Calculating Foreign Trust DNI and UNI: Avoiding Throwback Tax on Undistributed Net Income

Identifying Income, Distribution Rules, U.S. and Non-U.S. Beneficiaries, Strategies, and Elections

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, October 31, 2018

Recorded event now available

or call 1-800-926-7926
Program Materials

This webinar will provide estate planners and fiduciary advisers with a practical guide to navigating “the throwback tax” on distributions from foreign trusts to U.S. beneficiaries. The panel will define undistributed net income (UNI), detail the reclassification process, and offer specifics on avoiding the costly tax on the accumulation of undistributed income by a U.S. owner or beneficiary of a foreign trust.

Description

Calculation of trust accounting income and the tax concept of distributable net income (DNI) in domestic trusts is one of the more complicated tasks in both fiduciary and tax accounting and can be even more daunting with foreign trusts involving U.S. persons. In general, a U.S. taxpayer who either creates a foreign trust, transfers or receives money or property from a foreign trust, or is the U.S. owner of a foreign trust, is subject to tax requirements.

While foreign non-grantor trusts are not usually subject to U.S. income tax on non-U.S.-sourced or effectively connected income, U.S. beneficiaries are subject to income tax on distributions made out of the trust’s DNI.

IRC 643 provides that all income earned by a complex foreign non-grantor trust is DNI. However, the throwback rules require that, unless current DNI is distributed within 65 days of the tax year’s end, the DNI must be reclassified as UNI rather than being treated as an addition to trust corpus.

U.S. beneficiaries receiving distributions from foreign trusts more than DNI in a given year must pay an “accumulation” or throwback tax, plus interest, on that portion of the distribution classified as UNI. This throwback tax can equal the entire amount of the accumulation distribution. Given the steep tax consequences to both trusts and U.S. beneficiaries of having UNI, tax advisers need to thoroughly understand the special rules involving DNI calculations on foreign trusts.

Listen as our expert panel provides practical guidance for navigating rules on calculating DNI and UNI in foreign trusts.

READ MORE

Outline

  1. Default U.S. tax treatment of foreign non-grantor trusts with U.S. beneficiaries
  2. Trust accounting income vs. DNI
  3. Calculation of DNI under various income scenarios
  4. Identifying UNI
  5. Interest charges and penalties on UNI accumulation
  6. Strategies to access principal and avoid or defer accumulation tax on distributions from UNI
  7. Structuring foreign sub-trusts to receive distributions
  8. Planning opportunities and the “65-day rule”

Benefits

The panel will review these and other priority issues:

  • Identifying income that must be treated as UNI
  • Tax treatment of distributions made out of UNI to a U.S. beneficiary
  • Structuring foreign sub-trusts to serve as beneficiaries to make trust-to-trust transfers to avoid triggering of accumulation/throwback tax
  • Tax and other risks involved in using foreign sub-trusts to remove UNI from a primary foreign trust

Faculty

Lazo, Christiana
Christiana M. Lazo

Counsel
Ropes & Gray

Ms. Lazo’s practice consists of representing ultra-high net worth individuals, their family offices, and closely...  |  Read More

Lipoff, Lawrence
Lawrence M. Lipoff, CPA, TEP, CEBS
Director
CohnReznick

With more than 30 years of experience, Mr. Lipoff specializes in the delivery of domestic and international private...  |  Read More

Mehany, Dianne
Dianne C. Mehany

Member
Caplin & Drysdale

Ms. Mehany's practice focuses on international tax planning and controversies, including inbound and outbound tax...  |  Read More

Other Formats
— Anytime, Anywhere

Download

CPE Not Available

$147