Default Method

Default Method

by Richard C. Wilson & Family Offices Group Association Team

Family Office Definition: Default Method

Default Method definition:  Default method is an IRS calculation of distributions to U.S. beneficiaries of foreign non-grantor trusts that can be treated as current-year income for tax purposes. Instead of being based on actual income in the trust, the average annual distribution for the prior three years is calculated. As long as calendar-year withdrawals are not greater than 125% of this amount, it can be taxed as current-year income.  This allows U.S. beneficiaries to move assets out of a foreign trust over time without paying special throwback taxes and interest charges on accumulated earnings. The distributions permitted under the default method increase by roughly 12% annually.

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