Form 3520: Reporting Foreign Trust Activities on U.S. Beneficiaries' Income Tax Returns

Description

Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, presents significant complexity for beneficiaries of foreign trusts. Even if no transactions related to the trust occurred during the tax year, The Internal Revenue Service requires taxpayers who owned any part of the assets held in a foreign trust, received a distribution from a foreign trust or who qualify as the responsible party for reporting a foreign "reportable event," to file Form 3520.

Tax advisers preparing Form 3520 must also contend with the special rules governing U.S. tax treatment of foreign trusts. Distributable Net Income calculations are different for foreign trusts than domestic trusts, and U.S. tax rules distinguish the taxation of distributions made from DNI vs. UNI with the latter's distributions subject to harsh tax consequences for beneficiaries in the form of "throwback rules”. Unless the current DNI is distributed within 65 days of the tax year's end, the “throwback rules” require the DNI to be reclassified as UNI rather than being treated as an addition to the trust corpus.

For foreign trusts, the disallowance of miscellaneous itemized deductions (MIDs) may lead to an increase in the DNI the trust must distribute to avoid reclassification. It is recommended that trust advisers serving U.S. beneficiaries or owners of foreign trusts begin calculating DNI earlier in the tax year to ensure that the trust has sufficient liquidity to meet distribution requirements and avoid the imposition of the Throwback Tax. Listen and learn as our panel of expert practitioners provides a deep dive into the filing requirements and specific sections of Form 3520, along with a discussion of foreign trust compliance.

Listen as our panel of expert practitioners provides a deep dive into the filing requirements and specific sections of Form 3520, along with a discussion of foreign trust compliance.