Embed Size (px)
Citation preview
Avoiding Foreign Trust Throwback Tax onDistributions to U.S. Beneficiaries FromUndistributed Net IncomeDNI and UNI Rules, Structuring Foreign Subtrusts, and Strategies to Defer Accumulation Tax
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, NOVEMBER 28, 2017
Presenting a live 90-minute webinar with interactive Q&A
The audio portion of the conference may be accessed via the telephone or by using your computer'sspeakers. Please refer to the instructions emailed to registrants for additional information. If youhave any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is nolonger permitted.
Today’s faculty features:
Kirsten Burmester, Member, Caplin & Drysdale, Washington, D.C.
Lucy S. Lee, Partner, Akin Gump Strauss Hauer & Feld, Washington, D.C.
Tips for Optimal Quality
Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internet connection.
If the sound quality is not satisfactory, you may listen via the phone: dial1-866-961-9091 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we can address theproblem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
NOTE: If you are seeking CPE credit, you must listen via your computer — phonelistening is no longer permitted.
Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.
FOR LIVE EVENT ONLY
Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internet connection.
If the sound quality is not satisfactory, you may listen via the phone: dial1-866-961-9091 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we can address theproblem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
NOTE: If you are seeking CPE credit, you must listen via your computer — phonelistening is no longer permitted.
Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email that youwill receive immediately following the program.
For CPE credits, attendees must participate until the end of the Q&A session andrespond to five prompts during the program plus a single verification code. In addition,you must confirm your participation by completing and submitting an AttendanceAffirmation/Evaluation after the webinar.
For additional information about continuing education, call us at 1-800-926-7926 ext.35.
FOR LIVE EVENT ONLY
In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email that youwill receive immediately following the program.
For CPE credits, attendees must participate until the end of the Q&A session andrespond to five prompts during the program plus a single verification code. In addition,you must confirm your participation by completing and submitting an AttendanceAffirmation/Evaluation after the webinar.
For additional information about continuing education, call us at 1-800-926-7926 ext.35.
Program Materials
If you have not printed the conference materials for this program, pleasecomplete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
If you have not printed the conference materials for this program, pleasecomplete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
November 28, 2017
5
6
Distributions from Foreign Grantor Trusts Treated as paid directly from the grantor of the trust as a gift if
the beneficiary receives a Foreign Grantor Trust BeneficiaryStatement (“FGTBS”)
Distributions from Nongrantor Trusts If the U.S. beneficiary receives a Foreign Nongrantor Trust
Beneficiary Statement (“FNGTBS”), the U.S. beneficiary istaxable on distributions of current year DNI and is subject to a“throwback tax” on distributions of UNI
Distributions from Foreign Grantor Trusts Treated as paid directly from the grantor of the trust as a gift if
the beneficiary receives a Foreign Grantor Trust BeneficiaryStatement (“FGTBS”)
Distributions from Nongrantor Trusts If the U.S. beneficiary receives a Foreign Nongrantor Trust
Beneficiary Statement (“FNGTBS”), the U.S. beneficiary istaxable on distributions of current year DNI and is subject to a“throwback tax” on distributions of UNI
7
If no FGTBS or FNGTBS, the “Schedule A” defaultregime applies Entire distribution is treated as taxable Amount of distribution that exceeds 125% of the average of
the past three years’ distributions is subject to the throwbacktax and interest charge that apply to distributions of UNI The portion of the distribution not subject to the throwback
tax is treated as ordinary Regime is referenced in section 6048(c)(2) and Notice 97-34,
but specific rules are only found in the Form 3520 instructions
If no FGTBS or FNGTBS, the “Schedule A” defaultregime applies Entire distribution is treated as taxable Amount of distribution that exceeds 125% of the average of
