I encountered this question for the first time a few weeks ago and was not able to find much guidance in my usual practice guides—I’m talking about you, LexisAdvance. So, it was down the rabbit warren (no single rabbit hole in this Wonderland!) of grantor trust rules and regulations in an effort to suss out the answer.
This particular case involves an investor in a U.S. partnership who is neither a citizen nor a resident of the U.S.—instead, he was a citizen and resident of New Zealand. This individual—let’s call him Richard—set up a family trust under New Zealand law. The trust is and has always been administered in New Zealand, and has no U.S. beneficiaries.
Unfortunately, Richard passed away. His trustees need to obtain some kind of U.S. federal tax ID number in order to file U.S. returns on account of the trust’s partnership income. During Richard’s lifetime, the trust would have been treated as a grantor trust under U.S. law. What happens now?
Under 26 CFR 301.6109-1(a)(2)(i)(A), the trust is required to obtain an EIN unless (1) it is treated as “owned by one or more persons under IRC 671 through 678,” and (2) it reports its income in a prescribed manner. If the trust meets these exceptions, it may report its income using the personal tax ID number of the grantor—i.e., the Social Security Number of a U.S. grantor, or the ITIN of a non-U.S. grantor.
As many tax practitioners know, a trust that is set up by a married couple may continue to be taxed to the surviving spouse on an individual basis even after the death of the first spouse. If the surviving spouse is herself or himself the grantor of trust assets, he or she will retain that grantor status even after the other spouse dies. And if the surviving spouse was not the grantor, he or she will generally be treated as the owner of the trust’s assets (or portion thereof) to the extent the survivor has the power to vest the assets in himself or herself—i.e., take over ownership. (See IRC Section 678 for the details.)
So, does this mean that Richard’s wife should be treated as the owner of the trust under Section 678? Not so fast. First, we must navigate the tunnels of IRC Section 672(f) and related Treasury Regulations. More to come.
This is a general overview and not to be confused as legal advice. If you would like to speak to Jonathan about International trusts, or other legal matters, please email him at firstname.lastname@example.org or call him at (925) 217-3255.