Calculation of DNI for foreign trusts
   1. Differences in computing DNI between domestic and foreign trusts
   2. Foreign tax credits
   3. Trust accumulation calculations and tax impact on UNI
4. Information reporting obligations
   1. Chapter 3 (withholding tax) and Chapter 4 (FATCA) documentations
   2. Foreign trusts with U.S. grantors (Forms 3520-A, FBARs, etc.)
   3. Foreign trusts with U.S. beneficiaries (Forms 3520, FBARs, etc.)
5. Discussion of current issues and exposure
   1. Attribution of interests in foreign companies (CFCs and PFICs)
   2. Impact of changes under Tax Reform

The panel will discuss these and other relevant topics:

• When is a foreign trust subject to U.S. tax and information reporting?
• What must a foreign trust report and on which forms?
• What are the modifications needed on Form 1040NR to report foreign trust FDAP income and ECI?
• What are the differences in DNI calculations between foreign and domestic trusts?
• What obligations information obligations are imposed on foreign trusts?

Learning Objectives

After completing this course, you will be able to:

• Determine foreign non-grantor and grantor trusts that must be reported as foreign individuals for income tax reporting purposes
• Recognize the rules for determining residence and classification of foreign trusts
• Discern the difference in DNI calculation and treatment between domestic and foreign trusts
• Identify adjustments for trust accounting that must be made in reporting a foreign trust on a Form 1040NR

• 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, preparing complex tax forms and schedules, supervising other attorneys. Specific knowledge and understanding of foreign asset reporting requirements, identifying foreign-based trusts, and collection due process rules; familiarity with beneficial ownership rules, familiarity with income tax treaty treatment of foreign trust income.

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).