International Tax

Foreign Trusts

A Foreign Trust is one that is created and governed by the laws of a jurisdiction outside of the U.S. While the trusts may be used for investment, estate planning, and succession planning, the most common use is for asset protection. However, the asset protection benefits vary depending on the jurisdiction that governs the trust. Foreign trusts are most efficient for asset protection purposes if the assets that fund the trust are liquid and transferred offshore. It must be remembered that foreign trusts do have IRS filing requirements and there can be tax consequences. Failure to meet the requirements or filing improperly can lead to significant penalties.

General IRS reporting rules apply to a U.S. person who:

• Creates a foreign trust
• Transfers any money or property to a foreign trust
• Receives a distribution from a foreign trust
• Is treated as the U.S. owner of a foreign trust

For the above persons, Form 3520 must be completed. In addition to the Form 3520, other forms may be required upon filing depending on how the how the trust funds were transferred or distributed. Filing and reporting responsibilities also apply to the beneficial owners of the foreign trusts. These are the persons or entities that receive or have the right to receive proceeds or other advantages based on their ownership.

In addition to the imposed reporting requirements on the “responsible parties”, the “owner” of any portion of a foreign trust must adhere to the following:

• The trust files a return for each year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the U.S. agent for the Trust, and such other information as is prescribed
• The trust furnishes such information as required to each U.S. person who is treated as an owner of any portion of the trust or who receives (directly or indirectly) any distribution from the trust

The Trustee may use Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, to satisfy the trusts’ reporting requirements.

Citizens and residents of the U.S. are taxed on their worldwide income and Congress has enacted specific provisions in the Internal Revenue Code to prevent trusts and other offshore entities from tax avoidance schemes.

It is true that there are many benefits to a foreign trust, including increased ability of the settler to retain benefit and control, confidentiality and privacy, and flexibility. However, there are risks as well and it is critical that you choose an advisor who has experience in the area of foreign trusts. Esquire Group has significant knowledge of the jurisdictions that would be most favorable for asset protection. We consider such factors as: recognition of self-settled trusts; local taxation; availability of competent and reliable trustees, attorneys, banks; and stable political environments.

If you are considering a foreign trust, contact our offices to schedule a consultation with one of our international team members. If you currently have a foreign trust Esquire Group is available to assist you with filing Form 3520 and any other required documents.