Foreign Trusts: Grantor & Non-Grantor
A trust settled abroad, or one that moved abroad, carries some of the heaviest reporting in the U.S. system. The classification of the trust decides who is taxed and on what.
We advise U.S. grantors, trustees and beneficiaries of foreign trusts: classification, distributions, offshore asset protection structures and the forms that keep penalties away.
The penalties are percentages, not fixed amounts.
A U.S. person who creates or transfers property to a foreign trust is usually treated as its owner, taxed on all of its income, and must ensure Form 3520-A is filed each year.
A U.S. beneficiary of a foreign non-grantor trust is taxed on distributions, and accumulated income carries an interest charge under the throwback rules.
Form 3520 reports creation, transfers and distributions. The penalty for a missed distribution report is 35 percent of the amount. For a missed 3520-A, the greater of $10,000 or 5 percent of trust assets.
Foreign trust reporting in numbers.
From the IRS instructions for Forms 3520 and 3520-A.
Penalties can be abated for reasonable cause. A trustee’s failure to provide information is not by itself reasonable cause. Sources: IRS, Instructions for Form 3520; IRS, Instructions for Form 3520-A; IRS, Foreign Trust Reporting Requirements and Tax Consequences.
What we do with foreign trusts.
Grantor or non-grantor
The tests that decide classification, and how it changes when the grantor dies or moves.
Offshore asset protection trusts
Design and settlement of foreign trusts for protection, with the U.S. tax and reporting built in.
Distributions to U.S. beneficiaries
Planning distributions to limit throwback tax and interest, with the beneficiary statements that support them.
Forms 3520 and 3520-A
Annual filings by grantors, beneficiaries and trustees, including substitute 3520-A filings.
Missed filings and penalty defense
Reasonable cause, streamlined and voluntary disclosure submissions, and responses to penalty notices.
Domestication and migration
Moving a trust into or out of the United States, and the deemed sale rules that can apply.
How a foreign trust matter runs.
Classification first, because the forms and the tax follow from it.
Documents
Trust instrument, trustee statements, distribution history and prior filings reviewed.
Classify
Grantor or non-grantor status determined for each year, with the owner identified.
Compute
Income, distributions, accumulated income and any interest charge.
File
Current forms filed; prior years corrected under the right procedure.
Lawyers who plan the structure and defend it.
Structure before the move, the investment or the sale.
Residency timing, entity choice, trusts and elections are decided together, with the home-country result in view. We coordinate with your accountants and counsel abroad so the plan works in both places.
Compliance and controversy in the same hands.
Foreign asset reporting, penalty exposure, streamlined and voluntary disclosures and IRS examinations. The firm also litigates and arbitrates, so a plan is written knowing how it will be tested.
A 35 percent penalty applies to amounts, not to the tax on them.
The report is required even when no tax is due.
- Obtain annual statements from the trustee every year
- File Form 3520 for every distribution, transfer and large foreign gift
- Ask the trustee to file Form 3520-A, or file a substitute yourself
- Plan distributions before they are made
- Assume a protective trust abroad has no U.S. filing
- Move a U.S. trust offshore without reviewing the deemed sale rule
- Receive a large distribution from a non-grantor trust without a beneficiary statement
- Wait for a penalty notice to address missed years
From the firm’s writing.
Triggering Capital Gains with Offshore Trusts
The deemed sale rule when assets move to a foreign trust.
Read the articleTrust Planning for Non-U.S. Parents with U.S. Children
Distributions to U.S. beneficiaries during and after the grantor’s life.
Read the articleForeign Trust Reporting for U.S. Children: Attorney Guide
Who reports a foreign trust distribution.
Read the articleFrequently asked.
A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control all substantial decisions. Fail either test and it is foreign, regardless of where the trustee sits or what law it was drafted under.
In a grantor trust, the grantor is taxed on all of the trust’s income as if they owned it directly. In a non-grantor trust, the trust or its beneficiaries are taxed. A U.S. person who funds a foreign trust with U.S. beneficiaries is nearly always treated as grantor.
Rules that tax distributions of income accumulated in prior years by a foreign non-grantor trust. The income is taxed at the beneficiary’s rates for the years it was accumulated, with an interest charge, and capital gains lose their preferential rate.
The foreign trust itself, through its trustee. If the trustee does not, the U.S. owner must file a substitute Form 3520-A with their own Form 3520. The penalty for failure falls on the U.S. owner.
For the right client, yes. It is a legitimate structure when funded with assets not subject to existing claims and reported correctly. The reporting is demanding and the trustee relationship matters. We design the structure and the compliance together.
Other areas of the practice.
Inbound and outbound services, from pre-immigration planning to offshore compliance. Back to the overview.
A foreign trust in your family or your plan?
A confidential consultation. We will tell you how the trust is classified, what must be filed and what the distributions will cost.