Both my wife and I are dual citizens; New Zealand and US. A long standing family trust is being wound up as the settlers, my parents, are deceased some 8 years. I will inherit rental property and cash valued approx 1.2m. If I hold it in my name will I be subject to paying double tax on the income/ interest I receive? Is it worth setting up a trust where the Trustees of the Trust being wound up are grantor/settlors who nominate me as a protector but also enable me to be a tax free beneficiary? Am I even at any risk of being taxed in the US in addition to NZ ?
As a US citizen you are subject to tax on your worldwide income, no matter where earned. That means that you should have been filing US tax returns in addition to your NZ returns (if any). There is a tax treaty between the US and NZ that, generally speaking, ameliorates any double taxation; however, you are still subject to tax and must affirmatively claim treaty benefits if you wish to take advantage of them.
My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference.
You and your wife are both required to file annual 1040 income tax returns. Depending upon the actual terms of the trust, the distribution may include accumulated income or deferred income which could possibly be taxable. You will be paying tax on the interest and rents that you receive to both New Zealand and the US. You will get a credit for the New Zealand taxes on your US income tax return based upon the terms of the treaty between the countries. Nevertheless as a US citizen you are responsible to pay US taxes on your worldwide income. US and only one other country have this onerous requirement.
I hope this helps.
If you do not like this answer or disagree, please look at one of the other answers provided. It is not necessary for you to try prove this answer is "wrong" or something with which you do not agree. This is a free service for you based on limited facts. Nevertheless, many times you need to consult an attorney with the details to get actual advice specific to your concerns. Do not put too many details in your questions or comments because this makes the information public and could hurt you. Government Regulations contained in IRS Circular 230 regulate written communications about Federal tax matters, including e-mail, between us and our clients. This is another attempt by the government to limit your rights and to extend the control of government over individuals and businesses. Nevertheless, such communications are either opinions or other written communications. This is not an opinion. It is other written communication and was not written to be relied upon, by itself, to avoid any tax penalties. In order to receive assurances of protection from tax penalties from a written communication, you should get an opinion letter. If you would like to discuss an opinion letter relating to any matter, please contact me and I will explain what is involved and what it will cost.
1. The answer depends on details not found in your question. Generally an inheritance or gift received by you does not subject you to a U.S. income tax, even if the inheritance or gift is received from a foreign person or trust. There is however a tax reporting requirement with stiff penalties if the report is not promptly filed and the gift is over $100,000.
2. If a U.S. person is a beneficiary of a trust that accumulates income on behalf of the beneficiary, there are special tax consequences. These rules are the "foreign trust" rules and they are quite complicated. Basically the U.S. person must either pay tax on the income as it is accumulated by the trust or pay a tax when the trust distributes the proceeds as if the income had been taxed all along. Since its has been 8 years since your parents died, this may well fit your situation. You need professional advice on handling this issue.
3. The trust technique that you describe as a possibility for the future is unwise and could lead to U.S. criminal tax penalties.
4. Finally, you should report all of your income in the U.S. on your U.S. tax return. If you have to pay tax in New Zealand on the income, you will get a credit for the tax paid. The result is that you don't pay a double tax, but you may be taxed at an effective tax rate equal to the higher of the New Zealand tax rate or the U.S. tax rate.
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