Trust

What is a foreign trust?

A foreign trust is a trust that is created or organized outside the U.S. Whether in the U.S. or abroad, a trust is an arrangement where a third party (the trustee) holds and or manages assets on behalf of the beneficiaries.The bona fide residence test is one of the requirements that must be met to claim the pay income tax to the nation they are living in (if the nation requires the taxpayer to pay an income tax), have socio-economic ties to that nation and not have an abode in the U.S., amongst other requirements.

An example of a trust for U.S. taxpayers would be a 401(k)-retirement plan. In this scenario, the third-party trustee would be the financial institution with whom the employer has the 401(k) for its employees. In this arrangement, the employee will be the beneficiary.

It’s important to note that U.S. taxpayers must report their interest in foreign trusts, including interests in an IRA type plan that allows them to choose their investments. For example, if a taxpayer has a foreign IRA plan (such as an Australian Self-Managed Superannuation Fund), they are required to file some or potentially all the forms below:

  • Schedule B Part III
  • Form 3520
  • Form 3520-A
  • FBAR
  • Form 8938 (due to interest in a specified foreign financial asset)

Note: The FBAR and 8938 forms are filed only if the filing thresholds for the forms are met.

There are very high penalties if the applicable forms are not filed and penalties are aggregated per missing information per form.