Pre-Immigration Trust The old tax foreign grantor trust rules did not apply to a foreign settlor who transferred property to a foreign trust with US beneficiaries, even if the settlor becomes a US person.

Hence it was common tax planning for a Bermuda national to place their assets in an Bermuda trust prior to becoming a US resident, thus sheltering the trust income from US income taxes. Congress felt that this placed them at an unfair advantages as opposed to US citizens.

Now if a Bermuda national becomes a US resident within five years of transferring property to a foreign trust, they will be taxed on the income from the trust as of the first day they become a US resident. The new law applies to assets transferred to foreign trusts after February 6, 1995.

Fortunately, Congress did not close all tax planning opportunities in this area and it is still possible for a Bermuda national who will become a US resident to still transfer their assets to a foreign trust and to avoid US income tax on those assets.

Information reporting The reporting requirements have been significantly expanded and the penalties for failure to do so are onerous.

Transfers To Foreign Trusts US persons transferring money or property to a foreign trust must report the transfer. The penalty for failure to report the transfer is 35 percent of the money or property transferred. After 90 days of noncompliance, a penalty of $10,000 for every additional 30 days of noncompliance will be assessed. The new law is applicable to transfer occurring after August 21, 1996. US Grantors Of Foreign Trusts A US person who is treated as the owner of any portion of a foreign trust is responsible for ensuring that the foreign trust: File a return containing a full and complete accounting of trust activities; Furnish the name of the US agent for the trust; and Furnish other information (to be prescribed by future regulations) to each US person who is treated as the owner of the trust or who receives a distribution from the trust.

Failure to appoint a US agent will result in the IRS being allowed to determine in its sole judgment, the amount of income to be taken into account The failure of the US person to file the above report will result in a penalty being assessed of 5 percent of the gross reportable amount. The new law applies to tax years of US persons beginning after December 31, 1995.

Reporting By US Beneficiaries US persons who receive distributions from a foreign trust must report the name of the trust, the amount of the distribution received, and other information (to be prescribed by future regulations). If the information furnished is unclear, the distribution will be treated as an accumulation distribution, unless a US agent has been appointed. Failure to file the above report will result in the beneficiary being assessed a penalty of 35 percent of the gross reportable amount. The penalty is in addition to the income tax that may be due.

Reporting of Foreign Gifts If a US person receives purported gifts or requests from a foreign sources that total more than $10,000 during the taxable year, they must be reported to the Treasury Department. The amount will be indexed for inflation. Penalties for failure to report will be 5 percent of the amount of the gift for each month that the failure continues up to a maximum of 25 percent of the gift.

The new law applies to amounts received after August 21, 1996.

Despite the burdensome reporting requirements of the new legislation, tax planning to minimise or avoid the tax effects of the new legislation is still possible.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant about how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Services, PO Box 617, Bernardsville, NJ and is associated with GulfStream Financial Ltd. in Bermuda.

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