Unsure About Whether You are the Beneficiary or Owner of a U.S. or Foreign Trust? Get the Answer Here.
And if you’re really in a hurry…Use our 60-Second Answer Bonus Tool: We have created a handy calculation tool in the form of a few highly-specific yes-or-no questions. Simply toggle the radio buttons and you will know pretty much instantly, if the instrument you have or are listed as a beneficiary on is a true foreign trust, foreign grantor or foreign nongrantor trust. For further information on foreign trusts, foreign grantor trusts, U.S. Trusts, IRS form 352o, FBAR and more, see our Foreign Trusts, Estates and Gift Taxation Services page. For even more insights on cross-border tax issues, check our blog regularly or book a telephone or Zoom appointment with IWTA’s Founder and international tax expert, Jack Brister.
Who should file IRS Form 3520?
IWTA’s answer to the question, “Who should file IRS form 3520?”
Any U.S. person (citizen, green card holder or U.S. resident) who receives a distribution from a foreign trust, a gift or gifts of $100,000 or more from a foreign person, or a U.S. person who is the owner or economic grantor to a foreign trust. A distribution includes the use of any trust property without paying fair rental value for the use of the foreign trust property. An example of the use of trust property would be to use a painting or an apartment or other real property owned by the trust. Additionally, if a person receives or makes a loan arrangment with a foreign trust they will be required to file a Form 3520.
What is a foreign trust?
IWTA’s answer to the question, “What is a foreign trust?”
A a foreign trust is a trust that does not meet both the court and control tests. If the the applicable law of the trust as noted in the trust instrument is not with a U.S. state, or, any other provision of the trust instrument gives administrative authority to a U.S. court, the court test is failed. If substantial decisions of the trust are able to be made by a non-U.S. person the control test is failed.
Substantial decisions include but are not limited to: distributions of income or principal, amount of distributions, selection of beneficiaries, termination of the trust, allocate income between principal or income, compromise, arbitrate or abandon trust claims, sue or litigate on behalf of the trust, investment decisions, and appoint successor trustee or protector.
Are trust distributions taxable to the beneficiary?
IWTA’s answer to the question, “Are trust distributions taxable to the beneficiary?”
Distributions of a foreign nongrantor trust received by a U.S. person, regardless if they are a named beneficiary or not are taxable to the extent of their proprotion of the trust’s distributable net income (taxable income) as computed under U.S. tax law. A U.S. person who received a distribution should also receive a foreign nongrantor trust beneficiary statement from the trustee to inform them of the distribution and the amount taxable.
Note: Distributions recevied by a U.S. person from a foreign grantor trust are generally not subject to U.S. tax but may be subject to reporting as a foreign gift if the amount or amounts received during the year equal or exceed $100,000.
If the trust is a foreign grantor trust but is irrevocable and distributions are made to persons other than the grantor / settlor or the grantor / settlor’s spouse then the trust will be treated as a foreign nongrantor trust.
Do trust beneficiaries of a foreign trust pay taxes?
IWTA’s answer to the question, “Do trust beneficiaries of a foreign trust pay taxes?”
U.S. persons (citizen, green card holders and U.S. residents) who receive a foreign nongrantor trust will be subject to tax on any distribution received in proportion to the amount received to the distributable net income.
What is a foreign grantor trust owner statement?
IWTA’s answer to the question, What is a foreign grantor trust owner statement?
A foreign grantor trust owner statement is a statement generally provided by the trustee of a foreign grantor trust which provides the breakdown of the income and the provision of tax law applicable to the trust being treated as a foreign grantor trust. The statement is generally provided to a U.S. person who is treated as an owner / grantor/ or settlor of the trust.
Is a gift from a foreign person taxable?
