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Dimitry K., Esq.
Dimitry K., Esq., Attorney
Category: Family Law
Satisfied Customers: 38064
Experience:  I provide family and divorce law advice to my clients in my firm.
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Im interested in understanding the tax implications for myself

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I'm interested in understanding the tax implications for myself if I set a trust to manage my mother's retirement account. She is become incresingly forgetfull and I cannot help her remotely. She lives overseas and this is her only source of income. She depends on these funds for her survival. I have recently become a citizen and have lived in the U.S. for some time now. She is not likely to ever leave her country of origin, specially at her old age.

I would like to know if there is a way to setup a trust to manage an investment account and be able to send her a monthly estipend and be able to cover any medical needs and expenses if she is not able to or becomes incapacitated.
Submitted: 1 year ago.
Category: Family Law
Expert:  Dimitry K., Esq. replied 1 year ago.
Thank you for your post please permit me to assist you with your concerns. In what country is your mother located? I ask because different regulations may apply. Do you wish to transfer the funds from the revocable trust into this new account, or just create a new trust from scratch?
Customer: replied 1 year ago.

The country is Peru and I would much rather move it out of it's current trust into a new one. The currenty investment house if Merrill Lynch and I don't have a lot of good to say lately about them.

Expert:  Dimitry K., Esq. replied 1 year ago.
Manuel.

Not a problem. I will be more than happy to assist but do you mind if I take a bit to research and get back to you? I need to log off and return later this morning--if you need assistance right way I can ask a different professional to take over. Please advise.
Customer: replied 1 year ago.

It is not that urgent. Please do get back when you have more information.


 


thank you

Expert:  Dimitry K., Esq. replied 1 year ago.
Manuel,

Thank you very much for your patience. I do apologize for the delay. Please allow me to fully respond to your concerns below.

Here is the relevant snippet from the IRS code and IRS explanations of Foreign Trusts:
"
Print
Foreign Trust Reporting Requirements

International Tax Gap Series

August 2008

Although there are legitimate reasons why a U.S. person might create a foreign trust, or have transactions with a foreign trust, they can have tax consequences and result in filing responsibilities as well. Regardless of your motivation, failure to meet these reporting and filing requirements can result in very significant penalties.

General Rules
In general, the reporting rules apply to a U.S. person who:

Tax consequences can apply to the U.S. owners and U.S. beneficiaries of foreign trusts, and to the foreign trust itself.

Reporting Requirements and Tax Consequences

Information Returns

Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

Who must file Form 3520? There are several situations in which a Form 3520 (or statement with similar information) is required to be filed. The most common circumstances are where a U.S. person:

  • Creates or transfers money or property to a foreign trust
  • Receives (directly or indirectly) any distributions from a foreign trust
  • Receives certain gifts or bequests from foreign entities

Form 3520 Instructions have more detailed information about who must file a Form 3520; when, where, and possible penalties for late or incomplete filing.

Form 3520-A - Annual Information Return of Foreign Trust with a U.S. Owner. This form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. personwho is treated as an owner of any portion of the foreign trust.

Who Must File Form 3520-A? Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.

Instructions to Form 3520-A have more detailed information about who must file a Form 3520-A; when, where, and possible penalties for late or incomplete filing.

Other Possible Reporting Requirements

Form 1040, Schedule B, Part III, Foreign Accounts and Trusts must be completed if you receive a distribution from, or were grantor of, or a transferor to a foreign trust

TDF 90-22.1: Report of Foreign Bank and Financial Accounts – You might have to file this form if you have a financial interest in or signature authority over an account associated with a foreign trust.

Form 709 Gift Tax Return. A U.S. person who transfers money or property to a foreign trust may be required to file Form 709 United States Gift (Generation Skipping Transfer) Tax Return. See the Instructions for Form 709 for further information.

Form 1040NR – A foreign trust , which is not taxed to a U.S. owner as a grantor trust, may be obligated to file a Form 1040NR to pay U.S. tax on certain U.S. sourced income. See Publication 519 and the Instructions for Form 1040NR for additional information.

Income Tax Consequences

  • U.S. owner of a foreign trust - In general, the U.S. owner of a foreign trust is taxed on the income of that trust.
    A U.S. person is treated as the owner of a foreign trust under the grantor trust rules of Internal Revenue Code sections 671-679, which includes someone who transfers assets to a foreign trust which has a U.S. beneficiary of any portion of the trust. *Each U.S. owner should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3), which includes information about the foreign trust income they must report.
  • U.S. beneficiary of a foreign trust – In general, the U.S. beneficiary of a foreign trust will report their share of foreign trust income to the extent it is not reported by the transferors to the trust under the grantor trust rules. The U.S. beneficiary should receive a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, or a Foreign Non Grantor Trust Beneficiary Statement which includes information about the taxability of distributions they have received and foreign trust income they must report.
  • U.S. transferor of assets to a non grantor foreign trust - Internal Revenue Code section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust. See the Instructions for Form 3520-A for additional information.
"

Certain things to keep in mind--if you own the other irrevocable trust, you can move the asset into a new vehicle. You as trust owner remain liable for the trust income but any disbursement of trust assets makes the beneficiary liable for the expenses and tax implications. You CAN move the assets if you are the trustee provided that does not violate trust conditions. Or, you can put in more assets into the existing trust provided it is still revocable, and use it to create the conditions you are seeking for your mother.

Hope that helps.
Dimitry K., Esq., Attorney
Category: Family Law
Satisfied Customers: 38064
Experience: I provide family and divorce law advice to my clients in my firm.
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