You own a foreign trust.Certain transactions occur with your foreign trust.You received a large gift or inheritance from outside the U.S. - You own a foreign trust.
For example, imagine you inherit a trust fund from a grandparent who was a citizen of a foreign country. That trust fund could hold real estate, stocks, bonds, or other assets. As a beneficiary of the trust and a U.S. taxpayer, you report this foreign trust by providing details like the trust’s name, address, and value. Inheriting the foreign trust isn’t a requirement. If you set it up yourself, you’ll need to report your ownership status.
- Certain transactions occur with your foreign trust.
You need to report distributions or any income you receive during the tax year from the trust.
Report transactions like:
- Distribution of Principal – If you receive periodic withdrawals or a lump sum payment as part of the trust’s planned or unplanned distributions, report these transactions on Form 3520.
- Distributed Income – Report distributions of interest, dividends, or rents generated from any asset held in the trust, such as bonds, stocks, real estate, or other investments.
- Payment of Foreign Taxes – You may be eligible to claim a tax credit for taxes paid on income from the trust.
- Bequests or Gifts from the Trust – Report property transfers, cash gifts, or other assets given out of the trust’s assets.
- You received a large gift or inheritance from outside the U.S.
The large gift or inheritance need not be in the form of a trust fund for you to file Form 3520. For example, if your cousin transfers the deed to a South American property to you, your European aunt sends you a valuable painting, or you inherit your U.S. grandparents’ house. If any of these gifts are worth over $100,000 U.S., it’s time to file Form 3520. If you receive the gift from a partnership or corporation and not an individual, the triggering amount reduces to $15,601 instead of $100,000.
Form 3520 and Form 3520A Instructions
If you manage but don’t own a foreign trust with U.S. beneficiaries, Form 3520A is how the trust itself reports transactions. You might need to file both forms – 3520 reports your ownership and you file Form 3520A on behalf of the trust itself.
When to File
The general guidelines say to file Form 3520 by the 15th day of the fourth month after the end of your tax year – which usually means April 15th. Extensions may be granted until the 15th day of the tenth month – or October 15th. If December 31st is not the end of the tax year for your organization, count the months from your year-end. This is not necessarily the same as the due date of your personal income tax return, so check carefully.
What happens if you miss the filing deadline or don’t file correctly?
You may be looking at a fine of the greater of $10,000 or 5 to 35 percent of the value of what you failed to report if you don’t file or don’t do so correctly.
Takeaways
- The IRS requires Form 3520 if you manage or own a foreign trust.
- The same form reports the details of large gifts from abroad.
- Check to see if you are responsible for filing Form 3520A since you may need to file both.
- File on time and correctly, or you may be looking at some hefty fines.
Still wondering if you should or how to complete Forms 3520 and/or 3520A? Reach out to the tax experts at Bench for guidance.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
