QUESTION: Where can I get information on setting up a foreign
irrevocable trust? If I set up such a trust and file the gift tax
return, is there any future US tax form to send? My children, being
the beneficiaries of the trust, would pay taxes on the income from the
trust but the trust would remain offshore.

REPLY: The typical procedure is to hire a U.S. lawyer who does that
kind of work. There are a number of such lawyers that are listed as
authors and advisors for Offshore Press at the bottom left of the home
page (http://www.offshorepress.com/). Follow the liks to get a resume
and contact information. There are some additional listings for asset
protection resources at http://www.offshorepress.com/aplinks.htm.
Extensive information about offshore/foreign trusts is available on
our subscribers restricted web site.

A gift tax return may or may not be required depending on the specific
terms of the trust. A foreign trust with a living U.S. grantor/settlor
and with any U.S. beneficiaries is treated as a grantor trust for U.S.
income tax purposes even if it is irrevocable and the grantor has not
retained any powers over the trust assets, the trustee, distributions
or investments. A grantor trust is one (like a revocable living trust)
where the trust grantor continues to pay taxes on any income earned by
the trust. As long as the trust is a grantor trust, the U.S.
beneficiaries are not required to pay taxes on any distributions.

When the trust grantor dies, the trust assets will usually (not
always) be included in the grantor's estate. But where the trust
agreement provides for an irrevocable transfer and the grantor does
not retain any powers of appointment and a gift tax return is filed,
the assets in the trust can be excluded from the grantor's estate the
same as with transfers to an irrevocable domestic trust. After the
death of the grantor, income earned by the foreign trust is no longer
subject to U.S. income taxes until it is distributed to the U.S.
beneficiaries.

The trustee of a foreign trust is required to file an annual report on
Form 3520-A to report the income, expenses, assets, debts and any
distributions from the trust. If the trustee does not file the report,
the trust grantor is required to do so. The trust grantor is also
required to file a Form 3520 and in some cases, the beneficiary may be
required to file that form. If the trust owns a foreign corporation,
it will be required to file a Form 5471 and in some cases a Form 926.
If the trust is a partner in a foreign partnership, it will be
required to file a Form 8865 and if it is the owner of a foreign
disregarded entity it will have to file Form 8858. Additional
information about these various forms is available at
http://www.offshorepress.com/AICPA/

These comments merely scratch the surface of the varied issues that
may apply to a foreign trust that is created by a U.S. person.

Vern

The comments in this memorandum are not intended to constitute an
opinion regarding any specific tax issues because additional tax
issues may exist that could affect the tax treatment of the tax issues
addressed in this memo. This memorandum does not consider or reach a
conclusion with respect to those additional issues and was not written
and cannot be used for the purpose of avoiding penalties under code
section 6662(d). For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm