Is your Australian trust a “grantor trust” for US tax purposes?
The US taxes a “United States Person” (defined to include a ‘US resident’ or a citizen) on a worldwide basis, whereas non-US persons are taxed on US sourced income only. An individual will be a “US resident” if they are a green card holder.
The US taxes a US Person who is a beneficiary of a foreign trust if that beneficiary derives income from the foreign trust or is the “grantor” of that trust.
The “grantor” is the person who retains the power to control or direct the trust’s income or assets. The “grantor” can also be any person who creates a trust or directly or indirectly makes a gratuitous transfer of property to a trust. If a person creates or funds a trust on behalf of another person, they are both treated as the grantors of the trust.”
A “grantor trust” is taxed under the provisions of sections 671-679 of the Internal Revenue Code as if it is owned in whole or in part by the “grantor”, with the income of the trust being attributed to the grantor to the extent to which the grantor is considered to “own” the trust.
With an Australian trust, the IRS will generally consider the settlor, an individual trustee (or the directors or a corporate trustee), Appointor, Primary Beneficiary, and a notional settlor to be the potential grantor/s and owners of the trust – if you (as a US person, and the “grantor”) are seen to have the power to vest trust income and assets f in yourself. You are then required to report your share of trust income, deductions and credits, as if those items were received or paid directly by you.
The following “control” factors could characterize the Australian trust as a foreign grantor trust wher you:
1. transfer property to the trust (except to the extent that the transfer is for fair market value), regardless of whether you retain any power over the trust;
2. are the Appointor of the trust with the power to replace the trustee and vest trust assets in yourself;
3. have the beneficial enjoyment of the capital or the income of the trust if the power of disposition is exercisable by you without the approval or consent of any other party;
4. have the power to borrow trust income or capital, directly or indirectly without providing interest or security;
5. fail to repay a trust loan and interest;
6. have the power to control the investment of the trust funds;
7. (or your spouse) have the power to vest the title to the trust assets in yourselves, including, any power “to revoke, to terminate, to alter or amend, or to appoint”;
8. have the power to acquire trust assets for less than fair market value;
9. have the power to control trust distributions by paying principal to yourself instead of to other beneficiaries;
10. can distribute or accumulate trust income for your benefit (or that of your spouse).
Generally, grantor trust status is not triggered where there is an independent trustee or appointor. However, a “grantor” or who can influence the decisions of an “independent” trustee may negate their independent status and cause the trust to not qualify for this exception. Therefore, whether the presence of the “independent” person could limit the ownership and control would depend on how effectively the “independent” Appointor clause was drafted. For example, if the trustee has the power to vary the trust deed without the approval of the Appointor, or to vary the terms of the independent Appointor clause itself, the role of independent Appointor could be severely diminished.
What should you do?
If you are a US person and a beneficiary / trustee / Appointor / notional settlor of an Australian trust, you should:
1. examine your role in relation to the trust and the extent to which you could be seen to own or “control” that trust;
2. consider appointing an independent Appointor for the trust; and
3. subject to the terms of the trust deed, consider varying the deed in order to “tighten” the powers of the independent Appointor; or
4. renounce or disclaim your role as the trustee (or director of the corporate trustee) and / or Appointor – the grantor trust rules do not apply where there has been an effective renunciation.
For more information, contact:
Senior Tax Advisor
U.S. Australia Tax Desk