Tax Treatment of Beneficiaries of Nongrantor Foreign Trusts

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Discussion Questions: Tax Treatment of Beneficiaries of Non-grantor Foreign Trusts: Based on the purposes of the U.S. federal income tax, a non-grantor trust is regarded as a separate taxpayer despite of whether it's domestic or foreign (Pfeifer, 2008). Generally, a non-grantor trust is taxed in similar approaches as individuals, with certain alterations. Similar to a non-resident alien, a non-grantor foreign trust will pay American income tax only on income and some gains from American sources. Furthermore, non-grantor foreign trusts are subject to taxation on income or gains that are effectively linked to an American trade or business. During the calculation of taxable income for a non-grantor foreign trust, the trust will obtain a deduction for allocation to beneficiaries. These distributions are conducted to the degree that they consist of the deductible net income of the trust for the taxable period or year. The allocated deductible net income maintains its character before the recipient beneficiaries and will be taxable to them in addition to having the capital gain and ordinary income items. Reporting Obligations of Beneficiaries of Foreign Trusts: While an individual can have legitimate reasons for creating a foreign trust or being involved in transactions with a foreign trust, the initiative can contribute in the need for several filing responsibilities. These filing requirements and reporting responsibilities can in turn lead to serious significant penalties if

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