專業叢書
Estate Planning by U.S. Trust 美國報稅與海外財產揭露（英文部分）
Appendices
Section F: Trust Decanting
Decanting is the act of transferring assets from one trust into a different trust and is generally done with irrevocable trusts. Not all states allow trusts to be decanted, but Delaware and Nevada both have decanting statutes. People decant a trust for some reasons: to amend trusteeship, to adapt to changes, to fix drafting errors or to combine trusts or separating trusts. However, transferring assets from the original trust to a new trust may incur tax risks, so people need to be cautious with the details of each step in the decanting process.
Materials required for decanting:
1. New Trust Information
Names, addresses, set-up date and EIN of the new trust
2. New Trustee Information
Name, certificate of incorporation, articles of incorporation, registered address and the business address of the new trustee
3. Information of New Trustee Controlling Persons
List of current directors: list of authorized signatories of new trustees, minutes of the new trustees’ approval of the list of authorized signatories
4. New Trust Deed
Notify the attorney at the location of the new trust to draft the new trust document and contract.
5. Rationale Letter for the original trustee provided by the new trustee, explaining the reasoning behind setting up a new trust and transferring the assets. It is necessary to address that the transfer of the assets is for the best benefits of the beneficiaries and will not cause any negative tax issues.
6. Deed of Appointment and Indemnity signed by the new trustee
7. Legal Validity Opinion provided by a local lawyer in the location where the new trust is set up, validating the new trust under local law and the new trustee’s power to act as a trustee.
8. Written Statement provided by the new trustee to promise that the new trustee will be responsible for reporting the tax liabilities of the original trust in the following year after the assets have transferred to the new trust.
Steps a Decanting Coordinator should follow when decanting:
1. After the new trustee has signed the trust agreement, please confirm the following:
I. Apply for EIN for the trust
The application may take 2-4 weeks, since foreigners do not have Social Security Number and Individual Taxpayer Identification Number, they will need to fill out Form SS-4 and fax it to IRS, which will take a longer time.
II. Set up an LLC and draft its operating agreement
III. Open a bank account for the LLC under the trust
IV. The listed steps should be timed and scheduled since some trustee companies would only allow funds deposited in their escrow accounts for a limited period of time. The bank account of the LLC must be set up first, and then the funds can be transferred to the bank account of the company under the trust.
2. If the original trust is a foreign trust, it is important to note whether the original trust has distributed its annual earnings (DNI); decanting assets that include undistributed earnings (UNI) will be subject to throwback tax.
3. If the trust distribution is to be made in the current year, the distribution must be completed within 65 days after the end of the year.
Preparations:
Before decanting a foreign trust to a U.S. trust, the client should evaluate whether the foreign trust is under tax inefficient and poorly managed (e.g., high maintenance fees and tax liabilities) conditions and should also understand the whole picture of the trust structure, including: the grantor, beneficiaries, trustee company, and the background of the establishment with a decanting coordinator’s assistance.
The following situations require persons involved to further understand:
1. A foreign non-grantor trust is tax disadvantageous when the beneficiary is a U.S. citizen.
2. When the beneficiary of a foreign non-grantor trust is a U.S. person and the trust has accumulated undistributed income, the beneficiary will be subject to throwback tax when the trust receives distributions in that year; and when the foreign non-grantor trust holds foreign financial products such as mutual funds, money market funds, etc., there will be PFIC issues with future distributions of income from those assets.
3. It is possible that the beneficiary was not a U.S. person when the trust was originally established, but later becomes a U.S. person with a green card or U.S. citizenship.
4. At the time the trust is established, the grantor (who is also the primary beneficiary) has U.S. citizenship or green card.
Under what circumstances can decanting be permitted
We will confirm that whether there is a provision for decanting in the trust agreement. If there’s no such provision, we will further determine whether the government and courts in the jurisdiction where the trust law is located have such authority. In many cases, the trustee company initiates the decanting while in some cases, the beneficiary initiates the decanting, but it depends on the case to determine whether there is a negative tax effect.
What are the tax consequences of decanting?
It is important to analyze the tax consequences of decanting because many of the income, gift, estate, and GST tax consequences may result from decanting. Our goal is to minimize the tax burden at the time of decanting.
Eliminating beneficiary (beneficiaries) may trigger gift tax, which is the main tax disadvantage that should be prevented. Another scenario is where beneficiaries are not eliminated, but there is an exchange of beneficial interests, which may also have a negative tax effect in the decanting process.
It is advisable for the attorney to first understand whether the trust has Undistributed Net Income and to adequately justify that decanting will not cause an adverse tax effect, so the original trustee company will feel comfortable accepting the request for decanting.
With thorough evaluation, if it is concluded that “ when there is a U.S. beneficiary, there is a need to decant an offshore trust to a U.S. trust,” then KEDP will explain the necessity of decanting it to a U.S. trust. After obtaining the client’s consent, KEDP will assist in work related to the trust decanting.
Steps of trust decanting:
1. Clarify all the assets the client holds
2. Prepare a new trust agreement drafted by a U.S. attorney and select a new trustee company
3. If the client intends to decant his or her trust, he or she shall authorize KEDP or the attorney to notify the original trustee company.
