Attorney Suggests Changes to Proposed Regs on Foreign Trusts With U.S. Beneficiaries
NOV. 8, 2000
Attorney Suggests Changes to Proposed Regs on Foreign Trusts With U.S. Beneficiaries
DOCUMENT ATTRIBUTES
- AuthorsBruce, Charles M.
- Institutional AuthorsMoore & Bruce, LLP
- Cross-ReferenceFor a summary of REG-209038-89, see Tax Notes, Aug. 7, 2000, p. 755;
for the full text, see Doc 2000-20634 (59 original pages), 2000 TNT
150-7
, or H&D, Aug. 3, 2000, p. 1367. For a summary of REG-108522-00,
see Tax Notes, Aug. 7, 2000, p. 755; for the full text, see Doc 2000-
20908 (5 original pages), 2000 TNT 150-6, or H&D, Aug. 3, 2000, p.
1361. - Code Sections
- Subject Area/Tax Topics
- Index Termstrusts, foreign, U.S. beneficiariestrusts, foreign, transfers to
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-29348 (2 original pages)
- Tax Analysts Electronic Citation2000 TNT 222-22
=============== SUMMARY ===============
Charles M. Bruce of Moore & Bruce LLP, Washington, has suggested changes to the proposed regulations on transfers of property by U.S. persons to foreign trusts having one or more U.S. beneficiaries. (For a summary of REG-209038-89, see Tax Notes, Aug. 7, 2000, p. 755; for the full text, see Doc 2000-20634 (59 original pages), 2000 TNT 150-7
, or H&D, Aug. 3, 2000, p. 1367. For a summary of REG-108522-00, see Tax Notes, Aug. 7, 2000, p. 755; for the full text, see Doc 2000-20908 (5 original pages), 2000 TNT 150-6 , or H&D, Aug. 3, 2000, p. 1361.) Specifically, Bruce suggests (1) broadening the exception for transfers to charitable trusts; (2) clarifying that the use of a trust asset by a U.S. person doesn't make the use of a constructive distribution; and (3) simplifying the method for dealing with a nonsection 679 trust that later acquires a U.S. beneficiary. =============== FULL TEXT ===============
COMMENTS ON PROPOSED REGULATIONS UNDER SECTIONS 679 AND 684
PRESENTED AT INTERNAL REVENUE SERVICE HEARINGS
November 8, 2000
Charles M. Bruce
Moore & Bruce, LLP
These comments are submitted on behalf of Valmet Group, a part of the Mutual Risk Management (MRM) group of companies, and MTI Services, Inc. (MTI). Valmet is a corporate and trust services company. MRM, a listed New York Stock Exchange company, provides risk management services to clients in the United States, Canada and Europe, as well as financial services to a variety of mutual funds and other companies. MTI is a leading provider of tax-oriented structured transactions and organizations for international businesses since 1985.
SECTION 679 REGULATIONS
I. Section 679 applies regardless of the taxable status and
solvency of the grantor.
II. Spouses should be able to transfer interests and divide and
then transfer interests freely in anticipation of a transfer to
a foreign trust subject to section 679.
III. The fact that a U.S. person uses property that is an asset of
the trust makes no difference. Use is not a constructive
distribution. An example making this point might be inserted
after Example 6 under Reg. Sec. 1.679-2 (Trusts treated as
having a U.S. beneficiary).
IV. Directing a business opportunity to a trust is not a
constructive contribution.
V. A valid insurance policy under section 7702 (Life Insurance
Contract Defined).
VI. Assume a trust indenture is drafted along the following lines.
A, a U.S. individual, transfers property to a foreign trust for
the benefit of all of A's children who are non-U.S. citizens or
residents for the entire year during any year that a
distribution is made. A has three children, B (a non-U.S.
person), C (a non-U.S. person) and D (a U.S. citizen). Income
will be accumulated until the grantor dies and then distributed
in equal shares to the beneficiaries provided, however, that no
corpus or income can be distributed to any person who is a U.S.
person as defined in the Internal Revenue Code. It appears that
the trust is not a grantor trust under section 679. Is this
correct? The result in Example 13, Reg. Sec. section 1.679-2
(Trusts treated as having a U.S. beneficiary) apparently can be
avoided by drafting the provision to say that no person who is
a U.S. person can be a beneficiary.
