What are Tax Implications of Long-Term Trust for Non-U.S. Beneficiaries?
I represent a 90-year-old U.S. citizen that lives in Florida and has never been married and has no children. He would like to leave his estate, which consists of cash, stocks, and bonds to his ten nieces and nephews in Ireland. In order to alleviate the taxes required to be paid by the beneficiaries, he is considering setting up a revocable living trust into which he would transfer all the accounts and then distribute the funds in whatever way would reduce the tax liabilities on the beneficiaries. Would a revocable trust that is set up for for payments over the next ten or fifteen years help to alleviate the tax burden on the beneficiaries? Or is the tax exemption currently allowed a lifetime cap? Estimated value of the estate is $2.5 million dollars.
There would be no estate tax on funds your client is leaving his Irish nieces and nephews because his estate is well below the federal threshold and Florida has no state estate tax.
For advice on the income tax implications, I turned to Rita Ryan of Wolf and Company. It appears that the tax filings are a bit more complicated than for a trust where all the beneficiaries are U.S. residents. This could drive up the cost of administering the trust. Here’s her response:
The trust would have to withhold 30% on items of income distributed to the non-U.S. resident taxpayers, unless reduced or eliminated by tax treaty and properly documented via a form W-8BEN/W-8BEN-E.
Also, capital gains are treated as principal and taxed to the trust unless specifically distributed to the beneficiaries. If they are distributed, then there’s no withholding requirement.
The trustee would have to file 1042/1042-S forms in addition to the normal 1041 tax returns and K-1s for irrevocable trusts.
The extra costs of administering the trust, especially with 10 separate beneficiaries and the 30% withholding requirement might argue against having the trust continue for 10 or 15 years.