U.S. Tax for Foreign Trusts

U.S. persons who create a foreign trust, transfer property to one, receive distributions from one, or receive large gifts or bequests from non-U.S. persons generally must file Form 3520. The penalty for not filing starts at the greater of US$10,000 or a percentage of the amounts involved, even though the form is an information return on which no tax may be due.

We determine whether the form applies, prepare it, and coordinate it with your income tax return so the two are consistent.

A foreign trust with a U.S. owner must file Form 3520-A each year and issue statements to its U.S. owners and beneficiaries. Where a foreign trustee will not cooperate, the obligation falls to the U.S. owner. We prepare the trust return, the owner and beneficiary statements, and substitute filings where needed.

Foreign trust taxation turns on two questions: is the trust foreign, and who owns it for U.S. purposes? We review trust deeds and facts against the court and control tests and the grantor trust rules, and we document the conclusion so your filings rest on a reasoned position.

Distributions from a foreign non-grantor trust to a U.S. beneficiary can trigger the throwback rules, under which accumulated income is taxed at high rates with an interest charge that runs back over prior years. We calculate the exposure, prepare the beneficiary reporting, and advise trustees on distribution timing.

Many foreign trust issues surface years late, often when a family finds that a pension, savings plan, or inheritance carried a U.S. filing requirement. We prepare delinquent filings with reasonable cause statements and respond to IRS penalty notices with the facts and law set out clearly.