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Foriegn Grantor Trusts - 2010 HIRE Act

Foriegn Grantor Trusts - 2010 HIRE Act

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Published by Gary S. Wolfe
Under the 2010 HIRE Act, the U.S. government imposed a new reporting obligation on the U.S. owners (of foreign grantor trusts) so the IRS could obtain information about the foreign grantor trust, if the trustee was not cooperative and refused to file the annual Form 3520-A tax return for the Trust. Since the U.S. grantor has neither the legal authority nor the ability to force foreign trustees to file the Form 3520-A, the 2010 HIRE Act makes the grantor responsible to submit information to the IRS with respect to the Trust.
Under the 2010 HIRE Act, the U.S. government imposed a new reporting obligation on the U.S. owners (of foreign grantor trusts) so the IRS could obtain information about the foreign grantor trust, if the trustee was not cooperative and refused to file the annual Form 3520-A tax return for the Trust. Since the U.S. grantor has neither the legal authority nor the ability to force foreign trustees to file the Form 3520-A, the 2010 HIRE Act makes the grantor responsible to submit information to the IRS with respect to the Trust.

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Published by: Gary S. Wolfe on Aug 30, 2010
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01/02/2013

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LAW OFFICES
GARY S. WOLFE
A PROFESSIONAL LAW CORPORATION
9100 WILSHIRE BOULEVARDTELEPHONE (310) 274-3116SUITE 505, EAST TOWERFACSIMILE (310) 274-3118BEVERLY HILLS, CA 90212E-MAIL gsw@gswlaw.com
Foreign Grantor Trusts - 2010 HIRE Act
The 1996 Small Business Job Protection Act (“1996 Act”)established new reporting requirements for Foreign Gifts and ForeignGrantor Trusts. The 2010 HIRE Act included the Foreign AccountTax Compliance Act which imposed new foreign grantor trustreporting obligations on U.S. owners (i.e., U.S. Settlor) of ForeignGrantor Trusts.The 1996 Act, under IRC §6048(b)(1) made U.S. owners of foreign grantor trusts responsible to ensure that the foreign grantor trust (Trustee) file the annual trust tax return (From 3520-A).Under the 2010 HIRE Act, the U.S. government imposed a newreporting obligation on the U.S. owners (of foreign grantor trusts) sothe IRS could obtain information about the foreign grantor trust, if thetrustee was not cooperative and refused to file the annual Form 3520-A tax return for the Trust. Since the U.S. grantor has neither the legalauthority nor the ability to force foreign trustees to file the Form 3520-A, the 2010 HIRE Act makes the grantor responsible to submitinformation to the IRS with respect to the Trust.
(1) “1996 Act” -
Prior Law 
Prior to the Small Business Job Protection Act of 1996 (the“Act”), there was no requirement that a recipient of a gift made by aperson other than a U.S. person, report the gift.
 
Foreign Grantor Trusts - 2010 HIRE ActPage 2
New Law 
Under the “Act”, if the value of the aggregate “foreign gifts”received by a U.S. person during any tax year exceeds $10,000, theU.S. person must report each foreign gift to the IRS. A “foreign gift” isany amount received from a non-U.S. person which the recipienttreats as a gift or bequest. The term “foreign gift” does not includequalified tuition or medical payments made on behalf of a U.S. personor any distribution properly disclosed on a return.If a U.S. person fails, without reasonable cause to report theforeign gift within designated time, the IRS is authorized to determinethe treatment of the unreported gifts. The IRS’s authority to make adetermination of reasonableness will be subject to judicial reviewunder an arbitrary or capricious standard, which provides a highdegree of deference to its determination. In addition, the U.S. personis subject to a penalty of 5% of the amount of the gift for each monththat the failure continues, limited to a total penalty of 25% of theamount.
Effective Date
Amounts received after date of enactment of the 1996 Act in taxyears ending after date of enactment of the 1996 Act.Small Business Job Protection Act of 1996, Sec. 1905. IRC §6939F.
Information Reporting Requirement and Penalties -
Prior Law 
Prior to the Act, any U.S. person who created a foreign trust or transferred money or property to a foreign trust was required to reportthat event to the IRS without regard to whether the trust was agrantor or a nongrantor trust. Such persons were required to report,
 
Foreign Grantor Trusts - 2010 HIRE ActPage 3among other things, the name, address and identification number of the transferor, the trust, the fiduciary and trust beneficiaries; theinterest of each beneficiary; the location of the trust records; and thevalue of each item transferred. Similarly, any U.S. person whotransferred property-to a foreign trust that had one or more U.S.beneficiaries was required to report annually to the Service. Inaddition, if the transfer of any appreciated property by a U.S. personwas subject to the excise tax of Section 1491, the transferor wasrequired to report the transfer to the Service.Any person who failed to file a required report with respect tothe creation of, or a transfer to, a foreign trust could be subjected to apenalty of 5% of the amount transferred to the foreign trust. Similarly,any person who failed to file a required annual report with respect toa foreign trust with U.S. beneficiaries could be subjected to a penaltyof 5% of the value of the corpus of the trust at the close of the taxyear. The maximum amount of the penalty imposed under either casecould not exceed $1,000. A reasonable cause exception wasavailable. These civil penalties were determined separately from anyapplicable criminal penalties.
New Law 
The information reporting requirements relating to foreign trusts,and the associated penalties, are expanded.On or before the 90th day after any "reportable event," the"responsible party" must provide written notice of the event to theService. The notice must include the following information: (1) theamount of money or other property transferred to the trust in

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