An Overview Concerning Certain Recent Changes for Foreign Compensatory Trusts: 402(b) Trusts, Grantor Trusts and "Rabbi" Trusts

Abstract:     
This article describes some of the issues confronting the foreign deferred compensatory trust world in light of recent changes to Sections 671, 672 and 679 of the Internal Revenue Code and regulatory authority thereunder. In addition to addressing the recent changes in law that refine the boundary between domestic and foreign trusts, the article highlights some of the issues surrounding "inbound" and "outbound" compensatory arrangements which involve trusts. In particular, the article addresses proposed regulations which may subject U.S. entities and certain foreign entities to U.S. Federal income tax on the items of income produced by foreign compensatory trusts, regardless of whether the trusts would otherwise be treated as "grantor" trusts under the Internal Revenue Code. While these proposed rules are intended to address policy concerns regarding U.S. persons who do not pay their fair share on income attributable to foreign trusts, they also may impact the boundary between Section 402(b) "secular" trusts and the grantor trust rules with various potential practical and policy consequences and questions for foreign compensatory arrangements.

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