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

Identifying Filing Obligations, Completing the Form, DNI Planning After MID Disallowance, Avoiding Throwback Tax

Note: CLE credit is not offered on this program

A live 110-minute CPE webinar with interactive Q&A

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Wednesday, May 8, 2024 (in 9 days)

1:00pm-2:50pm EDT, 10:00am-11:50am PDT

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This course will provide a practical guide to U.S. tax reporting obligations of U.S. beneficiaries of foreign trusts and non-grantor trusts, including filing Form 3520. The panel will explain the circumstances, events, and transactions that trigger the requirement to file Form 3520. The panel will provide an in-depth review of Form 3520 and discuss distribution planning for foreign trusts with U.S. beneficiaries.

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 IRS 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 (DNI) 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.

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 provides an in-depth look into the filing requirements and specific sections of Form 3520, along with a discussion of foreign trust compliance.

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Outline

  1. Determining owners and responsible parties
  2. Reportable events
    1. Distributions
    2. Qualified Obligations
    3. Obligations
    4. Gifts and bequests
    5. Other form items
  3. DNI calculations and distribution strategies
  4. Completing the form
  5. Throwback tax
    1. 65-day rule
    2. Form 4970
  6. IRC Section 6677 penalties for failure to file and relief provisions
    1. Calculation of penalties
    2. Section 6048 special rules
    3. Reasonable cause exceptions

Benefits

The panel will discuss these and other key issues:

  • What reportable events trigger a Form 3520 filing requirement?
  • What is the overlap between Form 3520 and other foreign information reporting requirements such as Forms 5471, 8865, 8621, and Schedule B?
  • What are the filing requirements for the U.S. beneficiary of a foreign non-grantor trust?
  • What are the penalties and relief provisions for failure to file a Form 3520 or Form 3520-A?
  • What are the processes for establishing a reasonable cause exception for penalty abatement?

Faculty

Jack Brister
Jack Brister
Managing Member
International Wealth Tax Advisors

Mr. Brister specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset...  |  Read More

Lazo, Christiana
Christiana M. Lazo
Partner
Proskauer

Ms. Lazo’s practice consists of representing ultra-high net worth individuals, their family offices, and closely...  |  Read More

Lipoff, Lawrence
Lawrence M. Lipoff, CPA, TEP, CEBS
Director
CohnReznick

With more than 30 years of experience, Mr. Lipoff specializes in the delivery of domestic and international private...  |  Read More

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