3520 Rules For Foreign-Owned Domestic Trust Distributions to US Person
Foreign-Owned Domestic Trust Distribution to US Person & Form 3520: One of the most complicated aspects of international tax law involves tax and reporting of foreign trusts. The US government — and IRS in particular — are not big fans of trusts involving foreign persons. That is because the IRS is usually of the opinion that these trusts are oftentimes used to artificially avoid U.S. tax requirements. Therefore, the Internal Revenue Service requires significant reporting of foreign trust and gift transactions from foreign persons that involve US persons and/or domestic trusts. So what happens when a domestic trust is owned by a foreign person and makes a distribution to a US Person — how is it reported? Let’s go through the basics of the Form 3520 rules for foreign-owned domestic trust distributions to US Persons.
Foreign-Owned Domestic Trust
When a domestic trust is owned by only US persons, then form 3520 would presumably not ordinarily apply. That is because a Form 3520 is used when a US person owns a foreign trust. But, what happens when a domestic trust receives a contribution from a foreign person — In other words, technically, that could be described as a US person (e.g., trust) receiving a gift (contribution) from a foreign person.
A key distinction is whether or not the domestic trust is owned by a foreign person or US person. This will impact the Foreign-Owned Domestic Trust reporting rules for Form 3520.
As provided by the IRS:
“A domestic trust that is treated as owned by a foreign person is not required to report the receipt of a contribution to the trust from a foreign person.
However, a U.S. person should report the receipt of a distribution from a domestic trust that is treated as owned by a foreign person as a gift from a foreign person in Part IV, rather than as a distribution to a U.S. person in Part III.”
What does this mean?
It means that when a domestic trust is owned by foreign person, then the domestic trust is not required to report the receipt every contribution made from the foreign person into the domestic trust. But, if a foreign-person owned domestic trust and makes a distribution to a US Person, the US person should report the distribution as a gift from a foreign person under part IV instead of Distribution to a US person from a foreign trust under Part III.
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