Unhappy Results for Trust Settlors

In many foreign jurisdictions, trusts are settled by an individual or entity that the United States will regard as an intermediary of the U.S. person who will benefit from the trust. Section 679 provides that the beneficiary of this trust will be regarded as the settlor because that person is an indirect transferor of assets. Therefore, § 674(a) and § 677(a) treat the grantor as the principal of the trust for U.S. income tax purposes. The characterization of the beneficiary as a settlor will have consequences beyond taxation on income and gains of the trust.  

See Robert E. Ward, Whose Trust Is It Anyway? How Deference to Form Over Substance Can Produce Unhappy Results for Those Who Settle Trusts, Bloomberg, October 28, 2016.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.