# Foreign trust - trustee and beneficiary of Australian family trust with no income



## Pareto8020

Hello,
I'm currently an Australian in the process of applying for an immigration visa to the US. I don't expect to move to the US until at least mid-2020.

My 3 siblings and I (4 beneficiaries total) have a discretionary family trust in Australia, and I am (currently) the sole trustee. The only thing of value that the trust currently holds is an empty block of land that was given to the trust by my mum. My mum bought this land as an investment, but decided to give it to her kids via the trust. This block of land could in future provide income if we sell the land, but otherwise it has never produced any income. As a result, the trust has never paid any distributions to anyone, ever.

From my research on the IRS requirements on foreign trusts, I believe my family trust in Australia would be considered a foreign, non-grantor trust. It is non-grantor as the only thing of value owned by the trust is the block of land that was given to the trust by my mum, and who has no further interest in the land.

As a result, I believe I will need to submit forms to the IRS if we decide to sell the block of land and I receive some income as a beneficiary - specifically as the trustee, I'll need to provide US beneficiaries (i.e. myself) with a beneficiary statement; and as a US beneficiary, I'll need to file form 3520 (with the beneficiary statement attached) and pay tax on the received income. However, if we never sell the block of land, then the trust will never make any income or pay distributions. In this case, do I need to file any forms with the IRS?

Also, based on the above description of my family trust, do I need to worry about PFIC or Controlled Foreign Corporation issues? Am I correct in assuming that the trust is a non-grantor trust?

Since I am still in Australia and won't become a US-resident for a long time, I can easily resign as trustee and I'm also happy to be removed as a beneficiary from the trust, if it will make my life easier when I move to the US. Given I'll be a dual-tax resident (at least initially when I move to the US) I'd like to keep things as simple as possible for both the IRS and the Australian Tax Office!

Thanks very much for anyone who is able to give me advice on this!


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## 255

Pareto8020 -- You are wise to investigate CFC and PFIC rules, as well as how the U.S. treats foriegn trusts (poorly.) You are currently not a U.S. person and the trust, I presume, was organized under Austrailian law (of which I have zero knowledge.) There is currently no U.S. reporting requirements. If you maintain authority, as the Trustee, after you move to the U.S., you will have FATCA and FBAR reporting requirements. Hence, you would be wise to resign as Trustee, before your move. If you decide to sell the land and disolve the trust before you move -- of course, there would be no U.S. issues at all. If you resign as trustee, since you didn't form or fund the trust, you wouldn't have to file form 3520 until a distribution is made. Even then, it appears your distribution share would only be long term capital gains (if the property was sold at a profit) and return of principal (gift from your mother?) Cheers, 255


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## Moulard

Another thing to consider, is what sort of visa are you planning on entering the US. If it is an E3 visa, it is worth noting, that while it allows long term residency, and one can convert to permanent residency, it itself it does not grant permanent residency. Long term Permanent Residents of the US are subject to the same exit rules as US citizens nut long term residents under other visa categories (like the E-3) are not. Depending on the value of your share of any distribution from this trust (and your other assets) it is something to file away if you are planning to be in the US long term. Particularly worth noting giving current stratospheric land values in Oz at the moment.

Given you have plenty of time, you may want to carefully read the trust deed. Depending on the powers granted in the deed to beneficiaries, and limitations placed on the powers of the trustee it could be that that even if you are no longer the trustee, you could still be an owner of the trust for US reporting purposes.


