Nongrantor Trust and Form 3520
Nongrantor Trust and Form 3520: When most U.S. persons refer to trusts, they are generally referring to a basic grantor trust. With a grantor trust, the grantor retains power over the trust. For example, if a person owns a home and decides to put it into a trust, they form a revocable trust. The grantor or creator of the trust is able to control, change, or modify the trust. From an IRS perspective, the owner is taxed on any income attributed to the trust. For example, if the home then becomes a rental home and generates income, the grantor owner of the property is attributed the income and pays tax by reporting it on their tax return. In other words, the trust is not a separate identity from the grantor.
A grantor trust is reported on Form 3520.
A non-grantor trust is different, but they may still have a Form 3520 filing requirement.
What is a Nongrantor Trust
With a nongrantor trust, the assets are not treated as owned by the grantor. There are many, many technicalities, exceptions and limitations but the general rule is that the nongrantor no longer owns, and can no longer control the asset — that is left up to the trustee.
For example, with a nongrantor trust, the owner of the home would place the asset into a trust in which they no longer control.
The nongrantor trust controls the asset, not the person who placed them into the trust — in this case, the trust is a separate entity.
As provided in the Form 3520 instructions:
- “Nongrantor Trust 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 under the grantor trust rules in sections 671 through 679. 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.”
What does this Mean?
It means that even through a trust is grantor trust, portions of the trust may be designated as nongrantor trust.
Is the Nongrantor Trust Reported on Form 3520?
The form 3520/3520-A is for foreign trusts with ownership or other transactions associated with a U.S. Person.
If the trust is a foreign nongrantor trust in part or whole, then it may still have to be reported on the Form 3520 or 3520-A in situations in which there is a U.S. person trustee, U.S. person beneficiary who received a distribution and/or other transfers or transactions between the foreign nongrantor trust and U.S. person.
International Tax Law Specialist Team: Golding & Golding
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