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Minneapolis Foreign Trust Attorney | International Tax Lawyer

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If you live in Minneapolis, Minnesota, and you are an owner or a beneficiary of a foreign trust, you need to secure the help of a Minneapolis Foreign Trust Attorney to properly comply with US international tax laws.

You should consider retaining Sherayzen Law Office as your Minneapolis Foreign Trust Attorney. Sherayzen Law Office is a leading US international tax firm concerning US tax compliance of US beneficiaries and owners of a foreign trust. Our experience covers US taxpayers with a beneficiary and/or ownership interest in most of the countries that allow for the creation of a trust, including such important jurisdictions as: Australia, the Bahamas, Bermuda, Canada, Cook Islands, India, Japan, Jersey, New Zealand, Saint Kitts and Nevis, the United Kingdom and others. We also have an experience dealing with trusts organized in the United States that are treated as foreign trusts and, vice versa, trusts organized outside of the United States but treated as US trusts.

Minneapolis Foreign Trust Attorney: Foreign Trust Annual US Tax Compliance

Sherayzen Law Office is an experienced US international tax law firm that helps its clients to stay in full compliance with the US international tax reporting requirements concerning foreign trusts, including Forms 3520, 3520-A, 4970, 8938 and FBAR. This applies to both, US beneficiaries and US owners (including US grantors, US trustees and deemed US owners) of a foreign trust.

Minneapolis Foreign Trust Attorney: Foreign Trust Offshore Voluntary Disclosure

Sherayzen Law Office also helps its clients to remedy past noncompliance with respect to reporting of their beneficiary and/or ownership interests in a foreign trust as well as income from a foreign trust.  The primary legal vehicle for remedying such past tax noncompliance is an offshore voluntary disclosure.

Since 2005, Sherayzen Law Office has developed a profound expertise in all forms of offshore voluntary disclosures, including: Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent International Information Return Submission Procedures and Reasonable Cause voluntary disclosure (also known as “Noisy Disclosures” or “Statutory Disclosures”).   Due to its unique expertise, our firm is able to handle both, the legal and the accounting sides of an offshore voluntary disclosure; i.e. we prepare all of the legal documents and tax forms for you within one firm.

Minneapolis Foreign Trust Attorney: Foreign Trust Tax Planning

Sherayzen Law Office assists its clients with all aspects of US tax planning concerning foreign trusts.  Foreign trust tax planning can be very complex and involve multiple tax jurisdictions, but it remains one of the most effective tools to ethically and legally reduce your current income tax compliance burden.

Minneapolis Foreign Trust Attorney:  Challenging IRS Classification and IRS Penalties

Sherayzen Law Office represents its clients before the IRS with respect to challenging IRS classification of a foreign trust as well as high IRS penalties imposed for prior tax noncompliance concerning foreign trusts.

Contact Sherayzen Law Office for Professional Help With Your US International Tax Compliance Concerning Your Beneficiary or Ownership Interest in a Foreign Trust

Timing is highly important in cases involving a foreign trust. Hence, if you have a beneficiary or ownership interest in a foreign trust, you contact us in order to maximize the positive impact of our involvement.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

§318 Employee Trust Attribution | Foreign Trust US Tax Law Firm

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In a previous article, I explained special §318 rules concerning grantor trusts as an exception to the general §318 trust attribution rules. Today, I will discuss the special §318 employee trust attribution rules as another exception to the general §318 trust attribution rules.

§318 Employee Trust Attribution: Focus on Tax-Exempt Employee Trusts

First of all, it is important to define the type of employee trust which is the subject of today’s article. The focus is on employee trusts described in §401(a) and which are tax-exempt under §501(a), collectively “tax-exempt employee trusts”. In other words, we are discussing mostly trusts which were created under qualified pension, profit-sharing and stock bonus plans.

§318 Employee Trust Attribution: Main Rule – No Attribution to Tax-Exempt Employee Trusts

Under §§318(a)(2)(B)(i) and 318(a)(3)(B)(i), there is no downstream and upstream (respectively) attribution of stock between a tax-exempt employee trust and its beneficiaries. In other words, there is no §318 attribution of corporate stocks from a tax-exempt employee trust to its beneficiaries and there is no §318 attribution of corporate stocks from the beneficiaries to the trust.

Under §501(b), the non-attribution rule applies even in situations where a tax-exempt employee trust is subject to tax on its unrelated business income.

§318 Employee Trust Attribution: Certain Exceptions to Non-Attribution

The non-attribution rule with respect to tax-exempt employee trusts is reasonable and just. There are, however, certain exceptions to this rule.

A major exception concerns ESOP trusts. Under Petersen v. Commissioner, 924 F.3d 1111 (10th Cir. 2019), the non-attribution of stock ownership from tax-exempt trust to employee beneficiaries does not apply to certain ESOP trusts.

Moreover, certain tax-avoidance transactions will render the non-attribution rule inapplicable. For example, under §409(p)(3)(B), an individual is deemed to own stocks held by an ESOP trust for the purposes of determining whether there has been a prohibited allocation of S-corporation stock to a disqualified person.

