Naming a U.S. Person as "Administrator" of a Foreign Trust By Vernon K. Jacobs, CPA   & J. Richard Duke, J.D., LLM

Some promoters take the position that the formation of an offshore trust is irrevocable and no U.S. person is taxed.  The offshore trust designates a U.S. person as the "administrator" of the trust who receives an administrative fee (and is taxable); however, the remaining income is alleged to be not taxable.  The administrator, of course, controls the distribution of income to U.S. persons, from time to time.  This technique is a fraud and is only used to confuse U.S. persons and to justify a false claim that the U.S. person who forms the trust (the grantor) is not required to file various forms required of a foreign trust.

This existence of a person designated as the U.S. Administratordoes not alter the tax treatment of the trust income. If a foreign trust has a U.S. person who is the grantor of the trust and if the trust has any U.S. beneficiaries, then Section 679 of the U.S. tax code treats the U.S. grantor as the owner of the assets held by the trust even if the trust is irrevocable. This means that the U.S. grantor must pay the income taxes on the income of the trust. The trustee of the foreign trust must file a Form 3520-A each year with the IRS, or else the trust grantor must do so. In addition, the trust grantor must file a Form 3520 each year and any U.S. beneficiaries who receive any income from the trust (or engage in certain other transactions with the trust) must also file the form 3520. The U.S. grantor of the foreign trust must also file an annual statement with the Treasury Department to disclose the details of any foreign financial accounts held (directly or indirectly) by the foreign trust.

If a foreign trust is subject to the primary supervision (jurisdiction) of a U.S. court, and one or more U.S. persons have the authority to control all substantial decisions of the trust, then the trust will be treated as a domestic trust even if it is based outside the U.S.  When that happens, the rules applicable to domestic trusts become applicable. If at a future date, only foreign persons have the authority to make all substantial decisions of the trust, then it becomes a foreign trust. As a consequence of such a change, any untaxed appreciation in any trust assets will be treated as if the assets are sold when the trust changes from a domestic to a foreign status.  With a domestic trust, if the trust grantor is not subject to tax on the income of the trust, then the trust beneficiaries are subject to tax for any distributions or the trust is subject to tax on any accumulated income.

Naming a U.S. person as the administrator is pointless because the U.S. trust grantor must ensure that the filing requirements described above are completed. If a U.S. grantor of a foreign trust wants to hire someone to assist with these duties and to name that person as an administrator, they can do so but it won't alter the tax treatment in any way.  Or, if a trustee of a domestic trust is called an administrator or if the trustee hires a U.S. person to be an administrator, the administrator is either a trustee or an employee of the trustee. 
 
Copyright 2003

Vernon K. Jacobs, CPA
J. Richard Duke, J.D., LL.M.
 

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. He edits and publishes theonline 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 speciality.  He is a Consulting Editor for  theonline International Wealth Protection Reports Sponsored by Offshore Press, Inc.., Copyright, 2003, all rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press ., Vernon K. Jacobs, Webauthor .