Adviser Explains Tax Planning For US Citizens

Tax-News.com, New York

27 January 2003

Thomas Azzara's New Providence Estate Planners has published an issue of their Tax Haven Reporter (http://www.bahamasbahamas.com) devoted to tax planning for US citizens using foreign trusts in order to minimise inheritance tax and income taxes during life.

Mr Azzara quotes some figures from the IRS's online website in December 2002: "For 1998, some $1,300 million were reported as gifts or bequests from nonresident alien individuals or foreign estates, while $19 million were reported as gifts from foreign corporations or foreign partnerships." Since US beneficiaries of Foreign Trusts are only required to report trust income distributions of over $100,000, he estimates that the real amount of trust distributions to US taxpayers is certainly 5 to 10 times greater than the $1.3 billion reported, and that 'The corpus held in these foreign trusts is more than likely 100 times (in size) the annual distribution numbers - or perhaps as much as 5 trillion dollars.'

The article continues:

'Revenue Ruling 69-70 states: "An individual beneficiary who is resident of the United States is not taxable on a distribution from a foreign trust considered to be owned by a nonresident alien grantor under subpart E of subchapter J of the Code" - these are the exact words of the Internal Revenue Service tax writers - i.e., tax lawyers working for the Treasury department writing your tax law. They are people from Harvard, Stanford, and other big name institutions.'

The full text of the ruling is as follows:

'Rev-Rul 69-70: Advice has been requested whether the income of a foreign trust, under the circumstances described below, is taxable to the beneficiary, an individual who is resident of the United States.

'X, a nonresident alien individual, created a foreign trust for the benefit of a resident of the United States. Under the terms of the instrument, X reserves the absolute power to dispose of the beneficial enjoyment of both the income and the corpus of the trust. The trustees are nonresident aliens, and all the trust property had a situs outside the United States.

'When income-producing property is placed in trust, the Federal income tax liability generally shifts from the grantor to the trust and beneficiaries in accordance with subparts A through D of part I, subchapter J, Chapter 1, subtitle A of the Internal Revenue Code of 1954 (sections 641 through 669).

'However, where the grantor retains dominion and control over the income and corpus of the trust, subpart E of subchapter J (sections 671 through 678) rather than subparts A through D of subchapter J, is applicable. Since X, a nonresident alien grantor retained the absolute power to dispose of the beneficial enjoyment of both the income and corpus of the trust, he is treated as the owner of the trust under IRC §674(a) of the Code. Accordingly, an individual beneficiary who is a resident of the U.S. is not taxable on that portion of the income distributed to him from the foreign trust which is considered to be owned by the nonresident alien grantor under subpart E of subchapter J of the Code.

'It should be noted that United States source income of a foreign trust considered to be controlled by a nonresident alien grantor is taxed to the grantor. If the grantor is a resident of a non-treaty country, the provisions of section 871 of the Code apply concerning the tax. However, if the grantor is a resident of a treaty country, the provisions of the treaty may determine the tax.'

The article goes on to examine in depth how this ruling can be used in a variety of real-life (or real-death!) situations to minimise US tax.

Recommended