US Tax Filings by US Grantor of Foreign Trust

Today’s post is a continuation of a series of blog posts dealing with foreign trusts

A general overview of the US tax issues surrounding foreign trusts can be found here. When a US person is involved in any way with a foreign trust extra caution is required.  Strict US tax filing responsibilities come into play when a US person is involved in the various transactions with a foreign trust. What makes a trust “foreign” is set out in my earlier post.

In the case of a foreign “grantor trust” (FGT) with respect to the grantor, the filings particularly apply when a US person makes a transfer of any kind to a foreign trust, or, when a US person is considered to be the tax owner of a foreign trust.

Whether a foreign trust is a “grantor” trust is determined specifically under provisions of the IRC (Sections 671-679). Any trust determined not to be a grantor trust will be treated as a non-grantor trust.

As a general proposition, a FGT is created when a US person funds (or transfers assets to) the foreign trust and there is even the potential for the trust to have a US beneficiary.  In the real world what this means is that even if the named beneficiaries are all foreign persons, if the trust instrument does not expressly prohibit a US person from ever being a beneficiary of the trust, the trust will be treated as a FGT for US tax purposes.   When so treated, the US person is treated as the tax owner of the foreign trust under the so-called “grantor trust” rule of IRC § 679.  This means, he must report all items of income, deduction, credits and loss on his personal income tax return (Form 1040) even if he does not have any right to trust distributions.

1. IRS Form 1040: Schedule B, Part III

A US grantor or transferor to a foreign trust must report on this Schedule of their individual tax return for the year of transfer or creation, information regarding the creation of a foreign trust or the transfer of property to that trust, and the existence of any financial account in a foreign country in which the taxpayer has an interest or signatory authority.

2. IRS Form SS-4

This is the form used to obtain an Employer Identification Number (EIN) from the IRS for the foreign trust and it must be filed immediately upon formation of the trust by the US grantor.   You can access the form, instructions and IRS EIN online application here.

3. IRS Form 56: Notice Concerning Fiduciary Relationship

The IRS Form 56 involves a notice to the IRS of “fiduciary” authority over a foreign trust and it must be filed upon creation of the trust or when the first tax return is filed for the trust.

4. IRS Form 3520: U.S. Informational Return – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

US persons use this Form to report certain transactions with foreign trusts.  It is required for example, of US persons who are treated as the tax owner of any part of the foreign trust during the current tax year.  The US grantor of a foreign trust is considered a so-called “responsible party” and he must notify the IRS of a “reportable event” on Form 3520 (“reportable events” include for example, the creation of a foreign trust by a US person, the transfer of money to a foreign trust by a US person, including a transfer by reason of death).  Form 3520 is also used by US persons who receive any distributions from a foreign trust during the year (this will be discussed in a later blog post).

Generally, the following information is reported on the Form 3520: the names, addresses, and taxpayer identification numbers of the foreign trust, the fiduciary, the beneficiaries and their percentage interest, the amount of cash and value of other property transferred to or received from the foreign trust.

5: IRS Form 3520-A Annual Information Return of Foreign Trust with a US Owner

As mandated by Code Section 6048(b), a FGT having a US owner is required to annually file Form 3520-A.   Under the rules of Section 6048(b), when a US person, is treated as the “owner” of a foreign trust (or any part thereof) because of the “grantor” trust rules, that US person is responsible: for ensuring that the trust file the Form 3520-A, and; for ensuring that the trust provide other information as prescribed by the IRS to the US persons treated as owners and those receiving distributions from the trust (whether directly or indirectly).  The onus is technically on the US person-owner to ensure that the trust comply with the aforementioned rules.  As a practical matter, however, the trustee of the foreign trust would be the party having to provide the necessary information to the IRS, to file the Form and to furnish the information statements to owners and those receiving trust distributions.

6. IRS Form 709: Gift Tax Return

In some cases, Gift Tax can apply upon the transfer of assets to a foreign trust to the extent a “completed” gift has been made.  There should be no need to file this form upon the transfer of assets to a foreign trust if certain powers are retained by the grantor or transferor, precluding a “completed” gift for gift tax purposes (e.g., power to amend the trust).  If the transfer is to an irrevocable, non-amendable trust, then the transfer would result in a completed gift and Form 709 must be filed.

7. Form 114: Report of Foreign Bank and Financial Accounts (“FBAR”)

The infamous FBAR is an annual form that must be filed by US persons with a financial interest in any bank, securities or other financial account in a foreign country which exceeds in the aggregate, $10,000. In addition, individuals having signature authority over such accounts must file an FBAR. If a US person is treated as the tax owner of the foreign trust which has offshore accounts, the US person will have to file this form.  Where a trust account is set up offshore requiring the signature of both the trustee and the trust protector to facilitate withdrawals, the trust protector, if a US person, may be required to file Form 114. You can learn more about FBAR, Form 114 at the FBAR section of my US Tax Primer here and an earlier blog post, here.

Posted June 20, 2019

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