The IRS headline – Aliens with any U.S. Assets Must File Estate Tax Returns – is shocking to their adult children.
And, it gets worse for those decedents owning foundations, foreign trusts, foreign companies, Stiftung, and Anstalts. The heirs could owe the IRS both estate taxes and income taxes on their inheritance.
The label of the entity (such as trust) does not decide the entities IRS tax classification. An entity labeled a “trust” can be classified for tax law a corporation. Similarly, a foreign corporation can be categorized by the IRS as a trust.
Suzan’s father is a French citizen. When he passed away, he was residing in Spain. To avoid French and Spain taxes, he formed a Panama foundation. In our telephone calls, Suzan labeled the foundation as a Panama trust.
As you expect, U.S. taxation of a foreign trust is very different from a foreign corporation. Two factors differentiate corporations from trusts. They are:
(1) the presence of associates; and
(2) the objective to carry on business and divide the gains.
One court case held that term “associates” does not mean plural. The court held that a trust with a single beneficiary has associates. Because of this case, the IRS seems to be focusing on the objective to carry on business. An IRS legal opinion, on this link, highlights this.