the past three years’ distributions is subject to the throwbacktax and interest charge that apply to distributions of UNI The portion of the distribution not subject to the throwback
tax is treated as ordinary Regime is referenced in section 6048(c)(2) and Notice 97-34,
but specific rules are only found in the Form 3520 instructions
8
9
To avoid the Schedule A “default” regime the beneficiary cannot have used the default regime in a prior
year, or the foreign trust must have terminated during the year,and the beneficiary must attach a FNGTBS to the Form 3520
If the U.S. beneficiary receives a FNGTBS she reports her allocable share of DNI and the portion of the
distribution treated as an accumulation distribution on Part III,Schedule B of the Form 3520 she calculates the tax and interest on the accumulation
distribution on Part III, Schedule C of the Form 3520
To avoid the Schedule A “default” regime the beneficiary cannot have used the default regime in a prior
year, or the foreign trust must have terminated during the year,and the beneficiary must attach a FNGTBS to the Form 3520
If the U.S. beneficiary receives a FNGTBS she reports her allocable share of DNI and the portion of the
distribution treated as an accumulation distribution on Part III,Schedule B of the Form 3520 she calculates the tax and interest on the accumulation
distribution on Part III, Schedule C of the Form 3520
10
Must include: Explanation of the appropriate U.S. tax treatment of any distribution
or deemed distribution for U.S. tax purposes, or sufficientinformation to enable the U.S. beneficiary to establish theappropriate treatment of any distribution for U.S. tax purposes Statement identifying whether any grantor of the trust is a
partnership or foreign corporation (if so, attach explanation) Statement that the trust will permit either the IRS or the U.S.
beneficiary to inspect and copy the trust’s permanent books ofaccount, records, and other documents necessary to establishappropriate U.S. tax treatment.• Not necessary if U.S. agent is appointed
Must include: Explanation of the appropriate U.S. tax treatment of any distribution
or deemed distribution for U.S. tax purposes, or sufficientinformation to enable the U.S. beneficiary to establish theappropriate treatment of any distribution for U.S. tax purposes Statement identifying whether any grantor of the trust is a
partnership or foreign corporation (if so, attach explanation) Statement that the trust will permit either the IRS or the U.S.
beneficiary to inspect and copy the trust’s permanent books ofaccount, records, and other documents necessary to establishappropriate U.S. tax treatment.• Not necessary if U.S. agent is appointed
11
Must include: First and last day of the trust’s tax year Description and FMV of the property distributed Statement as to whether the foreign trust has appointed a U.S.
agent. If so, agent’s name, address, and TIN must be included. Basic identifying information (name, address, TIN) about the
foreign trust and its trustee
Must include: First and last day of the trust’s tax year Description and FMV of the property distributed Statement as to whether the foreign trust has appointed a U.S.
agent. If so, agent’s name, address, and TIN must be included. Basic identifying information (name, address, TIN) about the
foreign trust and its trustee
12
U.S. beneficiary includes in income her allocable share of thetrust’s distributable net income “DNI.” IRC §§ 652, 662. Note that DNI of a foreign trust includes capital gain. IRC § 643(a)(6)(C).
U.S. beneficiary is subject to the “throwback tax” onaccumulation distributions. IRC §§ 665-668. An accumulation distribution is the amount by which the amounts
specified in 661(a)(2) exceed DNI reduced by amounts specified in661(a)(1) – in other words, the amount by which the trust’s distributionsfor the year exceed the year’s DNI Note that no accumulation distribution exists if the current year’s
distributions do not exceed fiduciary accounting income If the trust’s DNI is not distributed in the current year, any remaining
DNI, reduced by any taxes imposed on the trust’s DNI, becomes UNI, andin subsequent years any distributions from the trust in excess of DNI willconsidered paid from UNI
U.S. beneficiary includes in income her allocable share of thetrust’s distributable net income “DNI.” IRC §§ 652, 662. Note that DNI of a foreign trust includes capital gain. IRC § 643(a)(6)(C).
