Foriegn Trust Reporting Requirements

Foreign Trust Reporting Requirements

Although there are legitimate reasons why a U.S. person might create a foreign trust, or have transactions with a foreign trust, they can have tax consequences and result in filing responsibilities as well. Regardless of your motivation, failure to meet these reporting and filing requirements can result in very significant penalties. General Rules In general, the reporting rules apply to a U.S. person who: Creates a foreign trust Transfers any money or property to a foreign trust Receives a distribution from a foreign trust Is treated as the U.S. owner of a foreign trust. Tax consequences can apply to the U.S. owners and U.S. beneficiaries of foreign trusts, and to the foreign trust itself. Reporting Requirements and Tax Consequences Information Returns Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Who must file Form 3520? There are several situations in which a Form 3520 (or statement with similar information) is required to be filed. The most common circumstances are where a U.S. person: Creates or transfers money or property to a foreign trust Receives (directly or indirectly) any distributions from a foreign trust Receives certain gifts or bequests from foreign entities Form 3520 Instructions have more detailed information about who must file a Form 3520; when, where, and possible penalties for late or incomplete filing. Form 3520-A – Annual Information Return of Foreign Trust with a U.S. Owner. This form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. personwho is treated as an owner of any portion of the foreign trust. Who Must File Form 3520-A?  Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. Instructions to Form 3520-A have more detailed information about who must file a Form 3520-A; when, where, and possible penalties for late or incomplete filing. Other Possible Reporting Requirements Form 1040, Schedule B, Part III, Foreign Accounts and Trusts must be completed if you receive a distribution from, or were grantor of, or a transferor to a foreign trust TDF 90-22.1: Report of Foreign Bank and Financial Accounts – You might have to file this form if you have a financial interest in or signature authority over an account associated with a foreign trust. Form 709 Gift Tax Return. A U.S. person who transfers money or property to a foreign trust may be required to file Form 709 United States Gift (Generation Skipping Transfer) Tax Return. See the Instructions for Form 709 for further information. Form 1040NR – A foreign trust , which is not taxed to a U.S. owner as a grantor trust, may be obligated to file a Form 1040NR to pay U.S. tax on certain U.S. sourced income. See Publication 519 and the Instructions for Form 1040NR for additional information. Income Tax Consequences U.S. owner of a foreign trust – In general, the U.S. owner of a foreign trust is taxed on the income of that trust. A U.S. person is treated as the owner of a foreign trust under the grantor trust rules of Internal Revenue Code sections 671-679, which includes someone who transfers assets to a foreign trust which has a U.S. beneficiary of any portion of the trust. *Each U.S. owner should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3), which includes information about the foreign trust income they must report. U.S. beneficiary of a foreign trust – In general, the U.S. beneficiary of a foreign trust will report their share of foreign trust income to the extent it is not reported by the transferors to the trust under the grantor trust rules. The U.S. beneficiary should receive a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, or a Foreign Non Grantor Trust Beneficiary Statement which includes information about the taxability of distributions they have received and foreign trust income they must report. U.S. transferor of assets to a non grantor foreign trust – Internal Revenue Code section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust. See the Instructions for Form 3520-A for additional information. Compliance Issue Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore. A specialized industry has developed in attempting to circumvent these provisions. The promoters of offshore schemes often advance technical arguments which purport to show that their scheme is legal. These arguments are used to provide some comfort to their clients, who are then induced to enter into a scheme which usually involves concealing the true ownership and control of assets and income. The filing and reporting responsibilities discussed here also apply to the beneficial owners of foreign trusts as well. The term beneficial ownership applies to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises. For more information about offshore tax schemes just click on the following link: Abusive Offshore Tax Avoidance Schemes Additional Information about any of the foreign trust reporting requirements and related income tax consequences is available by clicking on the relevant links throughout the article.

Gifts from Foreign Person

If you are a U.S. person who received foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax.  However, there are significant penalties for failure to file Form 3520 when it is required. General Rule:  Foreign Gifts In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income.  A “foreign person” is a nonresident alien individual or foreign corporation, partnership or estate. The IRS may re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income.  Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons.   A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person. Reporting Requirements You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest.  Include on Form 3520: Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).  You must aggregate gifts received from related parties.  For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000.  Report them in Part IV of Form 3520.  Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520. File Form 3520 separately from your income tax return.  The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions.  You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year.  See the Instructions for Form 3520 for additional information.  Under a new law effective June 17, 2008, gifts from individuals who ceased to be a U.S. citizens or green card holders (lawful permanent residents) on or after June 17, 2008 may be subject to special rules.  Refer to the 2008 Instructions for Form 3520 for additional information. Where to File Form 3520 Mail Form 3520 to the following address: Internal Revenue Service Center P.O. Box 409101 Ogden, Utah 84409 Penalties for Failure to File Form 3520 You may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate.  Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).  References: Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Instructions to Form 3520