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Grantor and Non-Grantor Trusts

This issue comes up very frequently, what makes a foreign trust a “Grantor Trust” for US tax purposes.

Fortunately, while there is a wealth of information available on the subject (so much that it can actually confuse the matter), there are some simple definitions.

A grantor trust, is a trust that allows the grantor (owner or creator) to control the assets and investments held within. The income it generates is taxed to the grantor at their tax rate rather than to the trust itself. In addition, any US person putting assets into a trust makes it a grantor trust for their portion contributed (considered their ownership).

A non-grantor trust is any trust where the above situation doesn’t exist.

A grantor trust is subject (in most cases) to 3520 & 3520-A reporting (foreign trust), whereby the US owner reports their share of trust activity.

So, based on the above, most foreign trusts are Grantor Trusts, and require additional reporting alongside your tax return each year.

Does your tax preparer understand the grantor trust rules? If not, or if you have any questions, contact us today on 09 373 2949 (NZ) or 02 8332 6120 (AU).