§318 Employee Trust Attribution: Special Case of “Loss Corporations”

A “loss corporation” presents an interesting set of issues with respect to §318 employee trust attribution rules.

Let’s first define the loss corporation. The IRC §382(k)(1) provides the following definition of a loss corporation: “a corporation that is entitled to use a net operating loss carryover or having a net operating loss for the taxable year in which the ownership change occurs. Such term shall include any corporation entitled to use a carryforward of disallowed interest described in section 381(c)(20). Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss.”

The IRC §382(g) defines “ownership change” as a two-step process. First, there must be an “owner shift”, which means with respect to a 5% shareholder, that there is a change in the respective ownership of stock of a corporation, and such change “affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change.” Second, the ownership change occurs if, immediately after any owner shift, “the percentage of the stock of the loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points” over “the lowest percentage of stock of the loss corporation (or any predecessor corporation) owned by such shareholders at any time during the testing period.” Id. The testing period is three years. §382(i).

Now that we know what a loss corporation is, we can analyze its interaction with the §318 employee trust attribution rules. Generally, under §318(a)(2)(B)(i), the participants in a qualified plan under which a tax-exempt employee trust is established are not treated as owners of any shares of a “loss corporation” owned by the trust.

This general rule, however, contains an important exception where the IRS will treat beneficiaries of the tax-exempt employee trust as owners of the loss corporation for certain §382 purposes. See 114 Reg. §1.382-10, T.D. 9269, 71 Fed. Reg. 36,676 (June 28, 2006), applicable to all distributions after June 23, 2006 (for distributions on or before June 23, 2006, see former Reg. §1.382-10T).

Why do we have this exception? The problem is that, by blocking the operation of general §318 trust attribution rules, a distribution of stocks in a loss corporation by the tax-exempt employee trust to the plan beneficiaries may cause an “ownership change” since the beneficiaries are not treated as owners of any interest in a loss corporation. Once the ownership change occurs, §382 may limit the amount of taxable income that can be offset by certain loss carryovers and recognized built-in losses of the loss corporation. Hence, the IRS enacted this exception to §318(a)(2)(B)(i) for certain §382 purposes. This is one of many examples of “an exception to an exception” that saturate the Internal Revenue Code.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

US tax law is incredibly complex (as the discussion of the loss corporation and its interaction with §318 employee trust attribution rules demonstrates); the complexity increases even more at the international level. US taxpayers who deal with US international tax law without the assistance of an experienced international tax lawyer run an enormous risk of violating US tax laws and incurring high IRS penalties.

Sherayzen Law Office is a highly experienced international tax law firm which specializes in US international tax compliance and offshore voluntary disclosures. We have helped hundreds of US taxpayers to successfully resolve their US international tax compliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Upstream Trust Attribution | US Foreign Trust Tax Lawyer & Attorney

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In a previous article, I discussed the Internal Revenue Code (“IRC”) §318 downstream trust attribution rules. Today, I would like to focus on the §318 upstream trust attribution rules.

§318 Upstream Trust Attribution: Downstream vs. Upstream

There are two types of §318 trust attribution: downstream and upstream. In a previous article, I already covered the downstream attribution rules which attribute the ownership of corporate stocks owned by a trust to its beneficiaries. The upstream attribution rules are exactly the opposite: they attribute the ownership of corporate stocks owned by beneficiaries to the trust. This article focuses just on the upstream attribution.

§318 Upstream Trust Attribution: Main Rule

Under §318(a)(3)(B)(i), all corporate shares owned directly or indirectly by a beneficiary of a trust are considered owned by the trust, unless the beneficiary’s interest is a remote contingent interest. Notice that the proportionality rule does not apply to upstream trust attribution under §318.

For example: if trust T owns 25 shares of X, a C-corporation, and A owns another 25 shares of X, as long as A has a beneficiary interest in T which is not a remote contingent interest, then T will constructively own all of A’s shares of X – i.e. T will own 50 shares of X.

§318 Upstream Trust Attribution: Contingent Interest

If a beneficiary’s interest in a trust is both, remote and contingent, then there is no attribution of stock ownership from the beneficiary to the trust. Hence, the key issue with respect to upstream trust attribution is classification of a beneficiary’s interest in the trust – is it a remote contingent interest or not? Let’s first define what a contingent interest is and then discuss when such an interest is considered remote.

A contingent interest is defined as interest that is not vested. This means that the beneficiary has no present right to trust property and has no present interest in a property with respect to future enjoyment of the trust property. In other words, this interest can only be activated by an occurrence of an intervening event.

§318 Upstream Trust Attribution: Remote Contingent Interest

A contingent interest is remote if “under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property.” §318(a)(3)(B)(i).

Let’s use an example to demonstrate how this rule works. The fact scenario is as follows: trust T owns 40 shares in X, a C-corporation; A, an individual beneficiary, has a contingent (not vested) remainder in the trust which has a value computed actuarially equal to 3% of the value of the trust property; A also owns the remaining 60 shares of X (X issued a total of 100 shares).

In this situation, A’s beneficiary’s interest is contingent because it is not vested and it is remote because its value is less than 5% of the value of the trust property. Hence, no shares of X are attributed from A to T, because A has a remote contingent interest.

