Taxation of Foreign Trust Beneficiaries and a Dive into the “Throwback Tax”
By Anthony Diosdi This article discusses the “throwback tax” which imposes harsh federal consequences for U.S. beneficiaries of certain foreign trusts. We will begin this article by discussing the grantor trust provisions of the Internal Revenue Code and the significance of a foreign trust being classified as a nongrantor trust compared to a grantor trust. Next, this article will describe the serious consequences of the throwback tax. We will conclude this article with a discussion on how to potentially mitigate the impacts of the throwback tax. Overview of Federal Taxation of TrustsThe Internal Revenue Code has several regimes for taxing trusts, depending upon whether they are “grantor,” simple or complex trusts. There are also several special rules applicable to foreign trusts. If a trust is a grantor trust, its income…