| U.S. Taxation of Grantors and Beneficiaries of a Foreign Trust |
If a foreign trust is funded (directly or indirectly) by a U.S. person (citizen or resident alien), the foreign trust will be treated as a "grantor" trust for U.S. tax purposes if it has any U.s. beneficiaries. A foreign trust is basically any trust that is not subject to the jurisdiction of any U.S. courts.
A "grantor" trust is a trust in which the person who funds the trust (also known as the settlor or trustor) is treated for income tax purposes as if he or she continued to own the assets that have been transferred to the trust. Hence, the grantor is subject to income tax on the income of the trust -- the same as with a revocable living trust.
A U.S. person who is a beneficiary of a foreign trust and who receives any distribution from the trust during the tax year is required to file Form 3520.
Also, any U.S. person who is the recipient of a gift in excess of $100,000 from a foreign person is required to file Form 3520 to disclose the gift, even though it may not be taxable to the recipient.
In addition, any U.S. person who directly or indirectly is the grantor (also known as the settlor or trustor) of a foreign trust that has any U.S. beneficiary, is required to file this form to report any transfers to the trust during the tax year.
Any U.S. person who receives a loan from a related foreign trust or makes a loan to foreign trust a may be required to file Form 3520.The trustee of a foreign trust is also required to file a Form 3520-A to report the income and assets of the trust each year. The form is filed with the Philadelphia office of the IRS and a copy is to be attached to the income tax return of the trust grantor.
There have been numerous attempts to circumvent these harsh rules nd there is a lot of misleading information, myths and hoaxes about foreign trusts on the Internet.
For links to articles by Richard Duke and Vernon Jacobs about common offshore tax scams and schemes link to http://www.offshorepress.com/offshoretax/otscams.htm
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