Beneficial Interest & Ownership in Foreign Trust
Reporting Foreign Trusts: Beneficial Interest or Ownership: When it comes to the US reporting of foreign assets, accounts and investments — one of the more difficult reporting aspects of IRS offshore compliance is when it comes to filing the annual foreign trust statements. That is because of the inherent complexity of the relationships involving a foreign trust — and the IRS reporting requirement for reporting foreign trusts in general. Whereas a bank account can be as simple as one person putting some money into the bank and just leaving it there, a foreign trust is much more complicated. There is a Grantor/Trustor, the Administrator or trustee, and the beneficiary.
And, especially when the trust is comprised of both US persons and non-US persons, there may be an overall confusion amongst the participants as to what needs to be reported to the US government for the foreign trust — and most importantly, whose responsibility is it to report it.
Let’s go through some of the basics of form 3520 and 3520-A annual reporting requirement for trusts.
Form 3520 for Beneficial Interest and/or Ownership
In accordance with form 3520 there are certain categories of individuals who must file the form if they have a certain beneficial interest or ownership of a foreign trust.
As provided in the introductory portion of the 3520 form:
(a) You are a U.S. transferor who, directly or indirectly, transferred money or other property during the current tax year to a foreign trust,
(b) You are a U.S. person who (1) during the current tax year, transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation, or (2) holds a qualified obligation from the trust that is currently outstanding, or (c) You are the executor of the estate of a U.S. decedent and (1) the decedent made a transfer to a foreign trust by reason of death, (2) the decedent was treated as the owner of any portion of a foreign trust immediately prior to death, or (3) the decedent’s estate included any portion of the assets of a foreign trust. Complete all applicable identifying information requested below and Part I of the form and see the instructions for Part I.
You are a U.S. owner of all or any portion of a foreign trust at any time during the tax year. Complete all applicable identifying information requested below and Part II of the form and see the instructions for Part II. You may also need to complete lines 15 through 18 of Part I if you answered “No” to line 3 and Part III. See the instructions for Parts I and III. (a)
You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who, during the current tax year, received, directly or indirectly, a distribution from a foreign trust, (b) You are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year, you or a U.S. person related to you received (1) a loan of cash or marketable securities, directly or indirectly, from such foreign trust, or (2) the uncompensated use of trust property, or (c) You are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you. Complete all applicable identifying information requested below and Part III of the form and see the instructions for Part III.
Categories of Filers
- If you are US person to transferor who transferred money or property into a foreign trust, then you have to report on form 3520.
- If you are a US person owns any portion of a foreign trust you have to complete form 3520.
- If you have a Beneficial Interest in the Foreign Trust.
These categories can be broken down even further, but these bullet-points represent the gist of what needs to report.
What Information is Reported?
The Form 3520 requires extensive reporting on matters involving trust ownership.
When a foreign trust has a U.S. Agent, it minimizes the amount of documentation that needs to be produced when submitting forms 3520/3520-A.
Transfers by U.S. Person to Foreign Trust
If a US person makes transfers into the foreign trust, then the IRS wants to know the information regarding the individual or non-individual, along with information about the actual transfer.
In addition, if there were any obligations of a related trust were gratuitous transfers, it must be separately identified as well —
U.S. Owner of a Foreign Trust
The US owners of the foreign trust must identify themselves and the relevant information so that the IRS can identify and locate these US person owners. This is true, even if the person resides outside of United States.
Distributions to a U.S. Person
If there are distributions made from the foreign trust to the US person beneficiary, then those distributions must be identified specifically as well.
Form 3520-A Foreign Trusts
While form 3520 is used to report the receipt of a gift or ownership or interest in a foreign trust, the form 3520-A is an informational return that is used to summarize the trust details for the tax year of the trust.
It requires some background information about the filer of the form, and then early on in the form wants to know whether a US agent has been appointed.
When the US agent has been appointed, the IRS does not require as much documentation as it does if a US agent was appointed
Foreign Trust Income Statement
The person completing the form on behalf of the foreign trust is required to provide an income statement regarding the income that was earned by the trust and the expenses that were paid or incurred.
In addition, distributions to US owners must be identified specifically as well.
Foreign Trust Balance Sheet
The Internal Revenue Service will also require the person completing the form to include hey balance sheet, balancing the assets come equities, and liabilities.
Trust Statements by the Owner and Beneficiary
Towards the end of the form 3520-A, the IRS also requires a grantor trust on her statement and grantor trust beneficiary statement.
As provided by the IRS in the actual form 3520-A
Foreign Grantor Trust Owner Statement
Trustee must prepare a separate statement for each U.S. owner and include a copy of each statement with Form 3520-A. Trustee is also required to send to each U.S. owner a copy of the owner’s statement. U.S. owner must attach a copy of its statement to Form 3520
Foreign Grantor Trust Beneficiary Statement
Trustee must prepare a separate statement for each U.S. beneficiary that received a distribution from the trust during the tax year and include a copy of each statement with Form 3520-A. Trustee is also required to send to each such beneficiary a copy of the beneficiary’s statement. Each U.S. beneficiary must attach a copy of its statement to its Form 3520.
Late Filing Penalties
The late filing of Form 3520 may result in fines and penalties. The IRS has procedures in place to assist Taxpayers if they can show reasonable cause and/or were non-willful. If they were willful, the IRS has developed other procedures as well.
Meet our International Tax Law Specialist Team: Golding & Golding
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.
Contact our firm today for assistance with getting compliant.