New IRS Regulations Coming for Foreign Trusts

Posted by Keith Codron | Jul 03, 2010 | 0 Comments

Fearful that foreign trusts are being used by "the rich" for tax evasion purposes, IRS is hard at work drafting new proposed regulations covering income tax reporting and filing requirements involving offshore trusts.

This disclosure was just made, on June 22, at a Washington, D.C. Bar program dealing with international tax issues pertaining to high net worth individuals. At the meeting, an IRS official, M. Grace Fleeman, who is a senior technical reviewer in the international division of the Associate Chief Counsel's office, admitted that the regulations will be aimed squarely at foreign trusts having U.S. beneficiaries who are taxable on the trust's distributable net income. 

Earlier this year Congress passed Public Law 111-147, the Hiring Incentives to Restore Employment ("HIRE") Act, which was signed by President Obama on March 18, 2010. Although mostly focused on creating domestic jobs, this law includes several provisions on foreign trusts and foreign financial accounts. While many of the foreign trust tax issues date back to 1996 legislation, and have been on the government's enforcement radar screen for more than a decade, IRS, in light of the 2010 legislation, has decided to include the foreign trust provisions of the HIRE Act in its pending regulations project. The tax official told the group of lawyers in Washington, D.C. that she hopes the IRS will have finished drafting the proposed regulations within the next six months.

The HIRE Act added a presumption, under Internal Revenue Code Section 679(d), which treats a foreign trust receiving property from a U.S. person as automatically having a U.S. beneficiary.  Another provision of the HIRE Act, codified at IRC §643(i), provides for the taxation of trust property used without compensation. Thus, by way of example, a loan of cash or marketable securities from the foreign trust to a U.S. grantor or U.S. beneficiary of that trust would be treated as a taxable distribution.

In response to questions from the program participants, the IRS official stated that the new regulations will address requirements for preparing Form 3520 [Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts], and for withholding, as well as the tax consequences of a distribution by a trust which has no distributable net income.  Furthermore, she said, the regulations will discuss foreign trust reporting requirements under IRC §6048, penalties for inadequate reporting under IRC §6677, and, under IRC §6039F, the reporting of large gifts received from foreign persons.

We will have to wait and see how the new regulations unfold, but one thing is very clear: IRS, in particular, and the Obama administration, in general, strongly dislike the use of offshore trusts by high net worth individuals residing in the United States and wish to discourage the use of such trusts by making tax compliance as burdensome and onerous as possible.

For additional information please contact the writer, Keith Codron, toll-free, at (800) 497-0864, or via email at [email protected] Mr. Codron, whose main office is located in Orange County, California, welcomes your comments and questions.

About the Author

Keith Codron

Keith Codron is an Orange County attorney with more than 40 years of experience in the field of trusts and estates. He has been certified as a specialist in estate planning, trust and probate law by the Board of Legal Specialization of the State Bar of California. Mr. Codron's practice is focused...


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