4. Communicate with the new trustee company about the decanting process
5. The original and new trustee companies should review the new trust agreement
6. The original and new trustee companies should sign a new trust agreement and relative documents with the client.
Materials required for decanting:
1. New Trust Information
Names, addresses, set-up date and EIN of the new trust
2. New Trustee Information
Name, certificate of incorporation, articles of incorporation, registered address and the business address of the new trustee
3. Information of New Trustee Controlling Persons
List of current directors: list of authorized signatories of new trustees, minutes of the new trustees’ approval of the list of authorized signatories
4. New Trust Deed
Notify the attorney at the location of the new trust to draft the new trust document and contract.
5. Rationale Letter for the original trustee provided by the new trustee, explaining the reasoning behind setting up a new trust and transferring the assets. It is necessary to address that the transfer of the assets is for the best benefits of the beneficiaries and will not cause any negative tax issues.
6. Deed of Appointment and Indemnity signed by the new trustee
7. Legal Validity Opinion provided by a local lawyer in the location where the new trust is set up, validating the new trust under local law and the new trustee’s power to act as a trustee.
8. Written Statement provided by the new trustee to promise that the new trustee will be responsible for reporting the tax liabilities of the original trust in the following year after the assets have transferred to the new trust.
Steps a Decanting Coordinator should follow when decanting:
1. After the new trustee has signed the trust agreement, please confirm the following:
I. Apply for EIN for the trust
The application may take 2-4 weeks, since foreigners do not have Social Security Number and Individual Taxpayer Identification Number, they will need to fill out Form SS-4 and fax it to IRS, which will take a longer time.
II. Set up an LLC and draft its operating agreement
III. Open a bank account for the LLC under the trust
IV. The listed steps should be timed and scheduled since some trustee companies would only allow funds deposited in their escrow accounts for a limited period of time. The bank account of the LLC must be set up first, and then the funds can be transferred to the bank account of the company under the trust.
2. If the original trust is a foreign trust, it is important to note whether the original trust has distributed its annual earnings (DNI); decanting assets that include undistributed earnings (UNI) will be subject to throwback tax.
3. If the trust distribution is to be made in the current year, the distribution must be completed within 65 days after the end of the year.
Preparations:
Before decanting a foreign trust to a U.S. trust, the client should evaluate whether the foreign trust is under tax inefficient and poorly managed (e.g., high maintenance fees and tax liabilities) conditions and should also understand the whole picture of the trust structure, including: the grantor, beneficiaries, trustee company, and the background of the establishment with a decanting coordinator’s assistance.
The following situations require persons involved to further understand:
1. A foreign non-grantor trust is tax disadvantageous when the beneficiary is a U.S. citizen.
2. When the beneficiary of a foreign non-grantor trust is a U.S. person and the trust has accumulated undistributed income, the beneficiary will be subject to throwback tax when the trust receives distributions in that year; and when the foreign non-grantor trust holds foreign financial products such as mutual funds, money market funds, etc., there will be PFIC issues with future distributions of income from those assets.
3. It is possible that the beneficiary was not a U.S. person when the trust was originally established, but later becomes a U.S. person with a green card or U.S. citizenship.
4. At the time the trust is established, the grantor (who is also the primary beneficiary) has U.S. citizenship or green card.
Under what circumstances can decanting be permitted
We will confirm that whether there is a provision for decanting in the trust agreement. If there’s no such provision, we will further determine whether the government and courts in the jurisdiction where the trust law is located have such authority. In many cases, the trustee company initiates the decanting while in some cases, the beneficiary initiates the decanting, but it depends on the case to determine whether there is a negative tax effect.
What are the tax consequences of decanting?
It is important to analyze the tax consequences of decanting because many of the income, gift, estate, and GST tax consequences may result from decanting. Our goal is to minimize the tax burden at the time of decanting.
Eliminating beneficiary (beneficiaries) may trigger gift tax, which is the main tax disadvantage that should be prevented. Another scenario is where beneficiaries are not eliminated, but there is an exchange of beneficial interests, which may also have a negative tax effect in the decanting process.
It is advisable for the attorney to first understand whether the trust has Undistributed Net Income and to adequately justify that decanting will not cause an adverse tax effect, so the original trustee company will feel comfortable accepting the request for decanting.
With thorough evaluation, if it is concluded that “ when there is a U.S. beneficiary, there is a need to decant an offshore trust to a U.S. trust,” then KEDP will explain the necessity of decanting it to a U.S. trust. After obtaining the client’s consent, KEDP will assist in work related to the trust decanting.
Steps of trust decanting:
1. Clarify all the assets the client holds
2. Prepare a new trust agreement drafted by a U.S. attorney and select a new trustee company
3. If the client intends to decant his or her trust, he or she shall authorize KEDP or the attorney to notify the original trustee company.
4. Communicate with the new trustee company about the decanting process
5. The original and new trustee companies should review the new trust agreement
6. The original and new trustee companies should sign a new trust agreement and relative documents with the client.
