At TFX we've been doing taxes for U.S. expats for over 25 years
Expat taxes are complicated. Seriously.
Every precaution recommended by the IRS & more
Clear, transparent process. Thorough & well-thought-out
IRS Restructuring & Reform Act of 1998 protects taxpayers
Trusted by tens of thousands of clients worldwide
Which should you hire and why?
We stand by our work — year in, year out.
If you have years of experience with expat tax, get in touch!
Live webinar with Q&A — join & ask questions!
Form 709 is required to be filed for transfers of assets to a foreign trust. Treas. Reg. § 25.2511-2(b) and (j) requires the grantor of a trust to file a Form 709 even where transfers are not completed gifts.
Also, if you make a transfer to a person (in or outside of the U.S.) that is not for their medical or educational expenses or payments to political organizations, or gifts to nonresident alien spouses in excess of $103,000 per year, the gifts must be reported on Form 709. The filing of a gift tax return is technically required even if the gift is eligible for the $11,000 annual gift tax exclusion for an individual or a split gift of up to $22,000 by a husband and wife.
The gift tax return is four pages, but in some cases it may require extensive attachments. The form basically requires the disclosure of gifts that are in excess of the annual gift tax exclusion and gifts that are subject to the generation skipping transfer tax. In some cases, a gift tax must be computed and paid with the return.
The gift tax return is due by April 15th of the year following the year in which the gifts were made. An extension to file the gift tax return can be made by requesting an extension of time to file your personal income tax return.
The address to which the gift tax return should be filed varies with the taxpayer's state of residence and is listed in the instructions to the Form 709.
The IRS estimate of the average time required to prepare the gift tax return is about two hours, but they also estimate that it will take an hour just to copy, assemble and mail the form to the IRS. Actually, the required time varies greatly with the complexity and scope of the gifts that are being reported and whether a gift tax is due with the return. In some cases, the valuation of the property that is being gifted will take far more time than the actual preparation of the gift tax return.
Penalties are generally for the late filing of a return on which a tax is due and/or for the late payment of any gift tax. If you can be sure that all gifts during the previous taxable year were either eligible for the annual gift tax exclusion or that they would be exempt by virtue of the lifetime unified estate and gift tax credit, then there is no financial penalty for a failure to file or for filing a late return.
Upon transferring cash to a foreign trust in order to acquire a variable life insurance policy or to pay premiums, a gift tax return should be filed. The applicable exemption amount against any taxable gift and the election to apply the exclusion against the generation-skipping transfer tax are reported on the gift tax return.
Treas. Reg. § 25.2511-2(j) states that if the donor takes the position that a power of appointment is of such a nature as to render a gift incomplete and, thus, not subject to the gift tax, the transaction "... shall be disclosed in the return and evidence showing all relevant facts, including a copy of the instrument of transfer, should be submitted." Treas. Reg. § 25.2511-2(b) provides that "... But, if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete ... or partially incomplete".
For example, if a donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among his descendants, no portion of the transfer is a completed gift. On the other hand, if the donor had not retained a testamentary power of appointment, but instead provided that the remainder should go to X or his heirs, the entire gift would be a completed gift. Where a foreign grantor (asset protection) trust includes the provision granting a testamentary (sometimes inter vivos) special power of appointment to change the disposition of assets after the death of the grantor, the gift is incomplete for gift tax purposes. The transfer of assets to a foreign non-grantor trust is a completed gift.
The transfer of appreciated property by a U. S. person to a foreign grantor trust is not subject to any recognition of gain since the U. S. person is treated as the owner. However, if a U. S. person transfers appreciated property to a foreign non-grantor trust, the transfer is treated as a sale or exchange and gain is recognized equal to the excess of the fair market value over the adjusted base of the property. Gain is recognized because the grantor of a foreign non-grantor trust is not treated as the owner of the trust assets.