Special Rules Apply to Foreign Trusts
If an arrangement involves a foreign trust, taxpayers should be aware that a number of special provisions apply to foreign trusts with U.S. grantors or U.S. beneficiaries, including several provisions added in 1996.
For example, a U.S. person who fails to report a transfer of property to a foreign trust or the receipt of a distribution from a foreign trust is subject to a tax penalty equal to 35 percent of the gross value of the transaction. Other examples of these provisions are the application of U.S. withholding taxes on payments to foreign trusts and the application of U.S. excise taxes to transfers of appreciated property to foreign trusts. See IRC §§ 6048, 6677, 1441, 1446 and 1491.