Most importantly, an interest in a foreign trust does not form part of the U.S. estate regardless of the assets held in the foreign trust. Treas. Reg. §§ 20.2104-1(a)(4), 20.2105-1(e). In other words, there is no look-through rule. The BETE Trust is quite simply invisible for U.S. estate tax purposes. This is what makes the BETE Trust an absolute requirement for anyone in the world that has U.S.-situs assets.
Moreover, foreign trusts are taxed as though they are nonresident alien individuals. IRC § 641(b). Therefore, to the extent it has U.S. source income, it must file a Form 1040NR. For investment real estate rental income, the BETE Trust is permitted to make a Section 871(d) Election to enjoy net-basis taxation on investment real estate rental income. And here’s the best part: Section 684 does not result in a deemed sale upon the transfer to this trust since it’s a grantor trust. IRC § 684(b). Therefore, you’re eligible to implement this at any time without any upfront tax consequences.
The BETE Trust can be administered in the U.S., managed in the U.S. by a U.S. Trustee, enjoy the safety and protection of the U.S. legal system under state law, be funded entirely with only U.S. assets with no deemed sale on the initial funding of the trust, report rental income on a net basis, enjoy preferred rates on any resulting capital gain from real estate, be exempt from non-real estate capital gain, still be deemed a foreign trust, and be entirely exempt from the U.S. estate tax. That is unquestionably the best of ALL worlds.
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