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## Pareto8020

255 said:


> Pareto8020 -- You are wise to investigate CFC and PFIC rules, as well as how the U.S. treats foriegn trusts (poorly.) You are currently not a U.S. person and the trust, I presume, was organized under Austrailian law (of which I have zero knowledge.) There is currently no U.S. reporting requirements. If you maintain authority, as the Trustee, after you move to the U.S., you will have FATCA and FBAR reporting requirements. Hence, you would be wise to resign as Trustee, before your move. If you decide to sell the land and disolve the trust before you move -- of course, there would be no U.S. issues at all. If you resign as trustee, since you didn't form or fund the trust, you wouldn't have to file form 3520 until a distribution is made. Even then, it appears your distribution share would only be long term capital gains (if the property was sold at a profit) and return of principal (gift from your mother?) Cheers, 255


Hi 255,

Thanks very much, that’s great advice and consistent with what I was thinking, but wasn’t sure. I’d certainly prefer not to complicate my life with FATCA and FBAR reporting requirements, so resigning as trustee seems like my preferred option. Then I won’t really need to worry about it until we sell the land – if that ever happens while I’m a US resident.

In regards to PFICs, I don’t believe the trust itself is a PFIC, nor anything it holds (just a block of land.. and about $30 in the trust bank account I forgot to mention earlier). I also don’t believe it would be considered a CFC, since it’s not a registered corporation and doesn’t operate like a business. If anyone is able to confirm my understanding (or not) I’d be grateful!


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## Pareto8020

Moulard said:


> Another thing to consider, is what sort of visa are you planning on entering the US. If it is an E3 visa, it is worth noting, that while it allows long term residency, and one can convert to permanent residency, it itself it does not grant permanent residency. Long term Permanent Residents of the US are subject to the same exit rules as US citizens nut long term residents under other visa categories (like the E-3) are not. Depending on the value of your share of any distribution from this trust (and your other assets) it is something to file away if you are planning to be in the US long term. Particularly worth noting giving current stratospheric land values in Oz at the moment.


Hi Moulard,

Thank you for your great advice, it’s much appreciated. I’m in the process of applying for a CR/IR partner visa (to get a Greencard), as my spouse is a US citizen. I’ve looked into the US Exit Tax, if I ever decide to give up my US greencard, and I’m almost certain that I wouldn’t have to pay any exit tax. Specifically, I may not be in the US for >8 years, and even if I am, it’s unlikely I’ll satisfy any of the criteria to be considered a “covered expatriate”. Even if I was considered a “covered expatriate”, any capital gains I might have would be much lower than the $700k+ exemption amount. So I think I’m good, but it’s great advice as something I should consider. Some parts of Oz are doing pretty well with land values, unfortunately not Perth where I’m from! 



Moulard said:


> Given you have plenty of time, you may want to carefully read the trust deed. Depending on the powers granted in the deed to beneficiaries, and limitations placed on the powers of the trustee it could be that that even if you are no longer the trustee, you could still be an owner of the trust for US reporting purposes.


In regards to being an owner of the trust for US reporting purposes, my understanding was that the concept of an owner was only applicable to grantor trusts, i.e. someone who gives assets to the trust but is really still considered to be the owner. Since the land was given/granted to the trust by my mum, and she now wants nothing more to do with it (not even principle repayment), then my understanding is that the trust would be considered a non-grantor trust. As a result, I don’t think I’d be considered a US owner of the trust. Can anyone confirm whether my understanding is correct? Thanks in advance!


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## Moulard

On the grantor / non-grantor trust front, yes, you are right. IRC § 679 takes precedence over the rules found in IRC §§ 673-678. I confused things. Sorry my bad.

I really must stop posting first thing in the morning.

And while it is outside your query, you should not forget superannuation. This is a case where it could be considered a foreign grantor trust... particularly if you have a self-managed fund - perhaps if you contribute to a master trust (depending on the trust deed).

I have to admit, I am rusty on all of the rules related to SMSF. Pretty sure that part of the definition of a SMSF under the Act requires it to be a resident super fund, so chances are high that you would need to wind it up, anyways... but to avoid US grantor trust issues, you would want to do that before you became a US person.


