On May 8, the IRS issued proposed regulations addressing matters related to foreign trusts and large gifts received from “nonresident aliens” (NRAs) by a U.S. person. See REG-124850-08 (proposed regulations). This article summarizes the treatment of ownership of foreign trust assets; discusses the guidance for reporting a transfer and a donee’s receipt of a distribution from a foreign trust, as well as the receipt of a large gift from an NRA; and addresses the treatment of certain loans with a foreign trust under the proposed regulations.

Transactions with Foreign Trusts

Loans and deemed distributions from foreign nongrantor trusts to U.S. persons. Generally, the law treats a loan of cash or marketable securities from a foreign nongrantor trust (FNGT) to a U.S. person as a distribution if the recipient is either a grantor or beneficiary of the FNGT or related to the grantor or beneficiary. The proposed regulations adopted and clarified the reporting requirements for such loans from previously issued guidance in Notice 97-34, which requires said “distributions” to be reported on Form 3520. The proposed regulations also outline various procedural rules, including how to determine a yield of a loan to maturity, and further clarify that a loan will not be treated as a deemed distribution if any of the following exceptions apply:

  • The loan is considered a qualified obligation.
  • Trust property is used for a reasonable period (60 days) in exchange for fair market value consideration.
  • The U.S. grantor, beneficiaries and/or relatives’ use of the trust property, other than cash or marketable securities, is considered de minimis (approximately 14 days).
  • A foreign corporation makes a cash loan to a U.S. beneficiary but only to the extent that the aggregate amount of the loan does not exceed the foreign corporation’s undistributed earnings and profits attributed to and included in the beneficiary’s gross income.