Reporting compliance for foreign trusts in the U.S.

In our previous blog for our U.S – India channel, Foreign Trusts in the U.S., we discussed about the treatment of foreign trusts as grantor and non-grantor trusts under the U.S. tax law.  The law further prescribes reporting requirement on U.S. citizens or residents of foreign trusts so that these trusts are not used as a conduit to avoid taxes for distributing funds to the beneficiaries.

The U.S. taxes its citizens and residents on a worldwide basis.  U.S. owners or beneficiaries of a grantor trust are obliged to file U.S. tax returns.  The foreign trusts which is not taxed to a U.S. owner may also be required to file a non-resident tax return for its U.S. sourced income.  In addition to filing the U.S. tax return, U.S. citizens and residents need to file information return to report transactions associated with foreign trusts and report their financial interest or signatory authority over a foreign financial account in a foreign trust.  A failure to complete these informational returns can result in a penalty as high as 5 % of the value of the relevant trust’s assets.

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High net worth individuals who are in the process of tax and estate and planning should discuss with their advisors about the reporting compliance they need to meet in addition to filing tax returns.  Our whitepaper, Interaction of  Indian and U.S. Tax Laws , discusses the U.S. tax implications of Indian families, or Indian family-business owners, who are moving to the U.S. with assets in India.  In discussing how the trust structures can assist with providing flexibility to a settlor to distribute the income from the assets protected in a trust, we have also highlighted the need to meet reporting compliance depending on the status of the U.S. owners or beneficiaries. Through this discussion, our whitepaper aims to make you aware of the compliances that you should discuss with your advisor if you intend to use a trust structure in your estate or tax planning.