Letter of Wishes for Non-Grantor Trust Distributions By Vernon K. Jacobs, CPA  & J. Richard Duke, J.D., LLM

The following arrangement is common in many foreign trusts established for U.S. persons, but many of these arrangements are poorly drafted and are highly likely to be disputed by the IRS. A U.S. person establishes an offshore trust and, under the provisions of the trust, no U.S. person is named as a beneficiary.  Generally, some foreign charity or purpose trust is named as the beneficiary. The purpose of this arrangement is to avoid having a "grantor trust" under U.S. tax law wherein the trust grantor/settlor is subject to income tax on the income of the foreign trust. However, under a "letter of wishes" to the trustee, the settlor (creator) of the trust requests the trustee to distribute income to the settlor or the settlor's family members.  Alternatively, the trust protector sends a letter of request to the trustee requesting that income be distributed to the settlor or the settlor's family members. 1.    Trust Includes a U.S. Beneficiary.  Under I.R.C. § 679(c), an offshore trust has a U.S. beneficiary unless it specifically states that no income can be paid to or accumulated for the benefit of a U.S. person; and if the trust were to terminate, no part of the principal or income can be distributed to a U.S. person. 2.    Consequences of Having a U.S. Beneficiary.  The settlor is taxed on all income, whether distributed or not, of a foreign grantor trust with a U.S. beneficiary.  In addition, the trust is required to transmit (i) to the owner, a Foreign Grantor Trust Owner Statement; and (ii) to any beneficiary who receives a distribution, a Foreign Grantor Trust Beneficiary Statement.  Copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement must be furnished to the U.S. owners and U.S. beneficiaries by the 15th day of the third month after the end of the trust's tax year. The IRS is nearly certain to dispute an arrangement wherein any income is accumulated for the benefit of a U.S. person. Thus, the trust must require that the current income not be accumulated – meaning it must be distributed to a non U.S. person or charity during the lifetime of the trust grantor.  Where a letter of wishes is used to circumvent the terms of the trust, the arrangement involves deceit and is therefore a scam. Vernon Jacobs & Richard Duke Reprinted in part from The Offshore Tax Seminar Manual Copyright, 2002, All rights reserved. Co-authors of The Offshore Tax Seminar Manual http://www.offshorepress.com/offshoretaxmanual.htm

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. He edits and publishes the online International Wealth Protection Reports ..  J. Richard Duke , JD, LLM is an attorney who specializes in international tax law and is an Adjunct J. Richard Duke is a Professor of international tax law. and a practicing attorney in the international specialty.  He is a Consulting Editor for the online International Wealth Protection Reports Sponsored by Offshore Press, Inc .., Copyright, 2004, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press  Vernon K. Jacobs, Webauthor .