U.S. owners and beneficiaries of foreign trusts can have some pretty complicated reporting requirements, depending on the trust’s specifications. Learn more about foreign trusts and foreign trust taxation in the U.S. below.
What is a foreign trust?
From a legal standpoint, a foreign trust is a trust over which a U.S. court is not able to exercise primary supervision or a trust over which U.S. persons don’t have the authority to control substantially all decisions of the trust.
In plain language; trusts reflect the laws of where they are created. If your trust was created outside of the U.S., or is governed by laws outside the U.S., you’re probably talking about a foreign trust.
Whether in the U.S. or abroad, a trust is an arrangement where a third party (the trustee) holds and or manages assets for the benefit of the trust’s beneficiaries. If your trust cannot pass one of the following two tests, you can assume it is a foreign trust:
- Control Test: U.S. persons control the substantial decisions of the trust
- Court Test: U.S. courts have jurisdiction over trust administration
Example of a foreign trust
An example of a trust for U.S. taxpayers would be a 401(k)–retirement plan. In this scenario, the employer would be the grantor because they open the plan on the employee’s behalf and transfers assets (wage income) from the employee’s pay to the plan. In this arrangement, the employee will be the beneficiary.
An example of a foreign trust would be a New Zealand Superannuation fund, or any other trust or retirement plan/pension held by a foreign entity. If you’re unsure whether your pension counts as a foreign trust or the reporting requirements for it, it’s best to speak with an Expat Tax Advisor.
Foreign trusts and U.S. taxes
If you are treated as a U.S. owner of a foreign trust, you do need to report the trust interest and its income. For example, a taxpayer holding a foreign IRA plan (such as an Australian Self–Managed Superannuation Fund), may be required to file some or all the forms below:
- Schedule B Part III
- Form 3520
- Form 3520-A
- Form 1040NR
- Form 8938 (due to interest in a specified foreign financial asset)
There are very high penalties if the applicable forms are not filed. For example, if you received qualifying distributions from a foreign trust and you either don’t file Form 3520 or file incorrectly, your fine could be whichever is greater — $10,000 or 5% – 35% of the gross value of all the property, assets, and trust distributions that weren’t reported.
That’s why it’s worth it to make sure you’re filing with an absolute expert.
H&R Block Expat Tax Services is here to help you report foreign trusts on your U.S. taxes
Reporting foreign trusts can get complicated, which is why the experts at H&R Block Expat Tax Services are here to help make sure all your foreign trust reporting requirements are taken care of. We’ve got a tax solution for you — whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or want to let one of our Expat Tax Advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.