JacobsReport
on International Financial Planning
The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.
U.S. Tax On Distributions from a Foreign Trust

QUESTION: My grandfather was a citizen of the Cayman Islands. He established a trust fund for me with me as beneficiary. I have decided to keep the majority of the money there, while wiring some of it here in the U.S. Will I be taxed if I wire money from the Cayman acct. to a U.S. account? I have heard that anything exceeding $10k would be subject to some sort of tax. In that case, what if I wired $12k into two seperate accounts, thus making each transaction $6k. Would that still be  reported?

REPLY:  Transfers from a foreign account to the U.S. are not subject to income taxes just because they exceed $10,000. There is a requirement for reporting currency received by a U.S. based business in excess of $10,000 -- whether it is recived in one or multiple transactions. Checks and bank drafts do not have to be reported and the IRS instructions make no mention of wire transfers. For details see
http://www.irs.gov/businesses/small/article/0,,id=148821,00.html 

U.S. financial institutions are required to file a Currency Transfer Report (CTR) to report the receipt or disbursement of amounts in excess of $10,000. For details see http://www.fincen.gov/fincenruling2003-3.html

Trying to avoid having to report transactions by breaking them into smaller elements is called structuring and is not permitted, as explained in the web sites shown above.

Gifts or bequests of more than $100,000 received from a foreign estate or a non-resident individual must be reported on Form 3520.

Distributions from a foreign trust to a U.S. beneficiary are subject to tax by the beneficiary to the extent of the accumulated income of the trust. Distributions in excess of the accumulated (and previously untaxed) income can be tax-free. However, the foreign trustee must file an annual information return (Form 3520-A) with the IRS and must agree to let the IRS review the books and records if they make such a request.

But if the beneficiary has the power to manage the investments and to direct the trustee to make distributions, then the IRS will treat the beneficiary as the trust grantor. That would then cause the beneficiary to have to file a Form 3520 and 3520-A each year and to pay income tax on all of the current income of the trust.

This is a very brief and non-technical explanation of the main issues relating to the question, but it should not be relied on without getting help from a qualified professional who is familiar with all of the details of your situation.

Vern Jacobs
The Jacobs Report

http://finance.groups.yahoo.com/group/JacobsReport/
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Copyright 2007, Vernon K. Jacobs
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Information in the Jacobs Report is educational in nature and deals with various tax or asset protection laws but not how those laws apply to any specific person or company. Readers should seek advice from a qualified professional for tax, legal or investment advice.
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