Form 3520 support — information packages for U.S. owners and beneficiaries

Form 3520 is generally filed by the U.S. person — not by the foreign trustee. However, the information required to complete the return is often held by the foreign trust, trustee, fiduciary or administrator.

An effective reporting process therefore requires a clear interface between the foreign trustee, the U.S. owner or beneficiary, and the U.S. tax return preparer. A structured Form 3520 information package can substantially reduce errors, incomplete reporting and unnecessary follow-up.

1) When can Form 3520 apply?

Form 3520 can apply to several different relationships and transactions involving a foreign trust.

A separate Form 3520 is generally filed for each foreign trust with respect to which the U.S. person has a reportable transaction or ownership interest.

2) Form 3520 is the U.S. person's filing

Form 3520 should be distinguished from Form 3520-A.

In a grantor-trust case, both forms can therefore apply: the foreign trust prepares Form 3520-A, while the U.S. owner separately files Form 3520.

3) What should the trustee provide?

The exact reporting package depends on whether the U.S. person is an owner, beneficiary, transferor or has another reportable transaction with the trust.

4) Support for a U.S. owner

A U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 must generally complete Part II of Form 3520, even where there were no additional transactions with the trust during the year.

If the foreign trust has filed Form 3520-A, the U.S. owner attaches the relevant Foreign Grantor Trust Owner Statement to Form 3520.

5) What if Form 3520-A was not filed?

If a foreign trust with a U.S. owner fails to file Form 3520-A, the U.S. owner may need to prepare and attach a substitute Form 3520-A to Form 3520.

The substitute filing is completed by the U.S. owner to the best of the owner's ability and includes the relevant Foreign Grantor Trust Owner and Beneficiary Statements.

6) Support for U.S. beneficiaries

A U.S. beneficiary who receives a direct or indirect distribution from a foreign trust generally reports the distribution in Part III of Form 3520.

The trustee's reporting package should clearly distinguish whether the distribution came from a grantor or nongrantor portion of the trust because the supporting statements and U.S. tax consequences differ.

7) Distributions are broader than cash payments

Form 3520 reporting is not limited to ordinary cash distributions. The trustee should identify transactions that may constitute direct or indirect distributions or other reportable benefits.

• cash distributions;
• distributions of securities or other property;
• payments made on behalf of a beneficiary;
• indirect distributions through another entity or person;
• loans of cash or marketable securities;
• extensions of credit;
• uncompensated use of trust property; and
• certain obligations involving the trust and a U.S. owner or beneficiary.

For non-cash property, fair market value at the relevant transaction date can be required.

8) Loans and use of trust property

Loans and uncompensated use of foreign trust property can create specific Form 3520 reporting issues.

Trustees should therefore maintain documentation that allows the U.S. return preparer to determine whether a loan qualifies for any applicable exception and whether use of trust property was adequately compensated.

9) U.S. agent information

Form 3520 asks whether the foreign trust has appointed a U.S. agent who can provide the IRS with relevant trust information.

Where a U.S. agent has been appointed, the reporting package should include the agent's:

• legal name;
• U.S. address;
• taxpayer identification number; and
• confirmation that the applicable agency authorization remains in force.

We can provide U.S. agent services in connection with an outsourced foreign-trust U.S. tax compliance engagement.

10) Form 3520 filing deadline

Form 3520 is generally due by the 15th day of the fourth month following the end of the U.S. person's tax year.

Certain U.S. taxpayers living and working outside the United States may have until the 15th day of the sixth month. An extension of the related U.S. income tax return can also extend the Form 3520 filing deadline where the applicable requirements are satisfied.

11) A practical Form 3520 information package

Instead of sending the U.S. beneficiary or tax adviser a collection of trust documents and bank statements, the trustee can provide a standardized annual information package.

• trust identification sheet — name, address, country, EIN and tax year;
• trust classification — grantor/nongrantor and relevant U.S. owner information;
• U.S. agent details, where applicable;
• U.S. owner or beneficiary identification;
• distribution schedule — date, type, amount and FMV;
• loan / trust property schedule, where applicable;
• Foreign Grantor Trust Owner Statement, where applicable;
• Foreign Grantor Trust Beneficiary Statement, where applicable;
• Foreign Nongrantor Trust Beneficiary Statement, where applicable;
• DNI / UNI calculations, where required;
• Form 3520-A copy or filing confirmation, where applicable; and
• supporting schedules and contact details for follow-up questions.

12) Trustee → U.S. taxpayer → return preparer

13) Related U.S. reporting may also apply

Form 3520 is not necessarily the only U.S. information return relevant to a foreign trust interest. Depending on the taxpayer and assets involved, additional reporting can include:

• Form 3520-A;
• Form 8938 — Statement of Specified Foreign Financial Assets;
• FinCEN Form 114 (FBAR);
• Form 8621 for PFIC interests held through or attributable to the trust;
• Form 5471 or Form 8865 where underlying entities create separate reporting obligations; and
• related U.S. income tax reporting on the beneficiary's or owner's return.

The exact filing profile must therefore be reviewed separately for each U.S. owner or beneficiary.

14) Outsourcing the reporting interface

Foreign trustees can outsource the U.S. tax reporting interface without transferring the trustee mandate or beneficiary relationship.

15) Key U.S. authorities

• IRS Instructions for Form 3520 — reporting requirements for U.S. owners, beneficiaries, transfers and foreign-trust transactions.
• IRS Instructions for Form 3520-A — annual reporting for foreign trusts with U.S. owners and substitute Form 3520-A procedures.
• IRS — Foreign trust reporting requirements and tax consequences — overview of foreign trust ownership, beneficiary taxation and information reporting.

Related reading

• Foreign Grantor Trust reporting — Form 3520-A & U.S. owner statements
• Foreign Nongrantor Trusts — U.S. beneficiary statements, DNI & UNI
• Foreign trust DNI, UNI & accumulation distributions — U.S. tax reporting
• U.S. Tax for Funds, Trusts & Investment Products