It should be noted that T’s shares in X are still attributed to A under the §318 downstream attribution rules; hence, A would constructively own 1.2 shares of X.

§318 Upstream Trust Attribution: Special Situations

I wish to conclude this article with a discussion of two special situations.

First, if beneficiaries are entitled to trust corpus, this is a vested interest. This is case even if the life tenant in the trust’s property has the right to exercise power of appointment in favor of others. Of course, if such right is actually exercised in favor of others, then the beneficiary will lose its vested interest in the trust.

Second, if a beneficiary interest is conditioned upon surviving a life interest, it is considered a contingent beneficiary interest. For example, in Rev. Rul. 76-213, the IRS stated that a beneficiary had a contingent interest, because his remainder interest in the trust would terminate if the beneficiary predeceased the life tenant.

§318 Upstream Trust Attribution: Grantor Trusts and Employee Trusts

While it is beyond the scope of this article to describe them in detail, there are special rules that apply to the attribution of stock from grantor trusts and employee trusts. I will discuss these rules in more detail in future articles.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

The complexity and importance of US international tax law (in which §318 constructive ownership rules play an important role) makes it extremely risky for US taxpayers to operate without assistance from an experienced international tax lawyer.

Sherayzen Law Office is a highly experienced international tax law firm which specializes in US international tax compliance and offshore voluntary disclosures. We have helped hundreds of US taxpayers to successfully resolve their US international tax compliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Determining the Residency of a Trust in Cross-Border Situations

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One of the most important tax aspects involving trusts in cross-border tax situations is the determination of the residency of a trust- i.e. whether it is a domestic or foreign trust for US tax purposes. This determination of the residency of a trust will have important tax consequences for US taxpayers.

In this article we will do a general exploration of how the residency of a trust in cross-border situations is determined; this article is not intended to convey tax or legal advice. Please contact Eugene Sherayzen an experienced tax attorney at Sherayzen Law Office, Ltd. if you have questions concerning trust planning or compliance.

General Criteria for Determining the Residency of a Trust

The general determination of the residency of a trust is described in the Internal Revenue Code (IRC) Section 7701 and Regulation Section 301.7701-7. Under these tax provisions, a trust will be deemed to be a U.S. person if: “(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and (ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).” (See explanations of the court test and the control test in the paragraphs below). Under the regulation, a trust will be a U.S. person for the purposes of the IRC on any day that the trust meets both of these tests. If a trust does not satisfy both of these tests, it will be considered to be a foreign trust for U.S. reporting purposes.

Determining the Residency of a Trust: The Court Test

In determining the residency of a trust under the Court Test, we need to consult the Treasury Regulations. Regulation Section 301.7701-7(c)(1) provides a safe harbor in which a trust will satisfy this (i.e. US residency) test if: “(i) The trust instrument does not direct that the trust be administered outside of the United States; (ii) The trust in fact is administered exclusively in the United States; and (iii) The trust is not subject to an automatic migration provision…”. For the purposes of the regulation, the term “court” is defined in the regulation to mean any federal, state, or local court, and the United States is used a geographical manner (thus including only the States and the District of Columbia, and not a court within a territory or possession of the United States or within a foreign country).

The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust.” The term “administration” is defined in the regulation to mean, “the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.” The regulations further provide examples of situations that will cause a trust to fail or satisfy the court test.

Determining the Residency of a Trust: The Control test

The Control Test is often the key area of dispute in determining the residency of a trust. “Control” in the control test is explained in the regulation to mean, “having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.” Critically important – it is required under the regulation to consider all individuals who may have authority to make “substantial decisions”, and not simply the trust fiduciaries.

Under the regulation, the term “substantial decisions” (see usage in first paragraph) is defined to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” (Some examples of “ministerial” decisions are provided in the regulation, including, bookkeeping, the collection of rents, and the execution of investment decisions).

The regulation further provides numerous examples of substantial decisions: “(A) Whether and when to distribute income or corpus; (B) The amount of any distributions; (C) The selection of a beneficiary; (D) Whether a receipt is allocable to income or principal; (E) Whether to terminate the trust; (F) Whether to compromise, arbitrate, or abandon claims of the trust; (G) Whether to sue on behalf of the trust or to defend suits against the trust; (H) Whether to remove, add, or replace a trustee; (I) Whether to appoint a successor trustee to succeed a trustee who has died, resigned, or otherwise ceased to act as a trustee…; and (J) Investment decisions; however, if a United States person under section 7701(a)(30) hires an investment advisor for the trust, the investment decisions made by the investment advisor will be considered substantial decisions controlled by the United States person if the United States person can terminate the investment advisor’s power to make investment decisions at will.”

Contact Sherayzen Law Office for Tax and Legal Help With Issues Involving Foreign Trusts

Determination of the residency of a trust is just one of a myriad of highly complex issues than an international tax attorney can help you resolve with respect to U.S. tax compliance, tax planning and estate planning. If you are an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional legal and tax help.

Contact Us Today to Schedule Your Confidential Consultation!