Identifying Foreign Trusts: Court and Control Tests, Grantor vs. Non-Grantor Trusts, Tax Consequences and Reporting Requirements

Determining whether an entity is a foreign trust is an analytical process that is not clear-cut. Deciding whether an entity is indeed a trust and then a foreign trust is complicated.

The definition of a trust under IRC § 301.7701-4 (a) states, "In general, the term "trust" as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries… ." The IRS clarifies that an entity created for business purposes and abusive trust arrangements or shams are not trusts for U.S. tax purposes.

To be considered a domestic trust, a trust must meet both a court test and a control test. Simply put, to satisfy the court test, a trust must be primarily supervised by U.S. courts. To satisfy the control test, a U.S. person must have the authority to control all substantial decisions of the trust. Determining what constitutes a U.S. person is another obstacle to overcome. Any trust that cannot satisfy these two requirements is considered a foreign trust.

The consequences of incorrect determinations regarding foreign trust status are severe. As outlined by the IRS: "A U.S owner may be subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by you at the close of the tax year, if a Form 3520-A or a substitute is not filed."

International tax practitioners working with multinational taxpayers need to thoroughly understand the criteria for deciding whether an entity is, in fact, a foreign trust.

Listen as our panel of highly skilled international tax attorneys reviews the steps for determining whether an entity is a foreign trust and discusses the significance of this classification.

I. Identify a foreign trust: court and control tests

II. Specificities of grantor and non-grantor foreign trusts

III. Income tax consequences to owners, beneficiaries, and transferors

IV. Reporting requirements 

The panel will discuss these and other critical matters:

• Determine the nature of an entity (e.g., corporation vs. trust)
• Determine the residency status of a trust (i.e., foreign vs. domestic)
• Ascertain the type of trust (e.g., grantor or non-grantor)
• Recognize the U.S. income tax consequences to U.S. and non-U.S. owners, grantors, trustees, and beneficiaries
• Understand abusive foreign trust tax evasion schemes
• Identify appropriate annual filings (e.g. Forms 1040NR, 3520, 3520-A, 8938)
• Understand penalties associated with foreign trust filing requirements and recent developments

Learning Objectives 

After completing this course, you will be able to:

• Identify a foreign trust
• Recognize what income tax consequences result from a foreign trust
• Ascertain which annual income tax returns should be filed and which statements should be attached to the returns
• Decide whether a trust is a grantor or non-grantor trust

• 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 preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

  
  

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IRS Approved Provider

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