IWTA’s answer to the question, “Is a gift from a foreign person taxable?“
A gift or gifts received from foreign persons by a U.S. person is generally not taxable but reportable if the amount exceeds $100,000. If the U.S. person who received the gift does not report or disclose the gift on Form 3520 by the due date, the IRS can assess a penalty in the amount which is the greater of $10,000 or 25% of the amount of the gift received.
How to create an international trust?
IWTA’s answer to the question, “How to create an international trust?”
There is not one standard defintion of a foreign trust. A trust that can accommodate an international family (families with members with more than one nationality or residing in multiple jurisdictions) can be established in various jurisdicitions. Most often international trusts are established in common law jurisdictions with various provisions within the trust agreement that can accomodate the needs and objectives of the grantor / settlor of the trust and the various family members’ needs. The objective is to effectuate efficient transfer of wealth from one generation to another.
Is a TFSA considered a foreign Trust?
IWTA’s answer to the question, “Is a TFSA considered a foreign Trust?”
There are three types of TFSA (Tax Free Savings Accounts) in Canada; a deposit account, an annuity contract and an arrangement in trust. Review your TFSA documents and if it is a deposit or annuity then you definitely don’t have a foreign trust. As a U.S. person you will be required to report the income. Even if the TFSA is considered a deposit account or an annuity, it may invest in foreign mutual / investment funds which may be treated as a Passive Foreign Investment Company for U.S. tax purposes which means a Form 8621 for each fund may be required or signficiant penalties can apply for not properly reporting these investments. If the TFSA is “an arrangement in trust” it will surely be treated as a foreign trust for U.S. tax purposes and a Form 3520 and possibly a Form 3520-A will be required to be filed or face significant penalties regardless of the amount of income.
What is the Schedule B compliance requirement for foreign accounts and trusts?
IWTA’s answer to the question, “What is the Schedule B compliance requirement for foreign accounts and trusts?”
If a U.S. person has:
- an interest (is the account owner)
- has signature authority (regardless of being the owner)
- or any other interest (such as ability to control the movement of funds),
and the combined value of all foreign accounts in which there is any kind of interest is in excess $10,000 on any given day during the year, they must be in compliance. It is required that the U.S. taxpayer mark the box “yes” to such a foreign account question and be sure to file U.S. Treasury form FinCEN 114 and also will need to note on the following line which countries these accounts are located.
Additionally, if a person is treated as having more than a 50% interest in a foreign trust the U.S. person will be treated as having a reportable financial interst in the foreign trust accounts. This will also apply to U.S. persons who are considered the economic grantor / settlor of a foreign grantor trust. Additionally, if a U.S. person received a distribution from a foreign trust or was the grantor / settlor of a foreign trust they will also be required to mark box 8 as yes and will need to file IRS Form 3520.
What is the U.S. taxation of foreign trusts?
IWTA’s answer to the question, “What is the U.S. taxation of foreign trusts?”
The income from a foreign grantor trust is taxable to to the grantor / settlor (i.e., the person who economically established the trust). The net taxable income of a foreign nongrantor trust (also known as distributable net income) must be computed under U.S. tax rules and a U.S. person who receives a distribution from the trust will be subject to taxation of their proportionate share of the distributable net income and any accumulated income received.
The beneficiary should receive a foreign nongrantor trust beneficiary statement from the trustee which will provide the amount and types of income which are reportable and taxable. Any accumulated income (also known as undistributed net income), if received, should be disclosed on the beneficiary statement and will be subject to ordinary tax rates regardless of the type of income. It will also be subject to a five-year average tax rate and penalties.
Answer the following yes or no questions to determine if the trust is a foreign or U.S. trust and what are your filing requirements.
1. Is the applicable law of the trust, which can be found in the trust agreement / instrument, of a non-U.S. jurisdiction?
2. Are any of the substantial decisions of the trust (see our foreign trust FAQs) controlled by a foreign person(s)/non-U.S person(s)?
3. Is the trust a revocable trust?
4. Are distributions only allowed to be made to the settlor or the settlor's spouse?
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