One of the most fundamental distinctions in US foreign trust law is the difference between an inbound foreign trust and an outbound foreign trust. This distinction was emphasized by the landmark piece of legislation “The Small Business Job Protection Act of 1996″ and should be clearly understood by US tax lawyers as well as US grantors and US beneficiaries of a foreign trust.
Definition of an Outbound Foreign Trust
In order for a foreign trust to be deemed “outbound”, two conditions must be satisfied. First, the trust was created through the transfer of assets by a US person. Second, the trust must be a foreign trust or a domestic trust that later became a foreign trust.
Obviously, a transfer by a foreign person of exclusively foreign assets to a foreign trust which has only foreign beneficiaries is completely irrelevant because there is no nexus with the United States (hence, the foreign trust is not subject to taxation in the United States).
Two Areas of Special Importance of an Outbound Foreign Trust
There are two particular areas of special interest for international tax lawyers with respect to an outbound foreign trust. First, the grantor trust rule under IRC (Internal Revenue Code) Section 679. In general, where a US grantor transfers property to a foreign trust, IRC Section 679 taxes the US grantor as the owner of any portion of a foreign trust attributable to the transferred property in any year in which the trust has a US beneficiary. This is a complex rule that deserves special treatment in a separate article.
The second area of special importance with respect to outbound foreign trusts is the taxation of the transfer of appreciated assets to a nongrantor foreign trust under IRC Section 684 and the excise tax under the already-repealed IRC Sections 1491-1494. Again, this is a topic that should be discussed in a separate article; I just wanted the readers to be aware of the existence of this rule.
Obviously, there are other highly important tax issues associated with an outbound foreign trust, but these issues are usually discussed in conjunction with an inbound foreign trust, taxation of foreign trusts in general, or they are similar to taxation of US domestic trusts.
Contact Sherayzen Law Office for Help With Respect to US Taxation of an Outbound Foreign Trust
The US tax issues associated with foreign trusts in general and an outbound foreign trust in particular are immensely complex. This is why, if you are a US person who is considered to be an owner or a beneficiary of an outbound foreign trust, you should contact Sherayzen Law Office for help with your US tax compliance and planning with respect to this outbound foreign trust.