U.S. beneficiary is subject to the “throwback tax” onaccumulation distributions. IRC §§ 665-668. An accumulation distribution is the amount by which the amounts
specified in 661(a)(2) exceed DNI reduced by amounts specified in661(a)(1) – in other words, the amount by which the trust’s distributionsfor the year exceed the year’s DNI Note that no accumulation distribution exists if the current year’s
distributions do not exceed fiduciary accounting income If the trust’s DNI is not distributed in the current year, any remaining
DNI, reduced by any taxes imposed on the trust’s DNI, becomes UNI, andin subsequent years any distributions from the trust in excess of DNI willconsidered paid from UNI
13
“Throwback rule” seeks to approximate the tax the beneficiarywould have paid if UNI carried out by the accumulationdistribution was distributed in the year it was earned by thetrust, and to impose underpayment interest on such amounts Important terms, such as “accumulation distribution” and
“UNI” are not defined in the Form 3520 instructions; mustreference Form 4970 for definitions
Distributions in excess of the trust’s DNI and UNI aretreated as paid from corpus
“Throwback rule” seeks to approximate the tax the beneficiarywould have paid if UNI carried out by the accumulationdistribution was distributed in the year it was earned by thetrust, and to impose underpayment interest on such amounts Important terms, such as “accumulation distribution” and
“UNI” are not defined in the Form 3520 instructions; mustreference Form 4970 for definitions
Distributions in excess of the trust’s DNI and UNI aretreated as paid from corpus
14
16
Taxation of the portion of the distribution treated as paidout of DNI is reflected on Schedule B, lines 40, 42, and 44 Instructions provide that these amounts should be reported on the
appropriate schedule of the U.S. beneficiary’s tax return (e.g.,schedule D for capital gain)
Distributions of corpus are reported on Schedule B, line 43 These amounts are not taxable
Accumulation distribution is reported on Schedule B, line 41 Tax-exempt portion of accumulation distribution reported on line
41a. Refer to Form 1041, Schedule J, and Form 4970 to compute
tax on accumulation distribution Form 4970 is attached as a worksheet
Taxation of the portion of the distribution treated as paidout of DNI is reflected on Schedule B, lines 40, 42, and 44 Instructions provide that these amounts should be reported on the
appropriate schedule of the U.S. beneficiary’s tax return (e.g.,schedule D for capital gain)
Distributions of corpus are reported on Schedule B, line 43 These amounts are not taxable
Accumulation distribution is reported on Schedule B, line 41 Tax-exempt portion of accumulation distribution reported on line
41a. Refer to Form 1041, Schedule J, and Form 4970 to compute
tax on accumulation distribution Form 4970 is attached as a worksheet
17
The accumulation distribution depletes prior years’ UNIusing a FIFO method (i.e., the earliest year’s UNI is depletedfirst, then the next earliest year, and so on). Using thismethod, determine the total UNI (reduced by any UNI paidout in prior years’ accumulation distributions) allocated tothe accumulation distribution, adding back any U.S. orforeign taxes imposed on the UNI, and removing any tax-exempt interest.
Ignore Line 2: Form 4970 instructs the filer to removeincome accumulated before the U.S. beneficiary attainedage 21. This rule does not apply to distributions fromforeign trusts. IRC § 665(b).
The accumulation distribution depletes prior years’ UNIusing a FIFO method (i.e., the earliest year’s UNI is depletedfirst, then the next earliest year, and so on). Using thismethod, determine the total UNI (reduced by any UNI paidout in prior years’ accumulation distributions) allocated tothe accumulation distribution, adding back any U.S. orforeign taxes imposed on the UNI, and removing any tax-exempt interest.
Ignore Line 2: Form 4970 instructs the filer to removeincome accumulated before the U.S. beneficiary attainedage 21. This rule does not apply to distributions fromforeign trusts. IRC § 665(b).
