US settlors and US beneficiaries of non-US trust face a myriad of US income tax and reporting obligations that are not imposed on US settlors and US beneficiaries of US trust.

In the first instance, both settlors and beneficiaries must report the income and gains of the trust allocated to them on their US income tax return. For US settlors this is generally all the income and gains realised by the trust. For US beneficiaries this is generally their allocated share of the trust’s income and gains with reference to (although not always) the benefit received.

The calculation of such amounts, particularly for the US beneficiaries, can be quite complex. These calculations require the trustees of the trust to deal with several US tax concepts and forming an understanding of the US Internal Revenue Code (IRC). The trustees typically then provide this information to the settlors/beneficiaries for them to correctly complete their US tax returns.
In cases where there is no trustee co-operation, US beneficiaries are having to use what is referred to as the “default calculation” to determine how much of their distribution is subject to tax. This may not necessarily be the most tax efficient way forward.

Adding to this complexity is the fact that trust structures tend to invest in or through non-US corporations, which can lead to additional informational reporting. Furthermore, the income/gains realised through these companies could potentially be taxed directly to the US settlor/beneficiaries, even though such amounts may not necessarily have been distributed to them.

The rules applicable to the US taxation of non-US trusts can be a minefield to navigate through, however, failure to correctly do so can expose the US connected parties to significant penalties. For any questions, please do not hesitate to get in touch with our trust and estates team or contact me directly.