"Creditor protection" is one reason U.S. residents transfer assets to trusts located abroad. The idea is that one’s assets are harder for a current or possible future U.S. creditor to reach if located in a foreign trust—preferably one in a country with strict bank secrecy and low taxes. There are other reasons for transfers to foreign trusts, some respectable or tolerable, some nefarious.

Transfers of appreciated assets—assets worth more than they cost—to a foreign trust are generally subject to U.S. income tax. Congress enacted this basic rule a few years ago. Internal Revenue Service (IRS) regulations now flesh it out with specifics—and exceptions.

In general, a transfer of an asset to a foreign trust is treated as a sale of the asset for its fair market value. If an actual sale is made to the trust, it is taxable on that fair market value even if the owner eventually receives less than that when the asset is sold. If it’s a capital asset (securities, art works, etc.) the gain is a capital gain. If the "sale" is at a loss, the loss isn’t deductible and can’t be offset against gain on other assets transferred.

Exceptions:

Transfers to a foreign trust are not taxable if one of the following events occur:

· If made because of the transferor’s death (in most cases).

· To a charity exempt from tax under U.S. law.

· To a trust treated as owned by the transferor, on whose income the transferor would owe U.S. income tax.

The IRS will impose a tax if an exempt transfer to a trust which should be taxable if the trust subsequently transferred the asset to a foreign trust.

For further information, contact Louis P. Stanasolovich, CFP™ at (412) 635-9210 or mailto:legend@legend-financial.com