18
Line 4 adds back U.S. and foreign taxes imposed on UNIbecause those amounts are credited later. For this purpose, foreign taxes include taxes imposed on the
settlor with respect to trusts that would have been grantortrusts but for 672(f) Note that if the multiple trust rule applies, amounts are not
added back in because the credit is denied• Multiple trust rule applies where beneficiary was deemed under
the accumulation distribution rules to receive distributions fromtwo or more other trusts in a year to which the currentaccumulation distribution is deemed to be distributed. Credit fortaxes attributable to the accumulation distribution in such a yearare disallowed.
Line 4 adds back U.S. and foreign taxes imposed on UNIbecause those amounts are credited later. For this purpose, foreign taxes include taxes imposed on the
settlor with respect to trusts that would have been grantortrusts but for 672(f) Note that if the multiple trust rule applies, amounts are not
added back in because the credit is denied• Multiple trust rule applies where beneficiary was deemed under
the accumulation distribution rules to receive distributions fromtwo or more other trusts in a year to which the currentaccumulation distribution is deemed to be distributed. Credit fortaxes attributable to the accumulation distribution in such a yearare disallowed.
19
Divide the amount determined in Step 1 by the numberof trust’s earlier tax years in which amounts areconsidered distributed, throwing out any year in whichthe trust’s UNI is less than 25% of the average annualaccumulation (i.e., the total accumulation distributiondivided by the number of years of accumulation).
Divide the amount determined in Step 1 by the numberof trust’s earlier tax years in which amounts areconsidered distributed, throwing out any year in whichthe trust’s UNI is less than 25% of the average annualaccumulation (i.e., the total accumulation distributiondivided by the number of years of accumulation).
20
Lines 14 through 25 compute the average amount of additionalU.S. tax the beneficiary would have paid in the five immediatelypreceding years, throwing out years with the highest and lowesttaxable income, as if the amount determined in step 2 had beenadded to her taxable income in each of those years.
The starting point for each year’s taxable income is the income asamended by the taxpayer or recomputed by the IRS Taxable income for a loss year is not treated as being less than zero Accumulation distributions from prior years deemed distributed in the
computation year are included in taxable income The form computes the addition to tax before any credits and
AMT
Lines 14 through 25 compute the average amount of additionalU.S. tax the beneficiary would have paid in the five immediatelypreceding years, throwing out years with the highest and lowesttaxable income, as if the amount determined in step 2 had beenadded to her taxable income in each of those years.
The starting point for each year’s taxable income is the income asamended by the taxpayer or recomputed by the IRS Taxable income for a loss year is not treated as being less than zero Accumulation distributions from prior years deemed distributed in the
computation year are included in taxable income The form computes the addition to tax before any credits and
AMT
21
Line 20 provides for an adjustment to tax for any credits thataffected by the change in taxable income, and for foreign taxcredits for foreign taxes paid by the trust with respect to the UNI Unlike U.S. taxes, which are credited against the additional tax on the
accumulation distribution as a whole, a foreign tax credit is computed foreach of the three base “computation” years The foreign tax credit limitation applies to the accumulation distribution
separately, without regard to the beneficiary’s other items of income FTC limitation for each computation year = recomputed U.S. tax for
computation year * (foreign-source trust income added in computationyear / recomputed worldwide income)
Line 22 requires AMT to be recomputed with respect to therecomputed taxable income; appropriate AMT schedule must beattached
Line 20 provides for an adjustment to tax for any credits thataffected by the change in taxable income, and for foreign taxcredits for foreign taxes paid by the trust with respect to the UNI Unlike U.S. taxes, which are credited against the additional tax on the
accumulation distribution as a whole, a foreign tax credit is computed foreach of the three base “computation” years The foreign tax credit limitation applies to the accumulation distribution
separately, without regard to the beneficiary’s other items of income FTC limitation for each computation year = recomputed U.S. tax for
computation year * (foreign-source trust income added in computationyear / recomputed worldwide income)
Line 22 requires AMT to be recomputed with respect to therecomputed taxable income; appropriate AMT schedule must beattached
22
Lines 26 multiplies the amount determined in Step 3 bythe number of years used as a divisor in Step 2.
