Foreign Trusts & IRS Form 3520 – A Guide for American Expats

If you’re an American living abroad, you may have a foreign trust reporting obligation, even if you didn’t realize it. Maybe your family set up a trust overseas, or you’re named as a beneficiary in a non-US estate, or you’re just investing internationally or have retirement savings abroad. All of these scenarios can trigger foreign trust reporting.

The IRS requires Americans to report certain foreign gifts, inheritances, and all dealings with non-US trusts using Form 3520. In many cases, the trust itself,  or you as the “owner”,  must also file Form 3520-A. These forms are informational only, and don’t mean you owe additional taxes. Penalties for not filing them however can be thousands of dollars, even when no tax is due.

In this article, we provide an overview of what foreign trusts are, how to file Form 3520, and what else Americans with foreign trusts need to do to stay in compliance.

• What is a foreign trust?
• When should expats file Form 3520?
• Penalties for not filing Form 3520
• Reporting gifts and inheritances on Form 3520
• How to avoid mistakes filing Form 3520
• What about foreign retirement accounts?
• What to do if you missed a filing
• Foreign trusts for Americans living abroad

What is a foreign trust?

The IRS defines a foreign trust as a trust that fails to meet either of the following conditions:

• A US court has primary supervision over the trust’s administration
  
• A US person can control all substantial trust decisions

This means most trusts formed abroad are classified as foreign trusts under US tax law.

Foreign trusts are common outside the US. In many countries, they’re used to manage estates, hold assets for children, or provide inheritance benefits. They may not be “taxable” entities locally, but they are under US rules.

From the IRS’s point of view, there are two main types of foreign trusts:

• Grantor trusts – Where a US person transfers property or money into a foreign trust and retains some control or benefit. In this case, the US grantor is treated as the “owner” for tax purposes and must report the trust’s income and file annual trust information returns.
  
• Non-grantor trusts – Where the trust is independently managed and the US person is a beneficiary rather than a creator. Distributions from the trust must still be reported, and claiming the Foreign Tax Credit may not fully offset tax due.

It’s also possible to be considered an owner of a foreign trust even if you didn’t set it up, for example, if a family member contributed assets on your behalf.

Key triggers that may make you subject to foreign trust reporting include:

• Receiving distributions (cash, property, or benefit) from a foreign trust
  
• Being named a trustee or beneficiary of a non-US trust
  
• Using trust-owned assets, like real estate or bank accounts
  
• Making a gift or transfer to a foreign trust
  
• Having a non-US pension or retirement plan that qualifies as a trust

In all these scenarios, you may need to file IRS Form 3520, and possibly Form 3520-A, depending on your role and the structure of the trust.

When should expats file Form 3520?

Form 3520 is used to report certain transactions with foreign trusts, as well as large foreign gifts or inheritances. If you transfer property into a foreign trust, receive a distribution, or benefit from a foreign trust in any way, you must report it.

You must also file Form 3520 if you receive gifts or inheritances from foreign individuals or estates totaling more than $100,000 in a calendar year. If the gift comes from a foreign corporation or partnership, the threshold is much lower.

Form 3520 does not mean you’ll owe US tax, it’s an informational form the IRS uses to monitor offshore transactions and check income isn’t being hidden in foreign structures. Form 3520 should be filed with your personal tax return, so by June 15th for Americans living abroad.

When should expats file Form 3520-A, and the substitute filing rule

Form 3520-A is the annual return of the foreign trust itself. It reports the trust’s income, gains, and distributions to the IRS. It must also send a statement to each US owner and beneficiary with their share of the trust’s activity.

If the foreign trustee fails to file Form 3520-A, the US person treated as the trust’s owner is responsible for submitting a substitute version with their Form 3520. That substitute return must include a full accounting of the trust’s activity for the year.

Form 3520-A is due March 15th each year, based on the trust’s reporting period. You can extend it by filing Form 7004. 

Penalties for not filing Form 3520

The penalties for missing or incorrectly filing Form 3520 or Form 3520-A can be high and accumulate quickly.

• If you fail to file Form 3520, the penalty is the higher of either  $10,000 or 35% of the gross value of any unreported distributions from a foreign trust.
  
• If you fail to report a transfer to a foreign trust, the penalty is 35% of the amount transferred.
  
• If you fail to file Form 3520-A, the penalty is the greater of $10,000 or 5% of the value of trust assets treated as owned by you.

These penalties are imposed per year, and continue until the forms are filed. The IRS can also assess interest on top of the penalty amount.

As of late 2024, the IRS ended its policy of automatically applying these penalties. Filers now have the opportunity to show reasonable cause for late or missing forms and request relief.

Reporting gifts and inheritances on Form 3520

If you receive a gift or inheritance from a non-US person, you must file Form 3520 if the total value exceeds $100,000 in a calendar year. This includes money, property, or assets transferred directly to you.

If the gift comes from a foreign corporation or partnership, the filing threshold drops significantly to roughly $19,000 depending on annual inflation adjustments.

You report foreign gifts in Part IV on Form 3520, rather than as income. They are not taxable, but you must still report them. Failure to report foreign gifts can result in a $10,000 penalty, even if you didn’t owe tax.

Distributions from a foreign trust must be reported separately in Part III, and are not treated as gifts.

How to avoid mistakes filing Form 3520

It’s important to keep good records. Maintain details for every transaction, including dates, amounts, fair market value in US dollars, and a description of what was received or transferred.

If you are a trust beneficiary, ask the trustee for a Foreign Grantor Trust Beneficiary Statement. This simplifies reporting and helps you avoid having the distribution taxed as ordinary income.

If the trustee won’t file Form 3520-A, file a substitute yourself to avoid the larger penalty.

Make sure you apply for an EIN for the trust if filing Form 3520-A. You’ll need it to file Form 7004 and to submit the annual information return.

In some cases, relief from an IRS revenue procedure called Rev. Proc. 2020-17 may let expats exclude certain tax-favored foreign retirement trusts from 3520/3520-A reporting.

What about foreign retirement accounts?

Many foreign pensions and retirement accounts qualify as trusts in the eyes of the IRS. If your plan has a trustee, holds assets for your benefit, and doesn’t meet requirements for possible US tax treaty exemptions, it may require Form 3520 and Form 3520-A reporting.

If you aren’t sure whether your foreign pension plan counts as a trust, consult a cross-border US tax expert. Getting this wrong can result in significant penalties.

What to do if you missed a filing

If you failed to file Form 3520 and Form 3520-A in a prior year, don’t panic. The IRS now reviews each case individually and allows late filings with a reasonable cause statement.

Explain why you didn’t file, what steps you took once aware, and confirm that the noncompliance wasn’t due to willful neglect. A well-drafted letter often results in full penalty relief, especially for first-time expats or unintentional omissions.

Working with a tax advisor familiar with these forms gives you the best chance of avoiding penalties.

If you haven’t filed your US taxes from abroad at all and the IRS hasn’t contacted you yet, you may be able to catch up without facing penalties under the Streamlined Procedure amnesty program.

Foreign trusts for Americans living abroad

If you’re an expat with ties to overseas wealth, family structures, or retirement accounts, you may well have to file Form 3520 or Form 3520-A.

The first step is understanding when you’re considered a trust owner or beneficiary, and then filing the right forms on time. The penalties are serious, but with awareness, good records, and expert advice, staying in compliance becomes simple.