When Is a Gift From a Trust Reported on IRS Form 3520

When Is a Gift From a Trust Reported on Form 3520?

When Is a Gift From a Trust Reported on Form 3520

When Is a Gift From a Trust Reported on Form 3520: Oftentimes, when for example a family member creates a foreign grantor trust, it is merely just an extension of the Grantor. In other words, the person who created the revocable trust does not typically consider themselves to own something separate and distinct — but rather it is just another way that they can hold their money. And, from a US tax perspective, a grantor trust is not distinct from its owner. But, from an IRS Form 3520 reporting standpoint, it can get complicated — because the threshold requirement for a US Person to report a gift that someone receives from a foreign person is different than a distribution that comes out of a foreign trust — even if it is from the same person. Let’s explore the basics of 1 as a gift from a trust reported on form 3520?

Gift from an Individual Form 3520 Threshold

When a US person receives a gift from a foreign person, the US person does not have to report the gift on form 3520 unless the value exceeds $100,000. It does not have to be a single gift, but rather can be a series of transactional gifts from the same person — and related person rules would apply.

Foreign Trust Distribution Form 3520 Threshold

When it comes to reporting a foreign trust distribution to a US person, the rules are different. In fact, there is no minimum threshold requirement for having to report a distribution from a foreign trust. In a common scenario, a parent or grandparent with a foreign trust wants to give a gift to a US person, but for one reason or another, they prefer to distribute it out of the trust — as opposed to giving the gift as an individual.

Example: Let’s say the value of the distribution is $95,000. While the $95,000 gift would be below the more than $100,000 threshold requirement if the gift was being given by a foreign individual — since the “gift” is actually a distribution from a foreign trust — there is no reporting requirement. Therefore, the full $95,000 has to be reported on Form 3520 as a trust distribution.

A Little Form 3520 Planning Goes a Long Way

In conclusion, if a foreign person has a foreign trust and wants to give a gift to a US person, then it is important to determine the value of the distribution(s) — and whether or not it will serve as a catalyst for starting the 3520 reporting requirement. Even if a US person missed the reporting requirements, they may still be able to file retroactively and avoid penalties — abate penalties already issued — using voluntary disclosure and/or reasonable cause.

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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Form 3520 penalty abatement.

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