A Foreign Non-Grantor Trust Beneficiary Statement Tax Overview

Importance of a Non-Grantor Beneficiary Statement for Foreign Trusts

When a US person receives a distribution from a US-based non-grantor trust, generally the trust will issue a K-1, and the beneficiary can then determine how to report the income on their individual 1040 tax return. With a foreign non-grantor trust, it is not uncommon for the foreign trust to not issue any type of K-1 or similar statement. That is because foreign trusts are not generally taxed or reported in the U.S. unless there is a US owner or a US beneficiary. Therefore, in order to minimize certain implications of receiving income from a foreign non-grantor trust, the trustee should issue a Foreign Non-Grantor Trust Beneficiary Statement.

Foreign Non-Grantor Trust Beneficiary Statement 

There is no specific form for the foreign trustee to use when he provides the US person with a Foreign Non-Grantor Trust Beneficiary Statement. This in and of itself makes the reporting and tax rules much more complicated, as it may impact issues such as UNI vs DNI and the throwback rule.

As provided by the IRS:

• • • U.S. beneficiary of a foreign trust – In general, a U.S. beneficiary of a foreign non grantor trust will report its share of foreign trust income to the extent of distributable net income (DNI).

    • Depending on whether the U.S. beneficiary is a beneficiary of a grantor or non grantor trust, the beneficiary should receive a Foreign Grantor Trust Beneficiary Statement or a Foreign Non-Grantor Trust Beneficiary Statement, which includes information about the taxability of distributions the beneficiary has received.

As provided by the IRS instructions:

• • • Line 30. If “Yes,” attach the Foreign Nongrantor Trust Beneficiary Statement from the foreign trust. A Foreign Nongrantor Trust Beneficiary Statement must include the following items.

      • An explanation of the appropriate U.S. tax treatment of any distribution or deemed distribution for U.S. tax purposes, or sufficient information to enable the U.S. beneficiary to establish the appropriate treatment of any distribution or deemed distribution for U.S. tax purposes.

      • A statement identifying whether any grantor of the trust is a partnership or a foreign corporation. If so, attach an explanation of the relevant facts.

      • A statement that the trust will permit either the IRS or the U.S. beneficiary to inspect and copy the trust’s permanent books of account, records, and such other documents that are necessary to establish the appropriate treatment of any distribution or deemed distribution for U.S. tax purposes. This statement is not necessary if the trust has appointed a U.S. agent.

      • The Foreign Nongrantor Trust Beneficiary Statement must also include items (1), (4), and (6), as listed in the line 29 instructions earlier, as well as basic identifying information (for example, name, address, TIN, etc.) about the foreign trust and its trustee.

Important Aspects of the Beneficiary Statement

The most important aspect of the Foreign Non-Grantor Trust Beneficiary Statement is that the beneficiary is able to ascertain the amount of income and category of income. The trustee should be sure to provide:

• • • Total Amount of Distribution: Income vs. Non-Income

    • Is the income Current Year, Prior Year, or Corpus

    • Was any of the income US-sourced?

    • Prepare and Submit Forms 3520/3520-A on behalf of the Beneficiary

Default vs Actual Method

Whether or not the taxpayer can obtain accurate accounting information will impact the ability to use the actual method for income calculations. If the information is unavailable must use the default method which can result in a higher tax liability (and required use in subsequent years). This is because the default position requires all of the income to be taxed as ordinary income aka UNI (or accumulated income DNI) in addition to interest – this operates similarly to the PFIC excess distribution rules. The taxpayer uses Form 4970 to compute the tax.

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