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IAPT: Domestic or Foreign?
The “Low Profiler”
If a trust is a “foreign” trust, Forms 3520 and 3520-A are required to be filed annually. Form 3520 is entitled “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” This form documents annual reports of transfers “to” and distributions “from” a foreign trust. All distributions to a U.S. beneficiary from a foreign trust must be reported by the U.S. beneficiary on Form 3520-A. Form 3520-A is entitled “Annual Information Return of Foreign Trust with a U.S. Owner.”
The “Low Profiler” is
a foreign trust set up so that it can take advantage
of all of the benefits of being foreign, and yet
for IRS reporting requirements, be exempt from reporting.
The “Low Profiler” is
most useful for those clients:
q who do not want to
spend the time and money involved in filing IRS reports,
q who are concerned that although an IAPT is tax neutral, the filing will raise
their IRS profile,
q who fear that creditors will obtain
their filing, or
q who want no trace of theirIAPT to be publicly available until
after they are in litigation.
A trust that is set up in a foreign country is not necessarily foreign for U.S. tax purposes. A trust set up in the U.S. is not necessarily a domestic trust for U.S. tax purposes.
A Trust must meet two IRS requirements to be a U.S. Trust. If a trust fails either of the two tests it is a foreign trust.
Test 1. The Court Test
A court within the U.S. must
be able to exercise Primary Supervision over the trust’s
administration. Please note that the court test is not satisfied if the trust states that if a creditor
attacks, a lawsuit is filed or the court attempts to
assert its jurisdiction over the trust, the trust would
automatically migrate from the U.S.
Test 2. The Control Test
One or more U.S. persons must have the authority to control all Substantial decisions of the trust. This test is not met if a non U.S. person has the ability to remove, add or replace a trustee.
We can create a foreign trust that is a domestic trust until a lawsuit is threatened by setting up a foreign trust that has both a domestic and a foreign trustee. Because the domestic trustee can be compelled by a U.S. court to take control over trust assets, the trust must give the offshore trustee the Discretionary power to remove the domestic trustee upon the occurrence of certain events. This would avoid the need to have the domestic trustee resign, which may subject the trustee to sanctions.
If the foreign trustee can fire the U.S. trustee, we fail the control test. To avoid failing the control test, we give the U.S. protector the right to veto or negate the foreign trustee. Therefore, all substantial decisions are made in the U.S. When the U.S. protector resigns, the foreign trustee has the discretion to fire the U.S. trustee and if he does so, the trustbecomes foreign and beyond the power of the U.S. court.
If a foreign trust is a U.S. trust for purpose of the Court and Control Test, you need not report it as a foreign trust. You can set up a trust which has all the asset protection benefits of a foreign trust and need not report to the IRS. There are two tests: the Court and the Control tests. If both are met, then the trust is, for IRS purposes, a U.S. Trust. We can set up a trust for you in a foreign domicile, move your assets outside of the U.S., open a foreign bank and brokerage account, and file nothing with the IRS because the trust is considered by the IRS to be a U.S. trust.
How Does It Work?
Give the U.S. protector the right to veto the foreign trustee. Therefore, all substantial decisions are made in the U.S. When the U.S. protector resigns, the foreign trustee has the discretion to fire the U.S. trustee. The trust is then foreign and beyond power of the U.S. court.
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