Line 27 subtracts from this amount the taxes paid bythe trust attributable to the accumulation distribution Note that the foreign taxes will have already been credited on
line 20, so this amount should include only domestic taxes
This amount is added to Line 49 of Schedule C of the3520.
Lines 26 multiplies the amount determined in Step 3 bythe number of years used as a divisor in Step 2.
Line 27 subtracts from this amount the taxes paid bythe trust attributable to the accumulation distribution Note that the foreign taxes will have already been credited on
line 20, so this amount should include only domestic taxes
This amount is added to Line 49 of Schedule C of the3520.
23
The number of years for which underpayment interest iscomputed is the “dollar-weighted” average number of years ofthe accumulation, rounded to the nearest half year
On Schedule B, Line 45, enter the trust’s total UNI, prior todepletion by the current year’s accumulation distribution
On Schedule B, Line 46, enter the trust’s weighted UNI Multiply each year’s UNI (prior to depletion by the current year’s
accumulation distribution) by the number of years since that year, andadd each year’s result Note that any year for which the U.S. beneficiary was not a U.S. person
during the entire year should be disregarded. IRC § 668(a)(4). This is notreflected in the instructions.
On Schedule B, Line 47, divide the amount on Line 46 by theamount on Line 45 to determine the “applicable years of thetrust”
The number of years for which underpayment interest iscomputed is the “dollar-weighted” average number of years ofthe accumulation, rounded to the nearest half year
On Schedule B, Line 45, enter the trust’s total UNI, prior todepletion by the current year’s accumulation distribution
On Schedule B, Line 46, enter the trust’s weighted UNI Multiply each year’s UNI (prior to depletion by the current year’s
accumulation distribution) by the number of years since that year, andadd each year’s result Note that any year for which the U.S. beneficiary was not a U.S. person
during the entire year should be disregarded. IRC § 668(a)(4). This is notreflected in the instructions.
On Schedule B, Line 47, divide the amount on Line 46 by theamount on Line 45 to determine the “applicable years of thetrust”
24
Use Lines 51 and 52 on Schedule C and the chart in theinstructions to the Form 3520 to compute underpayment interest No interest runs prior to 1976 From 1976 through 1995, underpayment interest was a flat 6% rate
without compounding From 1996, the interest is compounded daily at the rate imposed on
underpayments under section 6621(a)(2) On Line 51, report the “combined interest rate” This is determined by taking the “applicable years of the trust” and
looking up the combined interest rate on the chart on the Form 3520instructions
On Line 52, report the interest due Multiply the combined interest rate by the tax on the accumulation
distribution reported on Line 49 Note that the “interest” is not deductible. IRC § 668(c).
Use Lines 51 and 52 on Schedule C and the chart in theinstructions to the Form 3520 to compute underpayment interest No interest runs prior to 1976 From 1976 through 1995, underpayment interest was a flat 6% rate
without compounding From 1996, the interest is compounded daily at the rate imposed on
underpayments under section 6621(a)(2) On Line 51, report the “combined interest rate” This is determined by taking the “applicable years of the trust” and
looking up the combined interest rate on the chart on the Form 3520instructions
On Line 52, report the interest due Multiply the combined interest rate by the tax on the accumulation
distribution reported on Line 49 Note that the “interest” is not deductible. IRC § 668(c).
25
On Schedule C, Line 53, add the tax on theaccumulation distribution from Line 49 and the intereston the accumulation distribution on Line 52 Section 668(b) limits the tax plus interest charge to the amount
of the accumulation distribution. This is not reflected in theinstructions to the Form 3520.
Report this amount as “additional tax” on the U.S.beneficiary’s income tax return
On Schedule C, Line 53, add the tax on theaccumulation distribution from Line 49 and the intereston the accumulation distribution on Line 52 Section 668(b) limits the tax plus interest charge to the amount
of the accumulation distribution. This is not reflected in theinstructions to the Form 3520.
