- 1 Foreign Grantor Trust vs Non-Grantor Trust
- 2 What is a Foreign Grantor Trust?
- 3 What is a Foreign Non-Grantor Trust?
- 4 Grantor vs Non-Grantor & Forms 3520/3520-A
- 5 Reportable on Form 3520-A?
- 6 IRS Guidance on Form 3520-A
- 7 Form 3520-A Filing Tips to Avoid Penalties
- 8 Foreign Gift, Trust, and Inheritance Tax Specialist Team
Foreign Grantor Trust vs Non-Grantor Trust
What is a Foreign Grantor Trust vs. Non-Grantor Trust: One common question we receive is:
“What is the difference between a grantor trust vs non-grantor trust for Forms 3520 and 3520-A?”
While foreign trust reporting law in general can be complicated, it is important understand the basics of these two different types of trusts.
And, with the Internal Revenue Service significantly increasing the compliance enforcement of foreign trusts and Forms 3520 and 3520-A, compliance is important to avoid offshore penalties.
We will summarize the IRS reporting requirements for foreign grantor vs non-grantor trusts on forms 3520 and 3520-A.
What is a Foreign Grantor Trust?
At the most basic-level, the grantor trust is a trust that is owned by the grantor, and therefore the grantor is deemed the “owner” of the assets in the trust.
For example, if Jeanine has a home overseas she owns and wants to place in trust, she may create a revocable grantor trust.
In thais scenario, the trust is owned by Jeanine, and she would be deemed the grantor of the trust.
Since Jeanine, is the owner of the trust, the asset and income associated with the trust is attributed to her personally.
So, if Jeanine decides she wants to sell or rent the property, and income generated from the grantor trust asset (the house) would be attributed to her.
What is a Foreign Non-Grantor Trust?
The non-grantor trust is more complicated.
In a non-grantor trust scenario, the owner of the property (in theory at least) is no longer deemed the owner of the property and has relinquished control.
As a result, the owner of the property has given up their right to the property, which is now owned by the trust.
In a non-grantor trust scenario, the trustee will be the only party able to administer the income, assets, etc.
Of course, there are many planning techniques used to manipulate the control of the prior owner of the property (because who really wants to give up all control), but in essence, the owner of the property no longer controls it.
Grantor vs Non-Grantor & Forms 3520/3520-A
The form 3520 is used to report various type of gift and trust transactions.
As provided by the IRS:
“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.”
Therefore, if the trust is a grantor trust, then generally a person who has any ownership of assets in a foreign trust would have to complete the form 3520 to the extent they have any ownership.
If it is a foreign non-grantor trust with no U.S. owners, it may not have to be reported on Form 3520 unless the U.S. person transferred money or assets into the trust, received a distribution, or meet any of the other 3520 requirements.
Reportable on Form 3520-A?
The Form 3520-A is used to report an Annual Information Return of Foreign Trust With a U.S. Owner. The Form 3520-A is more comprehensive and detailed than the 3520.
As provided by the IRS:
“A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).
Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.
If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year) in order to avoid being subject to the additional separate penalty for the foreign trust’s failure to file a Form 3520-A.”
Therefore, unless there is a U.S. owner of the foreign trust, the 3520-A would not generally be required. But, it is important to note that the IRS may deem a portion of a foreign trust a grantor trust, and the other portions non-grantor, which would then require reporting:
As further provided by the IRS:
A nongrantor trust is any trust to the extent that the assets of the trust are not treated as owned by a person other than the trust. Thus, a nongrantor trust is treated as a taxable entity.
A trust may be treated as a nongrantor trust with respect to only a portion of the trust assets. See Grantor Trust above.”
IRS Guidance on Form 3520-A
The IRS recently published and updated a helpful tip guide for reporting on Form 3520-A. It has been reproduced below:
“The Internal Revenue Service would like to remind all U.S. owners of a foreign trust and their return preparers of the filing requirements for Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (Under section 6048(b)). See the Instructions for Form 3520-A for more information.
- Who must file. A foreign trust with a U.S. owner must timely file a complete and accurate Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries in order for the U.S. owner to avoid penalties for the foreign trust’s failure to file a Form 3520-A. If a foreign trust fails to timely file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to Part II of Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and furnish the required annual statements by the due date of Form 3520.
- When to file. A Form 3520-A must be filed by the 15th day of the third month after the end of the trust’s tax year. For example, a foreign trust with a tax year ending December 31, 2020, must file a Form 3520-A by March 15, 2021. However, if the U.S. owner files a substitute Form 3520-A with the owner’s Form 3520, then the substitute Form 3520-A is due by the due date of the U.S. owner’s Form 3520 and not the due date of for the Form 3520-A. A Form 3520 is due by the 15th day of the fourth month following the end of the U.S. owner’s tax year, or April 15th for calendar year taxpayers (with extensions).
- Extension of time to file. An automatic 6-month extension of time to file Form 3520-A may be granted by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, with the foreign trust’s Employer Identification Number (EIN) by the 15th day of the third month after the end of the trust’s tax year. Caution: A Form 7004 for a foreign trust cannot be processed if it has the U.S. owner’s Social Security number (SSN). In addition, an extension of time to file an income tax return will not provide an extension of time to file Form 3520-A.
- Use EINs to identify the foreign trust. Only an EIN should be used to identify the foreign trust in Part I, Line 1b of Form 3520-A. If the foreign trust does not have an EIN, refer to How to Apply for an EIN. Caution: Do not enter the U.S. owner’s SSN or individual taxpayer identification number (ITIN) in line 1b.
- Where to file. File Form 3520-A and Form 7004 with Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. File Form SS-4 with the Internal Revenue Service Center, Attn: EIN Operation, Cincinnati, OH 45999 or by fax at 855-641-6935.
- Exceptions from Form 3520-A filing requirements. A Form 3520-A is not required to be filed for Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs). See Rev. Proc. 2014-55 (PDF). In addition, a Form 3520-A is not required to be filed for certain tax-favored foreign retirement trusts or tax-favored foreign non-retirement savings trusts, provided that the U.S. owner is an “eligible individual” and the tax-favored foreign trust meets certain requirements. See Rev. Proc. 2020-17 (PDF). Caution: These exceptions do not affect any reporting obligations that the U.S. owner may have to report specified foreign financial assets on Form 8938 or any other reporting requirement, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
- Form 3520 filing requirements. In addition to ensuring that the foreign trust files Form 3520-A, a U.S. owner may be required to file a Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See the Instructions for Form 3520 for more information.
Form 3520-A Filing Tips to Avoid Penalties
- File Form 3520-A using an EIN for the foreign trust on Line 1b of the form rather than the U.S. owner’s SSN or ITIN. If the foreign trust does not have an EIN, refer to How to Apply for an EIN.
- File by the 15th day of the 3rd month after the end of the trust’s tax year. An automatic 6-month extension may be granted by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns. Form 7004 must be filed with the foreign trust’s EIN.
- If the foreign trust will not file a Form 3520-A, the U.S. owner of the foreign trust must file a substitute Form 3520-A by completing a Form 3520-A to the best of their ability and attaching it to a timely filed Form 3520, including extensions (see Form 3520-A and Form 3520 instructions for more information on filing a substitute Form 3520-A). Do not separately file a duplicate Form 3520-A if you are filing a substitute 3520-A.”
Foreign Gift, Trust, and Inheritance Tax Specialist Team
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.
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