At the end of last century, the Department of the Treasury led the way in making foreign trust popular. The IRS issued a legal memorandum providing the blueprint for protecting assets and saving taxes.
This may seem ironic given the Swiss bank account investigations. But, now, the Treasury Department allows the foreign trust tax status for domestic trusts. States such as Nevada also provide unique asset protection for these trusts. .
The tax advantage of a foreign trust is its classification as a “grantor trust”. This tax plan uses a special asset protection section of the tax code, section 679.
Unlike a domestic trust, all assets transferred to a foreign trust are allowed “grantor trust” status (with one tax planning exception explained below). They are also excluded from the taxable estate of the settlor.
As a “grantor trust”, the tax law allows the transfers of assets to the trust to be income tax free. Thus, you can do what you want to protect your assets and reduce estate taxes without worrying about income taxation.
This IRS blueprint on foreign trust tax planning is the explained in my blog talk radio episode bellow You can listen to it on the road by clicking on the iTunes button or you can listen to the radio show now.
The play time is about 22 minutes. Or, If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a complimentary one hour consultation.
If you want to defer income taxes, then fund the foreign trust with a loan due within five years. Such a loan is called a “qualified obligation“. This makes the trust a tax deferral vehicle. The tax deferral can last for more than a century. This type of a trust is named “non-grantor foreign trust”.
The IRS Form 3520-A (filed by the trustee) details the tax planning structure for a tax deferred foreign trust. You will want to use the “qualified obligation” found on page 3 of the Form 3520 (filed by the settlor).
Learn the basics on offshore trust on this short video. Be an expert with my easy to read book, International Taxation in America, available at Amazon.