One of the tax advantages of a Cook Islands or Nevis international trust is that neither the Cook Islands nor Nevis imposes taxes on trusts provided the Settlor and Beneficiaries are not residents of the Cook Islands or Nevis. However, this does not exempt the Settlor or Beneficiary from tax liabilities in their home country, particularly for U.S. persons, who must report their foreign trust interests to the IRS.
Settlors and Beneficiaries must ensure compliance with tax obligations in their home country. For US persons, this often means reporting the financials of their international trust to the IRS. Typically a CPA or tax advisor provides the Settlor with tax forms that require signing by the Trustee, this is often a form 3520-A. Form 3520-A is the Annual Information Return of Foreign Trust With a U.S. Owner and must be filed annually by the Trustee of a foreign trust that has at least one U.S. person associated with it. It reports detailed information about the trust, its income, distributions, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust. The Trustee is required to sign the form as a fiduciary; they have control over the assets of the trust and keep accurate records of the dealings of trust assets. The form must be filed by the 15th day of the 3rd month after the end of the trust’s tax year – usually December 31st .
The U.S. owner is subject to an initial penalty equal to the greater of US$10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year if the Settlor fails to file a timely form 3520-A so it is vital to ensure that filing takes place on time. An automatic six-month filing extension for Form 3520-A can be obtained by filing a properly completed Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) with the foreign trust’s employer identification number (EIN) by the 15th day of the 3rd month after the end of the trust’s tax year.
Often, tax forms are provided to the Trustee for execution. In some instances the tax forms do not align with the Trustee’s records – for example, a distribution from or contribution to the Trust Fund has been made however the Trustee does not have a record of the transaction. In this circumstance the Trustee will execute the tax forms on the basis that the missing transaction will be promptly and properly recorded to ensure the financial accounts are in alignment with the Trustee’s records. This ratification of prior transactions is not ideal from an asset protection or administrative standpoint however, it is a necessary that the tax filings remain aligned with the true financial status of the trust to ensure the trust fund balance is accurately maintained.
The Settlor of a trust may file certain tax forms without requesting execution by the Trustee. Regardless of who completes the forms and how they are filed, a Trustee still has a fiduciary duty to manage trust assets and maintain proper accounts of the trust fund. It is always recommended a Settlor provide copies of all signed tax filings and supporting financial statements to the Trustee so that there is an accurate record of the assets on hand.
After reviewing the tax forms provided by the CPA and its own financial records for alignment, the Trustee will execute the necessary forms and return them to the CPA for filing, or forward directly to the IRS if need be. Southpac works with a number of accountants with offshore experience – if you are having trouble with tax matters please reach out and we will be happy to put you in touch with a CPA who has offshore experience and is familiar with our structures.
If you have further questions about international trusts please contact us.
Disclaimer: the article above is for information purposes only. It is not intended to constitute legal or tax advice. If you are planning to establish or place assets into an offshore structure, please consult beforehand with legal and tax professionals in your jurisdiction(s) of tax residence.
