Expatriates Tax Considerations for Non Residents: Transactions With Foreign Trusts

Expatriates Tax Considerations for Non Residents: Transactions With Foreign Trusts
April 24, 2013

As a US citizen or resident alien, you are required to report all your worldwide income on your US expatriates tax return no matter where the source of your income is located. Many forms covering expatriates tax for non-resident citizens are designed to make sure US taxpayers comply with income reporting requirements.

As more taxpayers looked beyond US shores for ways to avoid or defer US income tax, tax forms expanded to stretch out the hands of US tax compliance reporting. One set of foreign tax compliance forms the US adopted is Form 3520-A/3520.

A US Foreign Trust Owner’s Filing Obligations

You may have noticed a question at the bottom of your Schedule B (“Schedule of Interest and Ordinary Dividends”) that requires you to answer “Yes” or “No” to reveal any transactions you have with a foreign trust. The question is there as part of the ever-reaching US tax compliance rules. You should presume that a “Yes” answer on Schedule B will be cross-checked with any 3520 you are required to file.

A foreign trust that has at least one US owner completes Form 3520-A with the information that the owner needs to complete his Form 3520. The due date to file Form 3520-A is March 15 for most trusts, and the due date for Form 3520 is the due date of the filer’s tax return. Penalties of $10,000 or more can apply to both the foreign trust and those who are required to file Form 3520 for failing to file. The IRS can decide to abate these penalties if you can show reasonable cause.

Who Else Must File Form 3520

A US owner of a foreign trust is not the only one who is required to file Form 3520. You also must file Form 3520 if you are a US citizen or resident alien and one of the following situations applies to you:

  • You have certain transactions with foreign trusts
  • You are an owner of a foreign trust
  • You receive certain large gifts or bequests from certain foreign persons.

If you meet any requirement for more than one foreign trust, you have to file a 3520 for each trust.

There are three types of transactions that would give you 3520 filing requirements in the year these transactions occur. One is if you transfer money or other property, directly or indirectly, to a foreign trust.

The second type of transaction is any direct or indirect distribution you receive from a foreign trust. The distribution can be cash or other property and can be an actual or constructive distribution.

The third type of transaction that requires you to file a 3520 is if your related foreign trust held an outstanding obligation that you or a person related to you issued and that you treat as a qualified obligation, or if you hold a qualified obligation owed to you by a related foreign trust. If these obligations involve your related trust and you, your family member, or your corporation, you are required to file Form 3520.

You must also file a Form 3520 if you received a gift in the current year that fits either one of the following descriptions:

  • A gift or bequest of more than $100,000 from a non resident alien individual or foreign estate
  • A gift of more than $14,375 (may be adjusted for inflation) from a foreign corporation or foreign partnership.

Receiving these gifts and bequests from a person related to a non resident alien or foreign corporation or foreign partnership does not let you sidestep the 3520 rules. You still have to file Form 3520 to report the gift or bequest received from the related party.

Certain estates of US decedents file Form 3520, as do some foreign retirement plans. Under US pension rules, foreign pensions are often classified as nonqualified plans and therefore may be foreign trusts. In that case, the trust and the owner have 3520-A and 3520 filing requirements. Canadian RRSP and RRIF plans may be excluded from 3520-A and 3520 filing requirements if you are eligible to file Form 8891.

If you are involved with a foreign trust or received gifts that fall with the 3520 filing requirements, you should make sure your 3520 filing requirements are met. Proper filing may require accurate interpretation and application of the technical rules regarding US tax for non residents, and you may need professional tax help.

Questions About Expatriates Tax, Foreign Trusts or Foreign Gifts?

It is important to make sure you meet all your US tax filing requirements when you are living abroad, so please contact us if you have any questions.

The IRS tax code is 7,000 pages. Want the cliff notes version for expats? Let us help.
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