In addition, a U.S. beneficiary includes: Foreign trust treated as having a U.S. beneficiary. Persons to a Foreign Trust During the Current Tax Year. The form should be sent to the Internal Revenue Service … That leaves only Form 3520 to be filed by a U.S. person who receives an inheritance from a nonresident alien. On one end of the spectrum, reporting a cash gift from an individual person is not very complex. Form 3520 & Instructions: The IRS Form 3520 is used to report a foreign gift, inheritance or trust distribution from a foreign person. Form 3520 is an information return for a U.S. person to report certain transactions with foreign trusts [as defined in Internal Revenue Code (IRC) section 7701(a)(31)] or to report the receipt of certain foreign gifts or bequests. Obligation and qualified obligation are defined later. However, you may not treat the foreign trust as having a U.S. agent unless you enter the name, address, and taxpayer identification number (TIN) of the U.S. agent on lines 3a through 3g on page 1 of the form. Such materials are for informational Thus, a nongrantor trust is treated as a taxable entity. • The grantor in the case of the creation of an inter vivos trust; • The transferor, in the case of a reportable event (defined above) other than a transfer by reason of death; or. In general, a foreign trust will be treated as having a U.S. beneficiary unless the terms of the trust instrument specifically prohibit any distribution of income or corpus to a U.S. person at any time, even after the death of the U.S. transferor or any event terminating the trust, and the trust cannot be amended or revised to allow such a distribution. A transfer of property to a trust may be considered a gratuitous transfer without regard to whether the transfer is a gift for gift tax purposes. Despite the fact that the IRS has promulgated many, many laws detailing the difference between a gift and inheritance (for example, “Step-Up Basis”), for Form 3520, they all mush together. Form 3520 is filed separately from your income tax return. If you file a joint income tax return with the deceased, you may file a joint Form 3520 as well. It does not have to be a “Foreign Gift.” Rather, if a foreign person gifts U.S. property – there may be a Form 3520 reporting requirement as well. Receipt of large gifts or bequests from certain foreign persons (or trusts or estates).Form 3520 is a complex tax form consisting of six pages and 12 pages of instructions. If you receive a CP15 Notice for a Foreign Gift or Inheritance, you only have a limited to respond. Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. So, why are Foreign Inheritances included in the filing requirements? File Form 3520 separately from your income tax return. A trust may be treated as a nongrantor trust with respect to only a portion of the trust assets. You are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding. Distributions from foreign trusts that are taxable as compensation for services rendered (within the meaning of section 672(f)(2)(B) and its regulations), so long as the recipient reports the distribution as compensation income on its applicable federal income tax return. One or more U.S. persons have the authority to control all substantial decisions of the trust. A nongrantor trust is any trust to the extent that the assets of the trust are not treated as owned by a person other than the trust under the grantor trust rules in sections 671 through 679. A U.S. agent is a U.S. person (defined later) that has a binding contract with a foreign trust that allows the U.S. person to act as the trust’s authorized U.S. agent in applying sections 7602, 7603, and 7604 with respect to: • Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed, or required to be taken into account under the rules of sections 671 through 679, with respect to a foreign trust; or. See section 6039F for additional information.”. For these purposes, an amount will be treated as accumulated for the benefit of a U.S. person even if the U.S. person’s interest in the trust is contingent on a future event and regardless of whether anything is actually distributed to a U.S. person during that tax year. I understand that I need to declare the inheritance as a foreign gift on form 3520, but the IRS really doesn?t give you much detail on how to do so in their instructions. Form 3520 Penalties Failing to file a required Form 3520 exposes a US person to enormous penalties. Most fair market value (FMV) transfers by a U.S. person to a foreign trust. If a foreign trust is not already treated as having a U.S. beneficiary under the rules described earlier and above, the trust will be treated as having a U.S. beneficiary if, after March 18, 2010, either: Presumption that foreign trust has U.S. beneficiary. A foreign corporation that is a controlled foreign corporation (as defined in section 957(a)), A foreign partnership if a U.S. person is a partner of the partnership, and. The Form 3520 complexity is on a sliding scale. The foreign trust loans cash or marketable securities directly or indirectly to a U.S. person and the U.S. person does not repay the loan at a market rate of interest within a reasonable period of time; or. However, some FMV transfers must nevertheless be reported on Form 3520 (for example, transfers in exchange for obligations that are treated as qualified obligations, transfers of appreciated property to a foreign trust for which the U.S. transferor does not immediately recognize all of the gain on the property transferred, transfers involving a U.S. transferor that is related to the foreign trust). A U.S. grantor, a U.S. beneficiary, or a domestic corporation controlled by the grantor or beneficiary may act as a U.S. agent. Note. If an arrangement is contingent upon the occurrence of an event, in determining whether the arrangement is a guarantee, you must assume that the event has occurred. purposes only and may not reflect the most current legal developments. 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