Most people who run into the US foreign trust rules never set out to use a trust. They received an inheritance from a parent in Hong Kong. They were named beneficiary of a family settlement in Singapore. They moved to the US with a perfectly ordinary foreign savings arrangement. Then they learned — often years later, via a penalty notice — that the US had a reporting regime waiting for them, with five-figure minimum penalties for silence.
This guide covers the two forms at the centre of that regime and the situations that trigger them.
What the US considers a “foreign trust”
A trust is foreign for US purposes unless it passes both of two tests: a US court can exercise primary supervision over it (court test), and US persons control all its substantial decisions (control test). Almost every trust settled outside the US fails at least one — and so do some arrangements that are not called trusts locally at all. Certain foreign pension and savings schemes, custodial arrangements, and wrapper products can be classified as foreign trusts, which is how thoroughly ordinary households acquire filing obligations.
The second key classification: grantor vs non-grantor. In a grantor trust, the person who funded it is treated as still owning the assets — its income lands directly on their US return. In a non-grantor trust, the trust is its own taxpayer, and US beneficiaries are taxed on distributions. Every filing obligation downstream depends on this analysis, which is why it comes first in any engagement.
Form 3520: the transactions return
A US person files Form 3520 for a year in which they:
- Create or fund a foreign trust;
- Are treated as owner of one (grantor trust);
- Receive a distribution from one — including indirect benefits like rent-free use of trust property; or
- Receive large foreign gifts or bequests: more than US$100,000 in a year from a non-resident individual or foreign estate (aggregated across related donors), or a much lower indexed threshold for gifts from foreign corporations or partnerships.
That fourth trigger deserves emphasis because it has nothing to do with trusts and catches the most people: an inheritance from a non-US parent is generally not taxable — but above the threshold it must be reported, and the penalty for not reporting can reach 25% of the amount received. A US$1 million unreported inheritance is a US$250,000 penalty exposure on money that carried no tax.
For trust-related failures, penalties start at the greater of US$10,000 or 35% of the property transferred or distributions received.
Form 3520-A: the trust’s own return
A foreign trust with a US owner must itself file Form 3520-A each year — a trust-level return with balance sheet, income statement, and statements issued to US owners and beneficiaries. Its deadline runs earlier than the personal filing calendar (the 15th day of the third month after the trust’s year-end), which is itself a common trap.
Foreign trustees frequently will not prepare any of this. The rules anticipate that: the US owner must then file a substitute Form 3520-A with their own Form 3520. Trustee non-cooperation shifts the work; it does not excuse it. The penalty for a missing 3520-A is the greater of US$10,000 or 5% of the trust assets treated as owned by the US person.
Distributions and the throwback regime
Distributions from a foreign non-grantor trust carry the nastiest substantive rule in this area: income the trust accumulated in earlier years and distributes later (UNI — undistributed net income) is taxed to the US beneficiary at the highest ordinary rates of the accumulation years, plus an interest charge compounding since then — the “throwback” rules. Long-accumulating family trusts can generate effective tax rates on distributions approaching the entire distribution.
The defence is record-keeping and timing: trustees of trusts with US beneficiaries should track DNI and UNI year by year, distribute current income currently where sensible, and obtain US advice before making large distributions — afterwards, the arithmetic is fixed.
Recent developments worth knowing
- IRS guidance (notably 2020 relief) exempts certain foreign tax-favoured retirement and savings arrangements from 3520/3520-A reporting — relief that may cover schemes like employer pensions and some government-mandated plans, subject to conditions. Whether a given account qualifies is an analysis, not an assumption.
- Proposed regulations issued in 2024 would update and partially codify this relief and refine the loan and use-of-property rules. The direction of travel is clearer rules, not fewer obligations.
- Courts have recently pushed back on some IRS penalty-assessment practices in the information-return area, which has improved the prospects of reasonable-cause relief for taxpayers who come forward properly. None of that helps those who stay silent.
If something was missed
Late 3520s and 3520-As are common and frequently survivable: penalty exposure depends enormously on how the correction is made — delinquent filings with well-drafted reasonable-cause statements, the streamlined procedures where wider non-compliance exists, and organised responses where notices have already issued. What converts a fixable situation into an expensive one is, almost always, more waiting.
If there is — or might be — a trust, an inheritance, or a foreign “plan” anywhere in your picture, have it classified before the IRS does it for you.