Tysoda

Hi,

I'm a green card holder, married to a US citizen and living in California since 2019. I'm expecting to receive an inheritance from my grandfather's estate and I'm completely at sea when it comes to the tax regulations. The long and the short of it is that my grandfather set up a trust (based on the Isle of Man) in 2007. The trustees were him, my grandmother and an uncle. There were and continue to be no named beneficiaries on the trust deed. Both grandparents passed away in 2015 and it was agreed that the contents of the trust would be equally distributed amongst the grandkids. To my knowledge, all UK tax issues have been resolved.

We have previously received a small amount of advice (in the form of a free consultation from an advisor who subsequently disappeared on us us when we said we wanted to engage their services!) They mentioned that it might count as a foreign non grantor trust, and that we may be on the hook for some pretty steep penalties because of that. We're particularly concerned as he seemed to suggest that the penalties might go back to the creation of the trust, despite the fact that that was 12 years before we even moved to the US and I've never been listed as a beneficiary. I also spoke to a lawyer this week who talked about form 3520 and suggested that there could also be non-disclosure penalties that might take 5 figure sums to sort out. On top of this, the accounting statements that we’ve received from the company managing the bond are, to say the least, minimalist (the only information we’ve been able to get is the original investment amount and the current value, no annual breakdowns or anything of that sort).

Suffice to say, we’re a bit scared of falling foul of the IRS and are looking for whatever guidance we can get. In the past, we’ve tried contacting some CPAs but they’ve all told us that they weren’t taking on new clients. I've posted on other forums for some advice and they suggested that I find some other Brits who might've gone through something similar. Unfortunately we live in the "cowboy capital of the world" and I'm not sure that there's another one of us within 50 miles! So I thought I'd try on here instead. If anyone has any insight as to what we need to be doing or advice as to what sort of professional we should be contacting to help us sort this all out, it would be much appreciated.

I noticed that there was a similar post to this a month or two ago, so my apologies if this is a bit repetitive. I thought about just piggybacking onto that one, but didn't want to insert myself into someone else's question!

Thanks

Glasgow Girl

From what you have described this is a foreign non grantor trust. As such, beneficiaries only need to file Form 3520 in the year in which there is a distribution. Since you have never received a distribution there should be no penalties for failure to file Form 3520 in previous years.

The steep penalties referred to in your free consultation may have been referring to what they call the throwback tax. In summary, this is a tax applied to any distribution that includes income accumulated within the trust that had not been previously distributed. The recipients share of that income is taxed at the recipients highest publisher marginal tax year for the year in which it was received within the trust and then compound interest is added to each years amount up to the current year. It is the compound interest that hurts over many years. My understanding (but I am not a financial professional) is that If you were not subject to US taxation prior to 2019 then no tax should be due on the income accumulated prior to that, but any income accumulated in the year you became subject to US taxation will be taxable (plus any subsequent years). If the trust has no information on what income was received when, then it would be reasonable to prorate it, or to document a reasonable strategy as to how it may have been allocated. I believe any distribution that is made from the original principal is not taxed.

It is complicated but a good estate planning lawyer should be able to work through this without too much trouble. Likely a good CPA as well, but I would try an independent CPA versus the big box guys. If there is no one local it could easily be done online. You should not need one of the uber expensive international outfits.

Cook_County

Let's start at the beginning. You are NOT receiving an inheritance. You are receiving a distribution from a foreign non-grantor trust which has a US beneficiary. Assuming the trustees know that you are a US person, the trustees will want advice on the tax implications for them - which might include how to minimise any tax liability for all of he beneficiaries. I would expect the trust to engage an international trust lawyer and pay the fees for the advice. If the trustees agree, they may be willing to share this advice with you.

Separately you will need advice from specialist US tax professionals who handle foreign trust reporting. These are not huge in number and can be tough to find.

Tysoda

Thank you, that's a really helpful way of re-framing it. I'll look out for someone with experience handling trusts rather than just inheritance issues. The trust actually has 2 US beneficiaries, one of whom was already a US person when the trust was set up, so it's a little strange that this wasn't all taken into account years ago. My grandfather set everything order to make things easier for us, but it looks like that was a slight miscalculation on his part!
I'm fairly sure that the trustee hasn't engaged anyone with US tax experience, I'm having a chat with him tomorrow so I'll double check then.
Thanks again for your input.

Tysoda

Thanks so much, now it all makes a lot more sense.
The throwback tax is definitely a term that was mentioned, it would be great if it only applies to 2019 onward. I'm absolutely all for paying my fair share, but I'll be quite annoyed if I end up having to pay tax for things that happened a decade before I even considered moving to the US!
I've got a meeting set up with a local CPA next week and I'm waiting for a call back from a couple of others and a tax lawyer, hopefully one of them has the right kind of experience, otherwise I'll just have to cast my net further afield.
Thanks again for your response, having stuff like this explained in simple terms makes everything seem a lot less daunting!

Glasgow Girl

Technically the throwback tax will go back to 2007 when the trust was created. It is fundamentally based upon what the recipients highest marginal income tax rate for each year would have been had the trust income been distributed in that year. If you were not subject to US taxes prior to 2019 that should be zero for those years. Of course it is never that simple, they do some kind of weird averaging over the years that the tax applies, and they apply some other complex calculations, but you should benefit considerably from having been a non US tax payer until 2019. If the trust can distribute the funds over a period of years there maybe be the opportunity to minimize taxes, but that is also complex (of course). It’s unfortunate, but had it been a simple inheritance it would have avoided these issues. Good luck, you will find the right professional to manage this.

S Folinsky

If you increase your ambit to 100 miles, you might increase your odds of finding someone.