Report this amount as “additional tax” on the U.S.beneficiary’s income tax return
26
If the default regime applies, the entire distribution istaxable either as ordinary income or as an accumulationdistribution paid out of UNI, regardless of whether it is paidfrom the trust’s income or corpus
Use Part III, Schedule A to determine the amount of thedistribution treated as ordinary vs. accumulationdistribution An amount equal to 1.25 times the average of the preceding three
years’ distributions to the U.S. beneficiary is treated as ordinaryincome The remainder of the distribution, if any, is treated as an
accumulation distribution paid out of UNI
If the default regime applies, the entire distribution istaxable either as ordinary income or as an accumulationdistribution paid out of UNI, regardless of whether it is paidfrom the trust’s income or corpus
Use Part III, Schedule A to determine the amount of thedistribution treated as ordinary vs. accumulationdistribution An amount equal to 1.25 times the average of the preceding three
years’ distributions to the U.S. beneficiary is treated as ordinaryincome The remainder of the distribution, if any, is treated as an
accumulation distribution paid out of UNI
27
The portion treated as ordinary is reported on theappropriate schedule of the tax return Query what the appropriate schedule is if the source and amount of
the trust’s income is unknown Tax on the portion treated as an accumulation distribution is
computed on Part III, Schedule C The entire accumulation distribution is treated as paid from UNI Tax is computed in the same manner as an accumulation distribution
from a foreign nongrantor trust for which a FNGTBS has beenobtained (i.e., look to Form 4970)• Unclear whether credits for taxes paid by trust are available The applicable number of years for the interest charge is the number
of years the trust has been in existence, divided by 2
The portion treated as ordinary is reported on theappropriate schedule of the tax return Query what the appropriate schedule is if the source and amount of
the trust’s income is unknown Tax on the portion treated as an accumulation distribution is
computed on Part III, Schedule C The entire accumulation distribution is treated as paid from UNI Tax is computed in the same manner as an accumulation distribution
from a foreign nongrantor trust for which a FNGTBS has beenobtained (i.e., look to Form 4970)• Unclear whether credits for taxes paid by trust are available The applicable number of years for the interest charge is the number
of years the trust has been in existence, divided by 2
28
Kirsten BurmesterMemberCaplin & Drysdale, [email protected]
______________________________________________
DisclaimerThis communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specificsituation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.
Attorney AdvertisingIt is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
© 2014 Caplin & Drysdale, CharteredAll Rights Reserved.
29
Avoiding Foreign Trust Throwback Tax on Distributions toU.S. Beneficiaries From Undistributed Net Income
