Form 1040NR for Foreign Trusts: Income Tax Reporting for Foreign Non-Grantor Trusts

Special DNI Calculations for Foreign Trusts, Tax on Trust Accumulations, Coordinating With Other Foreign Reporting Requirements

Note: CLE credit is not offered on this program

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


Conducted on Thursday, July 25, 2019

Recorded event now available

or call 1-800-926-7926
Program Materials

This webinar will provide tax advisers and compliance professionals with a thorough and practical guide for reporting foreign trusts with U.S. owners or other U.S. nexus on Form 1040NR. The panel will detail the events and transactions that require reporting, discuss filing obligations for owners and beneficiaries of foreign non-grantor trusts, review the form in depth, and help participants navigate form instructions that seem to be contradictory.

Description

A complex challenge for U.S. tax advisers is navigating the tax reporting requirements involved when a foreign trust has a U.S. owner, U.S. beneficiaries, or U.S. investments. Filing obligations vary depending on the U.S. tax classification of the foreign trust, classification of investments and income, and any distributions made or attributed to U.S. beneficiaries. As a result, tax advisers must be able to navigate a complex matrix of tax rules to ensure full compliance and avoid costly penalties.

While U.S. beneficiaries of foreign trusts must file a Form 3520 to report trust distributions or other foreign gifts, foreign trusts with U.S. nexus must also file an income tax return to report the trust's U.S.-source income (unless fully withheld at source) and any income effectively connected with a U.S. trade or business (ECI) including allocations from partnerships. Foreign trusts generally file a Form 1040NR, as modified to conform to trust accounting rules. Moreover, trustees of a foreign trust with a U.S. grantor must also file a Form 3520-A, and there may be additional income and information reporting obligations imposed on U.S. grantors and beneficiaries related to interests in foreign companies and foreign bank accounts.

U.S. tax treatment of foreign trusts have several significant distinctions from taxation of domestic trusts: DNI calculation rules are different for foreign trusts, and U.S. tax rules distinguish the taxation of distributions made from DNI vs. UNI with the latter distributions being subject to harsh tax consequences in the hands of beneficiaries. Moreover, the trust’s ownership in certain foreign companies (CFCs and PFICs) may be attributed to the U.S. beneficiaries, resulting in deemed inclusions and reporting obligations.

Listen as our experienced panel provides a thorough and practical guide to the rules for determining when a foreign trust triggers U.S. tax filing obligations and the adjustments necessary to accurately report foreign trust income.

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Outline

  1. Residence and classification rules for foreign trusts
    1. Residence based on ”control test” and “court test”
    2. Classification as grantor vs. non-grantor trust
  2. Form 1040NR reporting for foreign trusts
    1. U.S. income taxation of foreign trusts  B.
    2. Reporting on Form 1040NR
    3. Adjustments to Form 1040NR
  3. Calculation of DNI for foreign trusts
    1. Differences in computing DNI between domestic and foreign trusts
    2. Foreign tax credits
    3. Trust accumulation calculations and tax impact on UNI
  4. Information reporting obligations
    1. Chapter 3 (withholding tax) and Chapter 4 (FATCA) documentations
    2. Foreign trusts with U.S. grantors (Forms 3520-A, FBARs, etc.)
    3. Foreign trusts with U.S. beneficiaries (Forms 3520, FBARs, etc.)
  5. Discussion of current issues and exposure
    1. Attribution of interests in foreign companies (CFCs and PFICs)
    2. Impact of changes under Tax Reform

Benefits

The panel will discuss these and other relevant topics:

  • When is a foreign trust subject to U.S. tax and information reporting?
  • What must a foreign trust report and on which forms?
  • What are the modifications needed on Form 1040NR to report foreign trust FDAP income and ECI?
  • What are the differences in DNI calculations between foreign and domestic trusts?
  • What obligations information obligations are imposed on foreign trusts?

Faculty

Brister, Jack
Jack R. Brister, TEP

Partner
International Wealth Tax Advisors

Mr. Brister specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset...  |  Read More

Lee, Lucy
Lucy S. Lee

Shareholder
Greenberg Traurig

Ms. Lee focuses her practice on international tax and estate planning for individuals and families. She represents high...  |  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

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