Estate & Trusts With Foreign Beneficiaries or Heirs - This adds a layer of complications!

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David M. Kaufmann, CPA

Voice: 720.493.4804

Email: contact2@kaufmann-cpa.com

Physical Address:

2831 Wyecliff Way
Highlands Ranch, CO 80126

Mailing Address:

PO Box 632285
Highlands Ranch, CO 801
63-2285

Note: This is a complicated subject. We will only touch on some topics. We recommend that you talk these issues over with an attorney and a CPA.

To make this more readable I will use trust and estate, as if they are the same entity, and I will use beneficiary and heir, as if they are the same thing.

Overview

I typically prepare a trust income tax return after year-end.  There might be some planning before the year-end, but the bulk of the tax preparation takes place after year end.  If you have foreign beneficiaries, you need to get involved with the tax preparation before there are distributions!

If you have foreign or nonresident alien beneficiaries, this is more like a payroll situation. Maybe a bit more complicated.  I will try to frame this information, as if it were payroll.

The W-8BEN is somewhat like a W-4

Use this form to get the contact information, ITIN (Individual Taxpayer Identification Number) or home country tax ID number.  This is the first step.  I recommend doing this before making any distributions.

The Foreign Person's US Source Income Subject to Withholding (Form 1042-S) Is somewhat like a W-2 form

But, the 1042-S makes the W-2 form look trivial!

Form 1042-S reports to the foreign heir how much, if any, US tax has been withheld on the estate distribution.  Thus, you need to know how much US tax should be withheld when the distributions are made. Generally, 30% of the income is to be withheld as US tax.

If there is a tax treaty between the US and the beneficiaries home country, the withholding could be lower.  This needs to be researched before making the distributions.

If possible, Form 1042-S, should be electronically filed by the estate or trust.  The beneficiary gets this form, as well as a K-1.

Annual Withholding Tax Return for US Source Income of Foreign Persons (Form 1042) Is somewhat like a 941 form

As the name implies, Form 1042 covers 12 months (Form 941) covers a calendar quarter. You would indicate the withholding liability for each tax liability period.

This form is due on March 15 of the following year.

Annual Summary and Transmittal of Forms 1042-S (Form 1042-T) Is somewhat like a W-3 form

Like the W-3 form, it is not required, if the individual withholding forms (Form 1042-S) are electronically filed. Even though one might not be required to electronically file the 1042-S forms, one should consider doing so.

If you do not electronically file the 1042-S forms, Form 1042-T is due on March 15 of the following year.

Payment of the Withholding

The withholding payments should be made using the EFTPS system.

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If you have questions about this, do not hesitate to contact us at 1-720-493-4804.  We serve clients all over the country. A large portion of my business is preparing tax returns and tax planning for trusts, estates and beneficiaries of trusts and estates.