Form 4970 and Form 1041 Schedule J Accumulation Tax: Reporting Distributions From Foreign Trusts

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

Conducted on Thursday, January 11, 2018

Recorded event now available

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Program Materials

This webinar will provide tax advisers with guidance on calculating trust accumulation distributions for beneficiaries of foreign trusts. The panel will detail the computations required to complete Schedule J of Form 1041. The panel will discuss the interdependence between Schedule J and the reporting of accumulation distributions on Form 4970 of beneficiaries’ individual tax returns.

Description

The tax treatment of distributions to U.S. beneficiaries from foreign non-grantor trusts is particularly complex for tax advisers and compliance professionals. 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 distributable net income (DNI).

IRC 643 provides that all income earned by a complex foreign non-grantor trust is considered as 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 undistributed net income (UNI), rather than being treated as an addition to trust corpus.

U.S. beneficiaries receiving distributions from foreign trusts in excess of DNI in a given year must calculate and pay an “accumulation” or throwback tax, plus interest, on any portion of the distribution classified as UNI. This throwback tax is reported on Form 4970 and Schedule J of Form 1041 and involves difficult computations.

Tax advisers must have a thorough understanding of the throwback rules in reporting distributions from foreign non-grantor trusts to avoid costly consequences.

Listen as our expert panel provides practical guidance to reporting accumulation tax on foreign trust distributions from DNI and UNI on Form 4970 and Schedule J of Form 1041.

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Outline

  1. Default U.S. tax treatment of foreign non-grantor trusts with U.S. beneficiaries
  2. Throwback tax rules on distributions from UNI to U.S. beneficiaries
  3. Filing requirements and tax calculations
  4. Calculated/reported on Form 1041 Schedule J
    1. Accumulation distributions
    2. Throwback years and ordinary income accumulation (Part II)
    3. Taxes on undistributed net income (Part III)
    4. Long-term capital gains alternative tax election
    5. Allocation to beneficiaries (Part IV)
  5. Calculated/reported on Form 4970
    1. Income average and computation years (Part I)
    2. Calculating tax on accumulation distribution (Part II)
    3. Cross-referencing to Form 4970 and Form 1041
  6. Other foreign reporting requirements

Benefits

The panel will discuss these and other important topics:

  • Identifying income that must be treated as UNI
  • Calculating tax on distributions made out of UNI to a U.S. beneficiary on Form 4970 Part II
  • Methodology for computing “throwback” taxes and reporting on Schedule J Part III
  • Impact of electing alternative tax on long-term capital gains held by foreign trust

Faculty

Brister, Jack
Jack R. Brister, TEP
Managing Member
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

Castellanos, Alicea
Alicea Castellanos
Managing / Co-founding Partner
Global Taxes

Ms. Castellanos specializes in U.S. tax planning and compliance for foreign individuals with U.S. source income,...  |  Read More

Silver, David
David Silver, CPA, TEP
Senior Manager
MBAF

Mr. Silver has experience with transactional planning including due diligence, operational and structural analysis. He...  |  Read More

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