What Are the Reporting Requirements for Foreign Trusts?

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

If you are an American expat and are either the owner of a foreign trust or receive distributions from a foreign trust, there are general rules to follow as well as potential income tax consequences. First, we must discuss what a foreign trust is before we go any further. As part of the Internal Revenue Code, the IRS uses a specific two-part test to determine whether a trust is a foreign trust or a domestic trust. Section 7701 (a)(30)(E) of the IRC states that a trust is classified as a domestic trust if the two following conditions are met:

1.  A court within the United States is able to exercise what is referred to as primary supervision over the administration of that trust AND
2. One or more U.S. persons have the authority to control all the decisions about the trust that are deemed to be substantial.

Therefore, a trust is classified as a foreign trust unless it satisfies both of the conditions stated above. 

If you are the owner, or what is called the grantor, of a foreign trust, all income and expenses of the trust flow directly to your personal tax return. Further, if you are a beneficiary of a foreign trust, you will need to report your share of the income of the trust. In addition to this, there may be additional reporting requirements if you transfer assets to a foreign trust.

The two main forms that are filed for foreign trusts are Form 3520 and Form 3520-A.

Generally, Form 3520 is required to be filed under the following conditions:

• A U.S. person creates or transfers money to a foreign trust, or he or she makes a loan to a foreign trust
• Receives distributions from a foreign trust, or receives the uncompensated use of property of that foreign trust, or if they receive a loan from a foreign trust;
• If they are treated as a U.S. owner of a foreign trust under the grantor trust rules;
• And if they receive certain large gifts from foreign persons. 

Also, as part of the reporting requirements for foreign trusts, U.S. persons that are treated as owners of a foreign trust under the grantor trust rules must also take steps to ensure that there is a timely and accurate filing of Form 3520-A. 

In general, the due date for filing Form 3520 is April 15th, unless you live outside the U.S. or in Puerto Rico, or you are on military or naval duty outside of the U.S., in which case the due date is June 15th. If an extension was filed for your income tax return, you will have until October 15th to file Form 3520. 

As for filing Form 3520-A, in general, the due date is March 15th, unless you file an extension using Form 7004, which will grant you an additional six months (therefore, until September 15th). 

Given the complex nature and the series of steps involved when it comes to the reporting of foreign trusts, it behooves you to seek professional help to ensure that these foreign trust returns are filed accurately and on a timely basis. Please note that there may be additional forms for you to fill out depending on your specific situation (such as Schedule B, Form 8938, Form FinCEN 114, and so on), and that this article does not provide an exhaustive list of tax obligations related to foreign trusts. Therefore, if you are the grantor of a foreign trust, or you have received distributions from or have transferred assets to a foreign trust, please get in touch with us today to determine your filing requirements.