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## Pareto8020

Moulard said:


> And while it is outside your query, you should not forget superannuation. This is a case where it could be considered a foreign grantor trust... particularly if you have a self-managed fund - perhaps if you contribute to a master trust (depending on the trust deed).
> 
> I have to admit, I am rusty on all of the rules related to SMSF. Pretty sure that part of the definition of a SMSF under the Act requires it to be a resident super fund, so chances are high that you would need to wind it up, anyways... but to avoid US grantor trust issues, you would want to do that before you became a US person.


Thanks heaps for the follow-up. Good point on the superannuation, others have also mentioned that so I've also been looking into it and I think I'm ok. I actually work for the Australian Public Service and my superannuation fund is the Public Sector Superannuation (PSS) which is specifically discussed in a great article on smsfadviser.com (Google "smsfadvisor australian super system for us expats" - i'm too new to post links sorry).
That article says "contributions, accruals, and distributions from Australian public sector superannuation funds to US persons, fall under the category of “government remuneration,” which is exempt from US taxation under Article 19 of the Australia-US Tax Treaty (Governmental Remuneration Exemption)." It also says "government remuneration paid by the Australian government to a US person, who is also a citizen of Australia, and more importantly, was a citizen of Australia (and not the United States) while employed by the Australian government, is exempt from US tax under Article 2(4)(b)."
I definitely don't have a SMSF and am very glad I don't! Apart from the trust, fortunately my financial investments/structures aren't too bad, considering I had no idea about IRS requirements when I set everything up in Australia years ago.


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## 255

Pareto8020 -- If you are not the Trustee and the trust does not make any distributions, you do not have any CFC or PFIC reporting requirements. Both the CFC and PFIC rules are designed to capture income for tax purposes from U.S. owned corporations -- no income = no tax. Just so you do know, investment in real property for non-professionals is generally considered passive income by the U.S. IRS, so if income was derived -- say, as an example, the trust leased the land to a rancher for grazing, and distibution of income was made to you -- you would have to report the income via form 3520. Under U.S. "check the box" rules, entities are not always taxed as they would seem; although I do think treating the trust as a foreign trust is correct. Cheers, 255

P.S. Be advised, as Moulard referred, that if you have any interest in a foreign entity," that is valued over $50,000.00, you will have a reporting requirement (IRS form 8938.) Also. if the trust was dissolved, and you and your three siblings became joint owners of the land, in your own names, there would be no reporting requirement.


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## underation

Pareto8020 said:


> Thanks heaps for the follow-up. Good point on the superannuation, others have also mentioned that so I've also been looking into it and I think I'm ok. I actually work for the Australian Public Service and my superannuation fund is the Public Sector Superannuation (PSS) which is specifically discussed in a great article on smsfadviser.com (Google "smsfadvisor australian super system for us expats" - i'm too new to post links sorry).
> That article says "contributions, accruals, and distributions from Australian public sector superannuation funds to US persons, fall under the category of “government remuneration,” which is exempt from US taxation under Article 19 of the Australia-US Tax Treaty (Governmental Remuneration Exemption)." It also says "government remuneration paid by the Australian government to a US person, who is also a citizen of Australia, and more importantly, was a citizen of Australia (and not the United States) while employed by the Australian government, is exempt from US tax under Article 2(4)(b)."


It sounds like the writer is talking about US Persons resident in Australia.

But you should be ok, even while US-resident, as long as you don’t become a US citizen. (https://www.irs.gov/pub/irs-pdf/p901.pdf, p27)


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## Moulard

Article 2 contains the savings clause, which allows the US government to tax US persons as if the treaty was not in effect save particular clauses. One of those clauses protected from this treatment is Article 19 (Government Remuneration), and thus ...



> Wages, salaries, and similar remuneration, including pensions, paid from funds of one of the Contracting States, of a state or other political subdivision thereof or of an agency or authority of any of the foregoing for labor or personal services performed as an employee of any of the above in the discharge of governmental functions to a citizen of that State shall be exempt from tax by the other Contracting State


Therefore a PSS distribution would not be taxable by the US once you were there ... so long as you don't become a US citizen... If I read the technical memorandum correctly, at that point it could become US taxable.

