© Copyright 2000 Wealth International, Ltd.
NOTE: This report is presented with the understanding that the publisher is not engaged in rendering legal or accounting services. Questions relevant to the specific tax, legal, and accounting needs of the reader should be addressed to practicing members of those professions. This information was gathered from sources believed to be reliable but it can not be guaranteed insofar as it applies to any particular taxpayer. Wealth International, Limited specifically disclaims any liability, loss, or risk, personal or otherwise, incurred as a consequence directly or indirectly of the use and application of any of the techniques or contents of this report. No copies of this material may be made or redistributed without the express written consent of Wealth International, Ltd.
Table of Contents
Introduction
The “Grantor” Trust with a US Settlor/Grantor
The “non-Grantor” Trust
The Wealth International, Limited Alternative
The first thing one must realize when utilizing offshore trust structures is that United States tax law on the subject is very complex. It is always advisable to consult with an attorney or other professional in the field (though you must be sure to select a consultant that is competent in the particular field, as most attorneys do not know the first thing about the place of offshore trusts in financial planning and asset protection strategies) before making any concrete decisions.
The U.S. tax code makes several different classifications of offshore trusts, and each type of trust has different requirements, advantages, and disadvantages. We will discuss the following classifications in this summary:
The Grantor Trust with a U.S. Settlor/Grantor
What follows is a summary of both the reporting and tax consequences of various relationships one might have with an offshore trust.
There are many companies that provide the service of establishing a Grantor Trust on behalf of their clientele. Be aware, however, that many of those very same companies do not even know what the term Grantor Trust (as it is used in the U.S. Tax Code) means, much less tell their prospective clients that a Grantor Trust is the precise structure that they intend to provide.
Just what are they selling you?
According to U.S. Tax Law, retention by the Settlor/Grantor of any one or more of the following will result in Grantor Trust status, without regard to whether or not the U.S. person is the formal Settlor/Grantor listed in the trust document:
1) A significant (5% or more) reversionary interest*;
2) The right to control beneficial enjoyment of the corpus (assets) or income;
3) The power to revoke the trust;
4) The retention of administrative powers over trust operations or assets;
5) Certain rights to receive income currently or after accumulation
* An interest in property remaining with the transferor, e.g., rights retained in the property, aspects of ownership, etc.
Consequences of Being the Settlor/Grantor of a Foreign Grantor Trust with a U.S. Settlor/Grantor:
Reporting requirements:
The U.S. Settlor/Grantor is responsible to see that Question Number 8 (in Part II, Form 1040, Schedule B) is answered properly and that Form 3520 and Form 3520-A are properly completed and filed with the applicable Internal Revenue Service Center, and that page 4 of Form 3520-A (Foreign Grantor Trust Beneficiary Statement) is furnished to each U.S. Beneficiary (if any) who receives a distribution during the tax year.
Tax consequences:
Because the U.S. Settlor/Grantor is considered to be the owner of the foreign trust, said U.S. Settlor/Grantor is liable to be taxed on all income earned by the trust, whether or not that income is distributed.
Consequences of receiving distributions as a Beneficiary of a Foreign Grantor Trust with a U.S. Settlor/Grantor:
Reporting requirements:
A U.S. Beneficiary who receives a distribution from a Foreign Grantor Trust is responsible to see that Question Number 8 (in Part II, Form 1040, Schedule B) is answered properly and that Form 3520 and Form 3520-A are properly completed and filed with the applicable Internal Revenue Service Center. Part III of Form 3520 includes the disclosure of the amount and nature of any distribution. A Foreign Grantor Trust Beneficiary Statement must also be attached.
Tax consequences:
The tax rate for interest, distributions, etc. from a Foreign Grantor Trust is essentially the same as for regular onshore income. The gift tax rates are the same.
While a Grantor Trust is not a bad tool per se, any more than a saw is a bad tool, to drive a nail into lumber you do not use a saw, you use a hammer. If you wish to interact with an entity that does not fall under the above-mentioned reporting requirements and tax consequences, you will need a different tool altogether. Wealth International, Ltd. can supply just such a tool!
As a matter of policy, Wealth International, Ltd. will not provide a Grantor trust with a U.S. Settlor/Grantor because said entity offers no tax benefits whatsoever until the death of the U.S. Settlor/Grantor (since the trust is ignored for tax purposes and the U.S. Settlor/Grantor is required to pay tax on all of the trusts income, just as if the U.S. Settlor/Grantor earned that income himself), and with the burdensome reporting requirements to boot, this type of structure offers few real advantages.
On the asset protection side, with the numerous reporting requirement associated with a Grantor Trust it is obviously not private. Even if the deemed Grantor has absolutely no legal control of trust operations and distributions, one could easily imagine that the legal system could decide that the Grantor benefits somehow ... and should be treated accordingly. For example see our Asset Protection 101 piece “Doctrine of Disbelief”: A court may decide that the deemed Grantor’s non-control is not “believable”, and hold him/her in contempt unless or until a certain amount is repatriated to the Grantor in order to settle a judgement.
Consequences of Being the Settlor/Grantor of a Foreign “non-Grantor” Trust
Reporting requirements:
None.
Tax consequences:
None.
Consequences of receiving distributions as a Beneficiary of a Foreign “non-Grantor” Trust
Reporting requirements:
A U.S. Beneficiary who receives a distribution from a Foreign non-Grantor Trust is responsible to see that Question Number 8 (in Part II, Form 1040, Schedule B) is answered properly and that Form 3520 and Form 3520-A are properly completed and filed with the applicable Internal Revenue Service Center. Part III of Form 3520 includes the disclosure of the amount and nature of any distribution. A Foreign Grantor Trust Beneficiary Statement must also be attached.
Tax consequences:
None known.
It should be noted, however, that, for U.S. tax purposes, one can still be considered to be the substantial owner of a non-Grantor Trust – and thus fall under the same reporting and tax consequences described in the section on Grantor Trusts above – if both of the following conditions apply:
A U.S. person transfers property (including liquid assets) either directly or indirectly to such non-Grantor Trust
The non-Grantor Trust has a U.S. beneficiary
The first of the above two provisions will make it very difficult for a U.S. person to effectively form an offshore trust with a U.S. beneficiary that will be considered a non-Grantor trust for tax purposes. After all, how can one effectively establish a trust without transferring to it the necessary capital to allow it to begin operating, whether such operation be in the capacity of business, investment, or even asset protection? (Alternative legal vehicles afford no relief. See, e.g., our article: “To IBC or not to IBC?”)
Wealth International, Ltd., in providing its clientele with the most cutting edge, yet economical offshore strategies available, has developed and is making available the following system, which effectively deals with all issues of major concern to most people.
The Discretionary Foreign Charitable Trust: A foreign trust set up by a non-U.S. entity with a non-U.S. charitable beneficiary is able to accumulate profits without distributing all of said profits to its charitable beneficiary – although charitable distributions should be made from time to time. It is not required that transfers of cash or other assets, at fair or less than fair market value, to charitable trusts be reported. The assets of a charitable trust can be invested in the numerous investment opportunities available to offshore companies and citizens in total privacy. Any investment returns can compound completely tax-free, allowing a significantly greater rate of growth than if the returns were taxed. The time-frame in which sizable sum is able to be generated is thus significantly compressed ... assets which are then available to be accessed at the discretion of the Trustee.
Contact Wealth International, Ltd. for information if you have additional questions that were not answered by this general information.
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