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Form 3520: Guide on Reporting Foreign Trusts, Inheritances, and Gifts for U.S. Expats

Form 3520: Guide on Reporting Foreign Trusts, Inheritances, and Gifts for U.S. Expats

This article is for informational purposes only and does not constitute legal or tax advice.

Always consult with a tax professional for your specific circumstances.

For U.S. expatriates, understanding the nuances of Form 3520 is not just essential - it's imperative.

This form pertains to the reporting of certain transactions with foreign trusts, ownership of such trusts, and the receipt of significant gifts or bequests from specific foreign entities.

Foreign trusts and U.S. tax liability

Trusts, by nature, are intricate entities. When they have international implications, their complexity multiplies.

It's vital for U.S. expats to discern between foreign grantor and non-grantor trusts.

The tax implications vary based on this classification:

  • with grantor trusts still being controlled by the grantor, 
  • while non-grantor trusts operate independently.

Understanding Form 3520

At its core, Form 3520, "Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts," is an IRS document designed for U.S. persons.

Its primary purpose is to disclose specific interactions with foreign trusts and to report the receipt of certain large gifts or bequests from foreign entities.

Who is obligated to file Form 3520?

  1. U.S. Owners of Foreign Trusts: If the IRS considers you the owner of any assets of a foreign trust under the grantor trust rules, you're required to file.
  2. Recipients of Substantial Gifts or Bequests: This includes U.S. persons who have received gifts or bequests valued at more than $100,000 from foreign individuals or estates, or more than $15,102 from foreign corporations or partnerships.
  3. Engagements with Foreign Trusts: Any U.S. person who has been involved in specific transactions with foreign trusts, such as the creation or funding of such trusts.

Key components of Form 3520 (part by part)

Form 3520 is meticulously structured to capture a spectrum of transactions related to foreign trusts and gifts. Here's an enhanced breakdown:

Part I - Transfers to Foreign Trusts

This section captures information not just on the assets or funds transferred, but also the nature and purpose of the trust, the trustee details, and any beneficiaries.

It's essential to provide a comprehensive overview of the transaction, including dates and amounts.

Part II - U.S. Ownership of Foreign Trusts 

This is where U.S. persons detail their ownership stakes in foreign trusts. This isn't just about stating ownership; it's about providing specifics on the type of trust, its establishment, and any financial benefits or distributions you might be entitled to as an owner.

Part III - Foreign Trust Distributions

This part goes beyond just stating distributions received. It requires a detailed account of the type of distribution, its value, and its source within the trust.

Additionally, any indirect benefits, like the rent-free use of trust property or interest-free loans, need to be documented here.

Part IV - Large Foreign Gifts Received

The part is dedicated to substantial gifts from foreign entities. This isn't just about the value of the gift. It's about understanding the giver's relationship to the recipient, the source of the gift, and any conditions attached.

Whether it's from foreign individuals, estates, corporations, or partnerships, the nature and purpose of the gift, along with its value, are paramount.

Pro Tip: By ensuring each section is filled with precision and detail, you provide the IRS with a clear picture of your foreign financial engagements, reducing the risk of misunderstandings or potential audits.

Form 3520 preview


Key reporting aspects

  • Foreign Trust Engagements: This encompasses the creation of a foreign trust by a U.S. person, any transfers to foreign trusts, and situations where the death of a U.S. citizen involves a foreign trust.
  • Significant Gifts or Bequests: It's crucial to report gifts or bequests that exceed the thresholds set by the IRS.
  • Ownership Details: If you're treated as an owner of any assets of a foreign trust, this needs to be detailed in the form.

"It's not just about understanding your obligations related to Form 3520; it's about ensuring you remain compliant to avoid hefty penalties." - Nate D. (CPA)

Consequences of non-compliance

The IRS doesn't take kindly to non-compliance. Not filing Form 3520 or inaccuracies in filing can lead to severe penalties:

  • The repercussions for not reporting foreign gifts can be a monthly penalty of 5% for every month the form is delinquent, up to a total of 25%.
  • If you don't disclose transfers to foreign trusts, you might face penalties that are greater than $10,000 or 35% of the gross value of the distribution.

Essential tips for U.S. expats

  1. Remain Updated: Tax laws aren't static. They evolve. Regularly consult authoritative sources to stay informed.
  2. Documentation is Key: Ensure you maintain meticulous records of all foreign transactions, gifts, and inheritances. This will be invaluable if the IRS ever questions your filings.
  3. Stay Proactive: Engage with tax professionals early on. Their expertise can guide you through the maze of regulations.

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Bottom line

In conclusion, for U.S. expats, understanding and correctly filing Form 3520 is a critical aspect of financial compliance.

By staying informed, seeking expert advice, and being meticulous in your documentation, you can confidently navigate the complexities of U.S. tax laws. 

Ines Zemelman, EA
Founder of TFX