Its worth noting that technically you will still need to report the income, but you will not need to take a treaty based position (per regulations § 301.6114-1). 

Is also worth noting that if you have personal or non-government contributions into the PSS scheme (and I don't know whether choice of super applies), the portion of the distribution that is not government sourced would not be protected by the treaty.

But so long as you remain under your preservation age, you would just need to report your financial interest in the scheme.


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## underation

Moulard said:


> ... not be taxable by the US once you were there ... so long as you don't become a US citizen...


Yes, that’s what I said... 

Similar to UK.

The US obviously couldn’t have primary taxing rights on a pension paid by the Australian government to an Australian resident. The question only arises when the pension is being paid cross-border.


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## underation

The slightly worrying thing is the wording of Article 1.4(b) (exceptions to the saving clause):



> The provisions of paragraph (3) shall not affect:
> [..]
> (b) the benefits [exemption] conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, *nor have immigrant status in*, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).


However, the wording on p27 of Publication 915 seems unambiguous.

Edit: And fortunately the Technical Explanation doesn’t mention immigrant status:



> If such remuneration is paid by one of the States to an individual who is a resident of the other State (or by Australia to a citizen of the United States), it may be taxed by that other State (or by the United States in the case of U.S. citizens) in accordance with paragraph 3 of Article 1 (Personal Scope).


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## Pareto8020

255 said:


> P.S. Be advised, as Moulard referred, that if you have any interest in a foreign entity," that is valued over $50,000.00, you will have a reporting requirement (IRS form 8938.) Also. if the trust was dissolved, and you and your three siblings became joint owners of the land, in your own names, there would be no reporting requirement.


I think reading IRS websites/form instructions is making my head explode. In the IRS instructions for form 8938 (2018), it says:
_"Interests in foreign estates and foreign trusts. An interest in a foreign trust or a foreign estate is not a specified foreign financial asset unless you know or have reason to know based on readily accessible information of the interest. If you receive a distribution from the foreign trust or foreign estate, you are considered to know of the interest."_
Does this mean that I don't need to file form 8938 until I receive a distribution from the trust? It's quite possible that we'll never sell the land while I'm a US greencard holder, in which case the trust will never pay any distributions. I'm also happy to be removed as a beneficiary from the trust, if that makes my life any easier. Whatever I need to do to make life less complicated!


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## 255

Pareto8020 -- As per your quote from the IRS: if you know about it, you need to list it. As a former Trustee, you know about it! (There are many instances, both from trusts, inheritances and life insurance where the U.S. person has no knowledge until a distribution is made.) Bottom line, you need to list it, if you're a beneficiary and know about it. You just have to provide the information, if there is no distribution, there is no tax involved. The 8938 is just another form to include with your tax return (along with potentially many other forms.) In the scheme of things it is not any more daunting than many of the other forms involved. As you know, the IRS provides instructions for all of their forms and there are many commercial tax guides that are updated annually that can assist with more "plain language" expanations. There are also alot of articles for almost anything the IRS requires, online. I don't think you'll find it that difficult. (Just a little unfamiliarity now.) Of course, if you do not want to list it; you can of course, as you say, remove youself as a beneficiary. I don't know your entire financial situation, but you may need to complete Part III of form 1040, Schedule B and file form 8938 with your tax return and complete the FBAR, on-line, anyway. Cheers, 255

P.S. After reading your posts, I surmise that you, like me, would generally file your own tax return. Of course there are professionals from enrolled agents, accountants, CPAs to Tax Attorneys that make a living filing out forms.


