What is the taxation of foreign trusts?
Foreign trusts are used by individuals to move assets to offshore entities based in other countries. In South Carolina, foreign trusts are subject to taxation according to the Internal Revenue Code. In general, any income gained from foreign trusts is taxable as ordinary income. Additionally, if a foreign trust has accumulated income, then it may be taxed as well. For individuals living and working in South Carolina, any income from foreign trusts is reported on the federal form 1040 as part of the individual’s gross income. The income is then subject to the same federal income tax rates as any other income earned. Furthermore, foreign trust must also file a Form 3520-A each year to report their assets, income, and any distributions they make. In addition to income taxes, South Carolina also imposes an estate tax on foreign trusts. This applies to any foreign trust with assets in South Carolina. The estate tax applies to trust assets over the exemption amount and is calculated as a percentage of the amount over the exemption and is based on the value of the assets in the trust. In short, foreign trusts in South Carolina are subject to both income and estate taxes. The income is taxable as ordinary income while the estate tax is based on the value of the assets in the trust. It is important to remember that foreign trust must also file an annual Form 3520-A in order to report their assets, income, and any distributions they make.
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