Can a Foreign Trust Reduce Your U.S. Taxes and Protect Assets?

Can a Foreign Trust Reduce Your U.S. Taxes and Protect Assets?

Will a Foreign Trust Reduce Your U.S. Taxes and Protect Assets?

Whether it is to move assets and income offshore or to protect assets, one of the more common questions we receive from taxpayers across the globe involves foreign trusts. Namely, will creating a foreign trust protect the Taxpayer’s assets along with reducing their tax liability? In general, foreign trusts operate similarly to U.S. trusts, noting that over the past few years, the IRS has honed in on the enforcement of foreign trust compliance. The IRS has developed various programs aimed at investigating abusive foreign trusts as well – so before being goaded into forming an expensive offshore trust, it is important to be aware of these important facts.

Foreign Grantor Trust

The most common type of foreign trust is a Foreign Grantor Trust. With a foreign grantor trust, the grantor still owns the trust. This leads to two main issues:

• • • The assets are not really ‘protected,’ and

    • The Grantor is still taxed on the income

Foreign Non-Grantor Trust

With a foreign non-grantor trust, the grantor no longer controls the assets of the trust. From a protection standpoint, this will serve to protect the assets from waste by the grantor, but it also means that the grantor loses control over the trust. This is where trust planning becomes very important because the original grantor will want to ensure that the trustee(s) and trust protector are operating in the best interests of the beneficiaries.

Offshore Asset Protection Trust (Irrevocable)

Oftentimes, when a taxpayer seeks to protect their assets, they will come across the phrase OAPT or ‘Offshore Asset Protect Trust.’ The OAPT can be a way to protect trust assets, but the taxpayer must be aware of these key facts:

• • • These types of trust are usually irrevocable

    • They can be costly to maintain

    • They are subject to foreign country’s laws and rules, and

    • They may not serve the intended purposes of creating the trust in the first place

Foreign Trust Report Requirements  

In addition to forming the foreign trust, U.S. taxpayers may have several reporting requirements as well, depending on how the foreign trust is structured and what types of accounts, assets, and investments are maintained in the trust. There are many international information reporting forms that are filed (and failing to file these forms may result in fines and penalties)

Some of the more common forms include:

• • • FBAR

    • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8621

    • Form 8865

    • Form 8938

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.