VII. Section 1.679-2(a)(4) deals with situations where a trust may
be treated as having a U.S. beneficiary by reference to written
and oral agreements and understandings not contained in the
trust document and actual or reasonably expected disregard of
the terms of the trust instrument by the parties to the trust.
The regulations should not create a novel set of unclear rules.
If a true trustee is in place and controls the trust assets
subject to traditional fiduciary duties, then one should look
to see who the beneficiaries are under applicable trust law. If
a true trustee is not in place, then the arrangement is not a
trust. If the parties can be reasonably expected to ignore the
terms of the trust, it is not a trust.
VIII. Can a trust make a gift to a person who is not a beneficiary?
Can an entity owned by a trust make a gift to a person who is
not a shareholder?
IX. Section 1.679-2(c)(1) deals with the situation where a non-
section 679 trust, at the outset, subsequently acquires a U.S.
beneficiary. The U.S. grantor is treated as having additional
income in the first taxable year in which the trust has such a
beneficiary. The proposal not only taxes the grantor on the
trust's undistributed net income but also applies the throwback
and interest charge rules. This appears to go beyond the
statute. It will be recalled that the grantor may not have, and
in most cases will not have, received anything in the way of
income, i.e., the "income" in reality is nonexistent.
X. There should be some form of "old and cold" rule applicable to
transfers from a U.S. trust to a foreign trust, which are
treated as transfers to the foreign trust by the grantor of the
U.S. trust. It will be noted that coming the other direction,
with respect to transfers from a non-U.S. person to a foreign
trust followed by immigration to the U.S., transfers that are
over 5 years old do not trigger the tax consequence.
XI. The exception for transfers to a foreign charity should not
require that the recipient have a determination letter at the
time of the making of the transfer. The regulations should
permit the foreign trust to obtain a determination within a
reasonable time. Also, it should be recognized that transferors
can make a "contingent" transfer; that is, if the recipient
does not obtain a determination letter, the transfer is
nullified and the funds or other assets are returned promptly
without tax consequence. In addition, the U.S. in appropriate
instances should provide in bilateral treaties that qualified
charities under the law of the other contracting state are
treated as described in section 501(c)(3).
XII. The requirement that all qualified obligations must be
denominated in U.S. dollars should be changed to permit
denomination in currencies that are not subject to
hyperinflation. There is no strong reason for barring Euro-
denominated or Swiss franc denominated obligations, for
example.
SECTION 684 REGULATIONS
I. The death of the U.S. grantor of a foreign grantor trust is not
a transfer subject to section 684.
II. A contribution of stock by a U.S. taxpayer to a foreign
qualified or nonqualified pension or compensation trust is not
subject to section 684.
DOCUMENT ATTRIBUTES
- AuthorsBruce, Charles M.
- Institutional AuthorsMoore & Bruce, LLP
- Cross-ReferenceFor a summary of REG-209038-89, see Tax Notes, Aug. 7, 2000, p. 755;
for the full text, see Doc 2000-20634 (59 original pages), 2000 TNT
150-7, or H&D, Aug. 3, 2000, p. 1367. For a summary of REG-108522-00,
see Tax Notes, Aug. 7, 2000, p. 755; for the full text, see Doc 2000-
20908 (5 original pages), 2000 TNT 150-6, or H&D, Aug. 3, 2000, p.
1361. - Code Sections
- Subject Area/Tax Topics
- Index Termstrusts, foreign, U.S. beneficiariestrusts, foreign, transfers to
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-29348 (2 original pages)
- Tax Analysts Electronic Citation2000 TNT 222-22