© 2017 Akin Gump Strauss Hauer & Feld LLP
IV. Strategies to Avoid or Defer Accumulation Tax on Distributions
V. Decanting or Structuring Foreign Subtrusts to Receive Distributions, Etc.
Lucy S. Lee, Esq.Akin Gump Strauss Hauer & Feld, LLPWashington DC – New York – Los Angeles – San Francisco – London – Hong Kong
Avoiding Foreign Trust Throwback Tax on Distributions toU.S. Beneficiaries From Undistributed Net Income
Case Study
Steven is a U.S. beneficiary of a foreign nongrantor trust (“Trust”). Trust wascreated in 2007 by Steven’s father who was not a U.S citizen or a resident.FNT distributed $100,000 to Steven in 2014, a year in which the Trust’s DNIand trust accounting income was $20,000. Thus, Steven has received adistribution composed in part of UNI.Assume that the Trust had DNI in the preceding years and none of it wasdistributed. In 2007, the Trust had $4,000 of DNI, $20,000 in 2008, $30,000 in2009, and $40,000 from 2010-2013. Recap: Distributions composed of UNI to a U.S. beneficiary of a foreign non-grantor
trust have the following consequences: (1) capital gains are taxed at ordinary rates; (2)interest charge is imposed on the tax amount due on the distribution of accumulatedincome; and (3) “throwback tax” also applies to the accumulation distribution
Generally about 9 steps in determining the throwback tax, starting with allocating theaccumulation distribution to the preceding years
Of the $80,000, $4,000 is deemed made on the last day of 2007, $20,000 on the lastday of 2008, $30,000 on the last day of 2009, and $26,000 on the last day of 2010
Using the 9-Step method, Steven is looking at $23,300 in throwback tax + interest
Steven is a U.S. beneficiary of a foreign nongrantor trust (“Trust”). Trust wascreated in 2007 by Steven’s father who was not a U.S citizen or a resident.FNT distributed $100,000 to Steven in 2014, a year in which the Trust’s DNIand trust accounting income was $20,000. Thus, Steven has received adistribution composed in part of UNI.Assume that the Trust had DNI in the preceding years and none of it wasdistributed. In 2007, the Trust had $4,000 of DNI, $20,000 in 2008, $30,000 in2009, and $40,000 from 2010-2013. Recap: Distributions composed of UNI to a U.S. beneficiary of a foreign non-grantor
trust have the following consequences: (1) capital gains are taxed at ordinary rates; (2)interest charge is imposed on the tax amount due on the distribution of accumulatedincome; and (3) “throwback tax” also applies to the accumulation distribution
Generally about 9 steps in determining the throwback tax, starting with allocating theaccumulation distribution to the preceding years
Of the $80,000, $4,000 is deemed made on the last day of 2007, $20,000 on the lastday of 2008, $30,000 on the last day of 2009, and $26,000 on the last day of 2010
Using the 9-Step method, Steven is looking at $23,300 in throwback tax + interest
32
IV. Methods to Avoid or Defer Accumulation Tax
Best method may be to avoid accumulation of income!● Distribute DNI currently to beneficiary and/or trust
Default Method● Calculation can be found within the Instructions to Form 3520.● Possible to “super-charge”?
Stripping Distributions Assess principal after cleansing out DNI/UNI Consider individual beneficiaries and trusts
In-kind Distributions● But consider potential use of section 643(e) election
Limit Distributions to “Fiduciary Accounting Income” Qualifying as a Grantor Trust with a Non-U.S. Grantor Grantor as an Intermediary (to avoid section 643(h)) Loans to Beneficiaries
Best method may be to avoid accumulation of income!● Distribute DNI currently to beneficiary and/or trust
Default Method● Calculation can be found within the Instructions to Form 3520.● Possible to “super-charge”?
Stripping Distributions Assess principal after cleansing out DNI/UNI Consider individual beneficiaries and trusts
In-kind Distributions● But consider potential use of section 643(e) election
Limit Distributions to “Fiduciary Accounting Income” Qualifying as a Grantor Trust with a Non-U.S. Grantor Grantor as an Intermediary (to avoid section 643(h)) Loans to Beneficiaries
33
V. Decanting or Structuring Foreign Subtrusts
Decanting or resettlement of foreign nongrantor trust as a U.S. trust● Consider potential decanting statutes of local law● Continuation of UNI● Consider potential CFC and PFIC implications● Consider potential “step up” in basis of assets transferred to U.S. trust
Structuring foreign subtrusts to receive distributions Foreign (trust) to foreign (trust) loans
Decanting or resettlement of foreign nongrantor trust as a U.S. trust● Consider potential decanting statutes of local law● Continuation of UNI● Consider potential CFC and PFIC implications● Consider potential “step up” in basis of assets transferred to U.S. trust
Structuring foreign subtrusts to receive distributions Foreign (trust) to foreign (trust) loans
34
Thank You
Lucy S. Lee, Esq.Akin Gump Strauss Hauer & Feld, LLPWashington DC – New York – Los Angeles – San Francisco – London – Hong [email protected]
35
