Saturday, June 29, 2019
If a trust that is created and operated in Canada suddenly has an American beneficiary due to them moving to the states, a practitioner should understand the requirements for the American side of reporting.
Not only should the trust distribution be filed on a form 1040, U.S. Individual Income Tax Return, but also the beneficiary must also file a form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, as well as form 8938, Statement of Specified Foreign Financial Assets, which may have specialized valuation rules. The reporting requirements do not stop there. If the beneficiary receives as a distribution equal to more than 50% of the trust's income, they must file FinCEN form 114, Report of Foreign Bank and Financial Accounts.
There is also individual state income tax reporting to consider. Many states impose a state-level income tax on trusts, and the rules vary widely from state to state. New York only taxes trust income if the trust was created by a New Yorker or the trust makes its income from within the state. California, on the other hand, will attempt to tax any trust income that any resident of their state receives. To makes this even more complicated, a Canadian practitioner should also consider estate tax issues and whether the trust falls above the exemptions amount, both at the federal level and the individual state level (if applicable).
See Catherine B. Eberl, Canadian Trust Subject to US Tax, Canadian Tax Highlights, Volume 27, Number 6, June 2019.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.