Foreign trusts: taxes and compliance tips for US taxpayers
If you’re a US citizen or resident who owns, benefits from, or contributes to a foreign trust – such as a foreign pension plan, or a family estate trust set up abroad – you’re likely dealing with a complex set of reporting obligations. Whether you’re planning to set up a trust or already receiving distributions, read on for tax information and compliance tips related to foreign trusts.
This article is brought to you by Taxes for Expats (TFX) – a top-rated tax firm serving US citizens, residents, and anyone with US tax obligations, both at home and abroad. Are you a grantor or beneficiary of a foreign trust? Have questions about tax requirements? We’re here to assist you – learn more about our tax services or contact us.
What is a foreign trust?
For US tax purposes, the Internal Revenue Service (IRS) defines a foreign trust as any trust that fails to meet both of the following tests:
- Court test – A US court must be able to exercise primary supervision over the administration of the trust.
- Control test – One or more US persons must have the authority to control all substantial decisions of the trust.
If either test is not satisfied, the trust is classified as foreign.
In other words, a foreign trust is any trust not primarily supervised by a US court or not fully controlled by US persons. This means that to classify your trust structure correctly for tax purposes you must examine court authority and control.
A common example of a foreign trust is a retirement or superannuation fund established under foreign law – such as an Australian super fund or a UK pension plan – where a US taxpayer is a contributor or beneficiary, but the fund is administered outside the United States.
Importantly, what qualifies as a foreign trust is not always obvious. It’s not just about location — many foreign entities classified as trusts for US tax purposes wouldn’t be treated as such if they were domestic. For instance, a significant number of foreign pension funds fall under the definition of foreign trusts. In contrast, US pension accounts, while trust-like in structure, are not treated as trusts for tax reporting purposes.
Reid Kopald, enrolled agent (EA) and tax manager at Taxes for Expats
Who is considered an owner of a foreign trust?
Under the grantor-trust rules (IRC 679), if a US person transfers property to a foreign trust that has (or is presumed to have) at least one US beneficiary, the transferor is treated as the owner of the portion of the trust funded by that property.
Types of foreign trusts
Foreign trusts come in many forms, and their classification directly affects your tax obligations and filing requirements if you’re involved with one.
Grantor and non-grantor trusts
- Grantor trust: The grantor (person who created or contributed assets to the trust) retains control or benefit from the trust’s income or assets. The grantor reports trust income on their personal US tax return.
- Non-grantor trust: The trust is treated as a separate taxable entity. The trustee (often a non-US person) is responsible for trust income, while US beneficiaries may be taxed only on distributions.
Revocable and irrevocable trusts:
- Revocable: The grantor can revoke or amend the trust. Usually treated as a grantor trust.
- Irrevocable: Cannot be changed once established. These are typically non-grantor and subject to complex reporting and potential US tax exposure.
Discretionary and fixed trusts:
- Discretionary trusts: Trustees have discretion over whether to distribute income or principal to beneficiaries.
- Fixed trusts: Beneficiaries are entitled to specific amounts or shares.
US tax implications of foreign trusts
If you're a US person involved with a foreign trust, the IRS holds you to specific and often complex tax rules – whether you're a grantor, beneficiary, or transferor.
Grantor rules
Under Internal Revenue Code (IRC) 679, when a US person transfers property to a foreign trust that has at least one US beneficiary, the IRS treats the transferor as the owner of that portion of the trust for US tax purposes.
This means you're responsible for reporting all income, deductions, and credits tied to that trust on your Form 1040, even if you don't receive any distributions or cash. The trust’s activity becomes effectively yours from the IRS’s perspective.
Example – Swiss family inheritance trust: A US citizen contributes personal assets into a Swiss trust that will benefit their children, all US persons. Even though the trust is set up abroad and may not make distributions for years, the grantor must report the trust income yearly, since US beneficiaries exist.
Beneficiary rules
If you're a beneficiary, your tax obligation is based on distributions received. For non-grantor foreign trusts, distributions may be subject to accumulation distribution rules, which apply when the trust distributes previously accumulated income.
This can trigger the throwback tax, a regime that taxes the income as if it had been distributed in earlier years along with interest charges for deferred tax. These rules aim to prevent deferral of US tax through offshore structures.
Example – UK pension trust inheritance: A US resident inherits a stake in a British pension trust established by a UK relative. When the trust makes a distribution, it includes income earned over multiple years. Since this income wasn't previously taxed in the US, the throwback tax regime kicks in.
Gift and estate tax exposure
- Gift tax: Transferring assets to a foreign trust may require gift tax reporting.
- Estate tax: If you're a US citizen or resident at death, foreign trust assets you funded or retained control over may be included in your taxable estate.
IRS reporting requirements
US persons must comply with strict reporting requirements for foreign trusts. The key forms are:
| Form | Who files it | Purpose |
|---|---|---|
| Form 3520 | US owners, beneficiaries, and transferors | Reports transactions with a foreign trust, including contributions and distributions |
| Form 3520-A | The foreign trust (or US owner if trust doesn’t file) | Provides annual information about the trust and its US owners |
| Form 8938 | US taxpayers with foreign financial assets | May include foreign trust interests if value thresholds are met |
| FBAR (FinCEN 114) | US persons with foreign financial accounts over $10,000 | Required if trust accounts are accessible or reportable |
Form 3520-A is typically due by March 15 of the following year. Form 3520 is due with your individual tax return (including extensions).
Who must file Form 3520?
File one Form 3520 per trust if you:
- You transferred money or property to a foreign trust.
- You are the grantor, owner, or transferor.
- You received a distribution from the trust.
- You have signature authority or financial interest.
- You are owed or owe a qualified obligation.
- You received a gift or bequest: over $100,000 from a nonresident or foreign estate, or over the threshold from foreign corporations/partnerships (check IRS Rev. Proc. for current amount).
Failure to report foreign trust relationships can trigger penalties of $10,000 or more per missed form.
FATCA and FBAR compliance
If your foreign trust (alone or combined with other foreign accounts) exceeds $10,000, you must file an FBAR (FinCEN 114). This is separate from FATCA reporting (Form 8938) and applies even if the account generates no income.
Need help navigating foreign trust rules?
Are you an owner, beneficiary, or contributor to a foreign trust? Confused about IRS reporting requirements or which forms you need to file? At Taxes for Expats, we help US taxpayers around the world stay compliant with foreign trust reporting. Book your free discovery call – we’ll review your situation and guide you through your next steps.
