Issue: ”Sovereign Trust – new short form trust structures which present a cost effective succession planning tool with which to hold investments”
Faults: Sovereign Trust – succession planning tool
U.S. Tax System is Hostile to Offshore Trusts
The U.S. tax system is generally hostile to foreign trusts if there is a U.S. taxpayer involved. The hostility is understandable–trusts interfere with the government’s ability to impose or collect tax. As a result, the laws are slanted against foreign trusts. Income is taxed punitively. The right paperwork must be prepared “just so” and filed on time, or massive penalties can result.
Trust are tax penalized
There are IRS requirements for Passive Foreign Investment Companies (PFIC) to pay taxes on any income from interest, dividend and capital gains realized within the trust. All trusts can be considered to be a PFIC
U.S. Person’s offshore trust is subject to FATCA withholding and reporting
FATCA has decreased U.S. Person beneficiary access to foreign financial accounts, thereby limiting the possibility of a person gaining access to assets held in a foreign bank or brokerage account; moreover, Foreign Financial Institutions (FFI) are bound by U.S. FATCA rules to disclose beneficial ownership of all foreign accounts held by U.S. Persons for purposes of tax withholding which means that a U.S. person setting up an offshore trust would not likely find a Foreign Financial Institution willing to accept his account opening application.
Trusts have complex financial accounting
Distributions to beneficiaries require the trustee to keep complex financial accounting records that satisfy U.S. tax requirements, even if under local laws the record keeping and accounting is unnecessary.
Trust distributions can create huge tax bills
U.S. beneficiaries may pay gigantic U.S. income tax bills when they receive distributions. And the government doesn’t even have a proper U.S. income tax return for a foreign trust–we have to use Form 1040NR, the tax return for a nonresident individual.
Trusts are not free from the risk of law suits
Trusts are not free from the risk A Trustee is not free from the risk of being sued; law suits can take on its own life with claims, counter-claims, new parties joined, summons, discovery, dispositions, interrogatories and endless court appearances
Trusts have complicated and expensive tax reporting
[box type=”alert” style=”rounded” border=”full”]A trust needs to file 3520 each year, and 3520A each time there is a contribution/distribution[/box]
There are additional IRS filing requirements to report a structure in a compliant fashion, which can be complicated and cumbersome
There are IRS requirements for Passive Foreign Investment Companies (PFIC) to pay taxes on any income from interest, dividend and capital gains realized within the trust. All trusts can be considered to be a PFIC
There are troubling cases where settlers of an Foreign Trust have actually gone to jail for contempt of court when the foreign trustee refused to release assets and settle a U.S. court claim
There is much consternation with Offshore Trusts, given its tainted criminal history and portrayal in the mainstream media
[box type=”note” style=”rounded” border=”full”]Learn more about an IRS, FATCA and GATCA compliant overseas retirement plan, that is recognized, regulated and registered with the U.S. Treasury. Click Here to get the White Paper[/box]
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