I have written various blog posts covering foreign (i.e., non-US) trusts. Many of them concern US tax filing and reporting requirements with regard to such trusts. My initial post provided a general overview of the troublesome US tax issues surrounding foreign trusts, and my blog post here navigates the tricky waters in determining if a trust is a US domestic trust or a “foreign” trust.
If the creator of, or “grantor” to a foreign trust is a US person, very specific US tax filing and reporting requirements apply. My blog post here discusses those rules. The fact that some kind of US tax reporting is required by the US grantor is hardly surprising, since my readers know by now that the US Internal Revenue Service (IRS) requires filings by US persons for just about every aspect of their financial lives. This could never be more true than when the US person has dealings with offshore assets, accounts or entities.
What about the foreign trustee, however? If the trustee is not a US person, must it concern itself with US tax rules? The answers are here; today’s post provides a summary of relevant US tax filings imposed on the trustee or fiduciary of a foreign trust (and this includes a “foreign” trustee/fiduciary):
1. IRS Form 3520-A: Annual Information Return of Foreign Trust with a US Owner
This form is fully discussed here . The trustee of a foreign “grantor” trust that has a US owner is the party that must prepare and file the information required by this form. If the trustee does not complete a Form 3520-A, the US owner must complete and attach a substitute Form 3520-A to the Form 3520, otherwise the US owner may be liable for the penalties. Thus, as a practical matter, liability for compliance failure can be imposed on the US grantor.
Form 3520-A is filed annually and should provide the IRS with a complete accounting of the activities of the foreign trust for the year; the identity of the limited agent designated to receive requests for information from the IRS, and any other information required by law. The trustee is required to file this form by the 15th day of the third month following the end of the taxable year of the foreign trust.
The trustee must also send a “Foreign Grantor Trust Owner Statement” to each US owner of any portion of the trust and a “Foreign Grantor Trust Beneficiary Statement” to each US beneficiary who received a distribution during the taxable year.
In my discussions with various tax colleagues who prepare tax returns involving foreign trusts, I understand that one of the most common problems they encounter is a failure to keep the financial statements up-to-date when the trustee is not a professional trustee. They encounter this problem whether the grantor himself is a trustee of a grantor trust or a friend or a relative is a trustee in non-grantor trust situations. It becomes very difficult to determine the current year’s income or loss and thus, the trustees find themselves in the unenviable position of being unable to provide the proper tax reporting documentation to the US owner or the US beneficiaries of the trust (more on this topic in a later post). Bear in mind that when this situation arises, it can involve many years of financial statements, all of which must be prepared in accordance with US tax law and accounting principles.
2. IRS Form 56: Notice Concerning Fiduciary Relationship
The IRS Form 56 involves a notice to the IRS of “fiduciary” authority over a foreign trust with US income. A “fiduciary” is any person in a position of confidence acting on behalf of any other person. A fiduciary assumes the powers, rights, duties, and privileges of the person or entity on whose behalf he or she is acting. Form 56 should be filed by a fiduciary (as relevant here, the trustee) to notify the IRS of the creation or termination of the fiduciary relationship.
3. IRS Form SS-4
This is the form used to obtain an Employer Identification Number (EIN) from the IRS for a foreign trust with US income. You can access the form, instructions and IRS EIN online application here.
4. Form W-9: Request for Taxpayer Identification Number and Certification
The trustee may file this form to obtain the correct Employer Identification Number or Taxpayer Identification Number of the US agent, the US beneficiaries, and the US owner. You can access the form, instructions and other IRS information concerning Form W-9 here.
Posted September 5, 2019
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