Get Ready for New Rules: The Biden Administration is Homing in on GILTI

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

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Get Ready for New Rules: The Biden Administration is Homing in on GILTI

The treatment of foreign trust distributions received by U.S. beneficiaries is an incredibly  complex area of U.S. tax law. Changes proposed to GILTI tax rules (Global Intangible Low-Taxed Income) by President Biden will come with new regulations and laws  that will undoubtedly result in thorny new issues for U.S. shareholders of CFCs (Controlled Foreign Corporations) and U.S. beneficiaries of foreign trusts. 

As many new clients have learned when they come to see us at the 11th hour of a cross-border tax problem, failure to comply with the tax rules can have dire – and very expensive – consequences.

The Current State of GILTI

The United States has adopted a series of laws designed to prevent U.S. taxpayers from enjoying the advantages of foreign trusts as U.S. income deferral mechanisms. The obvious application of these laws is to U.S.income taxpayers (citizens, green card holders and persons meeting the substantial presence test) attempting to transfer cash or income-producing assets to or from an offshore trust.

It is clear by the size of the penalties imposed on taxpayers who fail to file the information Forms 3520 and 3520-A, that the U.S. government is very intent on compliance with foreign trust reporting activities.

For example, the IRS views certain types of transfers as taxable income to the recipient, even if the intention was to make a gift. In those cases, transfers received by a U.S. beneficiary from a foreign trust/foreign corporation would generally be treated as taxable distributions. They would then be subject to the normal income tax rules that apply to distributions from foreign corporations or partnerships (depending on how the company is classified for U.S. tax purposes). 

Distributions of a foreign nongrantor trust received by a U.S. person, regardless of whether they are a named beneficiary or not, are taxable to the extent of their proportion of the trust’s distributable net income (taxable income) as computed under U.S. tax law. A U.S. person who received a distribution should also receive a foreign nongrantor trust beneficiary statement from the trustee to inform them of the distribution and the amount taxable. 

The complex nature of these foreign trust rules can have extremely severe financial impact. Noncompliance can trigger negligence penalties as well as interest charges on the accumulated tax owed to the IRS.

Note: Not sure what kind of a Foreign Trust you have or are beneficiary of? Read our Foreign Trust FAQ page, answer a few questions and our calculator will tell you what the entity is.

The Potential Bad News: A Heftier Tax Bill and Rules on a Country-by-Country Basis

The interest of the trust is attributed to the US beneficiaries under current law, which causes the beneficiaries to be subject to GILTI tax under the Controlled Foreign Corporation rules. The Biden tax proposal would double the effective tax rate to 21 percent by amending the 50 percent deduction provided by Section 250. The proposal would also remove the tax-free return on 10 percent of the CFC’s Qualified Business Assets Income (“QBAI”) and require that GILTI be calculated on a country-by-country basis. 

Clearly, if you are a U.S. beneficiary dealing directly or indirectly with a foreign trust, CFC or overseas retirement plan, be certain to deal only with professionals whose business it is to know the intricacies of cross-border tax rules; and with in-depth experience in the U.S. income taxation of foreign trusts. That, of course, is where we come in. Do not hesitate to call on us to book a consultation. It is our job to inform clients in the U.S. and abroad of potential changes to the U.S tax laws and prepare them in advance to maintain as much of their wealth and earnings as possible. 

If you, a colleague or client need help with any of the above issues, do not hesitate to reach out.

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