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## Pareto8020

Moulard said:


> Article 2 contains the savings clause, which allows the US government to tax US persons as if the treaty was not in effect save particular clauses. One of those clauses protected from this treatment is Article 19 (Government Remuneration), and thus ...
> 
> Therefore a PSS distribution would not be taxable by the US once you were there ... so long as you don't become a US citizen... If I read the technical memorandum correctly, at that point it could become US taxable.
> 
> Its worth noting that technically you will still need to report the income, but you will not need to take a treaty based position (per regulations § 301.6114-1).
> 
> Is also worth noting that if you have personal or non-government contributions into the PSS scheme (and I don't know whether choice of super applies), the portion of the distribution that is not government sourced would not be protected by the treaty.
> 
> But so long as you remain under your preservation age, you would just need to report your financial interest in the scheme.


Excellent - that all makes sense and I'm well under my preservation age, so have nothing to worry about apart from reporting my financial interest in the PSS scheme (on form 8938 I assume)


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## Pareto8020

255 said:


> Pareto8020 -- As per your quote from the IRS: if you know about it, you need to list it. As a former Trustee, you know about it! (There are many instances, both from trusts, inheritances and life insurance where the U.S. person has no knowledge until a distribution is made.) Bottom line, you need to list it, if you're a beneficiary and know about it. You just have to provide the information, if there is no distribution, there is no tax involved. The 8938 is just another form to include with your tax return (along with potentially many other forms.) In the scheme of things it is not any more daunting than many of the other forms involved. As you know, the IRS provides instructions for all of their forms and there are many commercial tax guides that are updated annually that can assist with more "plain language" expanations. There are also alot of articles for almost anything the IRS requires, online. I don't think you'll find it that difficult. (Just a little unfamiliarity now.) Of course, if you do not want to list it; you can of course, as you say, remove youself as a beneficiary. I don't know your entire financial situation, but you may need to complete Part III of form 1040, Schedule B and file form 8938 with your tax return and complete the FBAR, on-line, anyway. Cheers, 255


Thanks for putting that all into perspective. Yes it's just a little overwhelming at the moment, but I'm sure after the first year it'll get a lot easier. It's good to know that I don't really need to go so far as to remove myself as a beneficiary - it's just another form I need to fill in, along with a whole lot of other forms. In fact I'll probably need to fill in 8938 anyway for other investments.



255 said:


> P.S. After reading your posts, I surmise that you, like me, would generally file your own tax return. Of course there are professionals from enrolled agents, accountants, CPAs to Tax Attorneys that make a living filing out forms.


Indeed! I've always done my own Australian tax return, and would like to eventually do my own US tax return too. But for the first year, I'll most likely get a professional to help me out. I just want to make sure that my finances are sorted _before_ I leave Australia so it minimises pain once I move to the US, e.g. I'm definitely going to be selling my Australian-domiciled Vanguard ETFs before the calendar year that I move to the US


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## Moulard

underation said:


> The slightly worrying thing is the wording of Article 1.4(b) ....


If you look at the US model treaty from 1996 - the earliest published on the IRS website and the closest to the date of the original Australian treaty ...

that clause reads, 



> .. upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State


If I was to guess, "immigrant status" is probably a quirk in drafting added at Australia's request to address some of the special rights British subjects had at the time. Lets face it, it was not until 1984 that Australian citizens ceased to be British subjects. It wasn't until 1986 that the highest court of appeal ceased being the Privy Council.


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## underation

Moulard said:


> If I was to guess, "immigrant status" is probably a quirk in drafting added at Australia's request to address some of the special rights British subjects had at the time. Lets face it, it was not until 1984 that Australian citizens ceased to be British subjects. It wasn't until 1986 that the highest court of appeal ceased being the Privy Council.


Yes, maybe. But “admitted for permanent residence” wouldn’t be any better as the OP will have a Green Card.

The “saving clause exceptions” article in the UK US treaty has similar wording, but fortunately the wording in Publication 915 firmly states that the US can’t tax a USC’s UK government pension unless the recipient is both a US citizen and a US resident. 

I was in the clear because not a US resident; the OP will be in the clear because not a US citizen. All’s well.


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