Offshore Succession Planning for American’s

08 Jul
Munich subway station Candidplatz - Offshore Investment

Munich subway station Candidplatz

Issue: ”Sovereign Trust – new short form trust structures which present a cost effective succession planning tool with which to hold investments”

Faults: Sovereign Trust – succession planning tool

U.S. Tax System is Hostile to Offshore Trusts

The U.S. tax system is generally hostile to foreign trusts if there is a U.S. taxpayer involved. The hostility is understandable–trusts interfere with the government’s ability to impose or collect tax. As a result, the laws are slanted against foreign trusts. Income is taxed punitively. The right paperwork must be prepared “just so” and filed on time, or massive penalties can result.

Trust are tax penalized

There are IRS requirements for Passive Foreign Investment Companies (PFIC) to pay taxes on any income from interest, dividend and capital gains realized within the trust. All trusts can be considered to be a PFIC

U.S. Person’s offshore trust is subject to FATCA withholding and reporting

Prussian Landtag, Niederkirchnerstr. 5, Berlin, Germany. Today this building is the residence of the parliament of the State of Berlin - Offshore InvestmentFATCA has decreased U.S. Person beneficiary access to foreign financial accounts, thereby limiting the possibility of a person gaining access to assets held in a foreign bank or brokerage account; moreover, Foreign Financial Institutions (FFI) are bound by U.S. FATCA rules to disclose beneficial ownership of all foreign accounts held by U.S. Persons for purposes of tax withholding which means that a U.S. person setting up an offshore trust would not likely find a Foreign Financial Institution willing to accept his account opening application.

Trusts have complex financial accounting

Distributions to beneficiaries require the trustee to keep complex financial accounting records that satisfy U.S. tax requirements, even if under local laws the record keeping and accounting is unnecessary.

Trust distributions can create huge tax bills

U.S. beneficiaries may pay gigantic U.S. income tax bills when they receive distributions. And the government doesn’t even have a proper U.S. income tax return for a foreign trust–we have to use Form 1040NR, the tax return for a nonresident individual.

Trusts are not free from the risk of law suits

Trusts are not free from the risk A Trustee is not free from the risk of being sued; law suits can take on its own life with claims, counter-claims, new parties joined, summons, discovery, dispositions, interrogatories and endless court appearances

Trusts have complicated and expensive tax reporting

A trust needs to file 3520 each year, and 3520A each time there is a contribution/distribution

There are additional IRS filing requirements to report a structure in a compliant fashion, which can be complicated and cumbersome

There are IRS requirements for Passive Foreign Investment Companies (PFIC) to pay taxes on any income from interest, dividend and capital gains realized within the trust. All trusts can be considered to be a PFIC

There are troubling cases where settlers of an Foreign Trust have actually gone to jail for contempt of court when the foreign trustee refused to release assets and settle a U.S. court claim

There is much consternation with Offshore Trusts, given its tainted criminal history and portrayal in the mainstream media

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