Are you concerned about the high IRS tax rates on a foreign trust? It is important to understand the tax and reporting consequences on this specific type of investment. It may very well be time to evaluate the net value of this form of investment based upon current IRS taxation rates.
The Control Test and the Court Test
IRS regulations and the US tax code provide two tests to determine whether a trust is a “foreign” trust: the “control test” and the “court test.” If your foreign trust investment does not pass both of these important tests it will be considered to be a foreign trust and subject to the high IRS tax rates on a foreign trust.
The “control test” is based upon the control of material decisions for the trust. If a US person has the proper authority to control every “substantial decision” of the trust, and no other individual or entity has the authority to veto those decisions the trust in question would pass the control test and not be considered to be a foreign trust.
The court test is quite simple: does a US Court have jurisdiction over the trust in all matters of administration? If the trust is governed by a US court, or, is registered with a US court, or, the fiduciaries of the trust are qualified as trustees by the US court, or, a US court shares supervision of the trust with a foreign court the trust will pass the court test. The failure to pass both the control test and the court test generally results in the classification of the entity as a foreign trust.
The High IRS Tax Rates on a Foreign Trust for a US Taxpayer
The high IRS tax rates on a foreign trust for a US taxpayer are based upon the highest possible US tax rates. Why would a US resident or citizen who is a taxpayer hold assets in a foreign trust? Unfortunately, many so called “gurus” have been selling the foreign trust idea as a way to protect income and assets in offshore accounts. This is simply not the case, and the resulting tax penalty is quite sobering for most US taxpayers.
If you are a US citizen, or a resident US taxpayer and you have assets and/or investments in a foreign trust you should evaluate the significant tax savings that could be achieved by moving those assets into a US-based trust or other investment vehicle. This could substantially reduce the underlying tax rate resulting in a significant reduction in taxes and increasing the amount of cash retained in the investment(s) by tens or hundreds of thousands of dollars.
These investments also usually trigger FBAR reporting requirements. Those who have not met associated FBAR reporting requirements should consider and consideration of IRS Offshore Voluntary Disclosure Program (OVDP).
Those with foreign trusts have also been forced to learn the meaning and significance of PFIC – Passive Foreign Investment Company. The reporting requirements of those participating in a PFIC continue to become more onerous with the passing of each year.
If you have invested in a foreign trust in the past, it is time to reconsider the tax implications associated with your investment and assets as well as the high IRS tax rates on a foreign trust for a US taxpayer. We will develop side-by-side scenarios that help you to visualize the inherent taxes associated with foreign trusts when compared to US based options. The costs associated with this work are minimal when compared to the first-year tax savings alone.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
