FORM 3520

First I want to start with an apology. I try not to bombard emails during the year, but this is seminar season. Thank you, Mr. Jennings, for always keeping us up-to-date (for a fee 😊)

DO NOT LET THE TITLE OF THIS FORM DISSUADE YOU FROM READING THIS POST. You will be surprised to see what is considered a foreign asset from a trust or gift.

First and foremost, when in doubt if an foreign asset is a trust distribution or a gift, report it. Better to report than face a penalty (see below)

Second, the government using the term, US person, not US citizen. The definition of a US person in this case is a US citizen AND a resident alien.

Now for a “short list” of what needs to be reported:

1. The creation of a foreign trust (Fill out a separate Form 3520 for each trust).
2. The transfer of cash or other assets by a grantor to a foreign trust (which may also
   require the filing of a gift tax return for irrevocable transfers in excess of $17,000 in
   2023 when the trust has beneficiaries other than the grantor and spouse) including a
   transfer by reason of death.
3. The receipt of any direct or indirect distributions by U.S. beneficiaries from the foreign
   trust.
   As a result of 2010 changes to §643(i)(1), the use of foreign trust property by a U.S.
   grantor, a U.S. beneficiary, or a U.S. person related to the U.S. grantor or the U.S.
   beneficiary is treated as a distribution of the fair market value (FMV) of the use of the
   property to the U.S. grantor or U.S. beneficiary. The use of the property is not treated
   as a distribution to the extent that the trust is paid the FMV for the use of the property
   within a reasonable period of time.
   For example, say a U.S. individual is a beneficiary of a foreign trust that was created
   by a nonresident alien relative, and the foreign trust owns a family home located
   outside the U.S. The family home is available for personal use by the U.S. individual
   and by other nonresident alien family members. **********If the U.S. individual visits the home
   for a two-week vacation, without paying rent for the two weeks, the U.S. individual will
   be treated as having received a distribution from the foreign trust in an amount equal
   to the FMV of the use of the home for the two week period.**********
   This deemed distribution would trigger a requirement to file Form 3520 for that year.
   
4. The receipt by any person of a gift or bequest (inheritance) from a foreign person or
   estate in excess of $100,000 in one year.
5. The receipt by any U.S. person of a gift from a foreign partnership or corporation in
   excess of $18,567 (2023).
6. Loan transactions between the trust and any beneficiary.
   
   
7. The death of a U.S. citizen or resident if the decedent was treated as an owner of any
   portion of a foreign trust or any portion was included in the estate.
8. The conversion of a domestic trust to a foreign trust.
9. The taxpayer is the owner of a foreign trust or any part of the assets of a foreign trust
   at any time during the year, even if there have been no transactions during the year.
   Form 3520 is an information return, not a tax return, because foreign gifts are not subject
   to income tax.
10. Mexican Land Ownership
    The Mexican Federal Constitution prohibits non-Mexican citizens from owning real
    property located within 100 kilometers of Mexico’s inland borders or within 50 kilometers
    of its coastline. These areas are known as “restricted zones” and only Mexican citizens or
    Mexican corporations whose bylaws forbid stock ownership by non-Mexicans are allowed
    to directly own real property within the restricted zone. In order for U.S. citizens to acquire
    property within the zone, they must obtain a permit from the Mexican Ministry of Foreign
    Affairs and to purchase a beneficial interest in a Mexican Land Trust under which legal
    title is held by a Mexican entity, usually a bank.
    This rule historically requires that U.S. citizens owning land in the Mexican restricted zones
    establish a Mexican Land Trust. The creation of the trust as well as the funding of the trust
    or the use of the trusts’ property previously required the completion of Form 3520, as well
    as the completion of an annual Form 3520-A to report activity in the trust. However, in
    Rev. Rul. 2013-14 the IRS determined that the situation where the U.S. taxpayer
    utilizes a Mexican bank for a Mexican Land Trust is not considered to be a trust for
    Form 3520 filing purposes, even if the U.S. taxpayer uses an intermediary LLC to
    own the trust interest. For this exception to apply, the trust may not hold any other
    assets.
11. Mr. Jennings further suggested that our clients review documents provided when purchasing timeshares in another country.
12. Foreign Gifts
    In general, a foreign gift is money or other property received by a U.S. person from a
    foreign person that the recipient treats as a gift or bequest and excludes from gross
    income. A “foreign person” is a nonresident alien individual, or foreign corporation,
    partnership or estate.
    If in a single year a taxpayer receives cash, financial assets, or even real estate (worth in
    total more than $100,000) from a single foreign estate upon the death of a foreign person,
    a Form 3520 is required to be filed for the year of the inheritance.
    Similarly, if in a single year a taxpayer receives cash, financial assets, or even real estate
    as a gift (more than $100,000) from a single foreign person, a Form 3520 is required to be
    filed.
    The IRS may recharacterize purported gifts from foreign partnerships or foreign
    corporations as items of income that must be included in gross income. Additionally, gifts
    from foreign trusts are subject to different rules than gifts other foreign persons.
    
    **********A gift to a U.S. person does NOT include amounts paid for qualified tuition or medical
    payments made on behalf of the U.S. person.**********
13. Canadian Retirement Accounts
    Transfers to, ownership of, and distributions from a Canadian registered retirement
    savings plan (RRSP), a Canadian registered retirement income fund (RRIF), or any other
    Canadian retirement plan under Rev. Proc. 2014-55 are exempt from reporting on Form
    3520.
    Select Foreign Retirement Accounts Requiring Form 3520:

• Australia’s Superannuation Fund
• Denmark’s Labor Market Supplementary Pension Fund (Arbejdsmarkedets
  Tillaegspension or ‘ATP’), Employees’ Capital Pension Fund (Lønmodtagernes
  Dyrtidsfond or ‘LD,’) and Special Pension Savings program (‘SP’)
• France’s Livret A, Assurance vie products, Plan d`Epargne Enterprise (‘PEE’) or
  Plan d’épargne retraite populaire (‘PERP’)
• Hong Kong’s Mandatory Provident Fund
• India’s Public Provident Fund or Employees Provident Fund
• Ireland’s small self-administered pension schemes (‘SSAP’) or personal retirement
  savings account (‘PRSA’)
• Italy’s fondi pensione aperti or life insurance contracts (‘PIP’)
• Japan’s Nippon Individual Savings Account (‘NISA’), kakutei kyoshutsu nenkin,
  kokumin nenkin kikin, or unit-linked policies
• New Zealand’s KiwiSaver or Universal Superannuation Fund
• Norway’s individuelle pensjonsavtaler (‘IPA’)
• Portugal’s Fundos de Pensões Abertos (open pension funds), Fundos Poupança
  Reforma (‘PPR’), or Fundos Poupança Acções (‘PPA’)
• Singapore’s Central Provident Fund (‘CPF’)
• Sweden’s premiepension (‘PPM’) or prämienbegünstigte Zukunftsvorsorge (‘PZV’)
• United Kingdom’s Individual Savings Account (‘ISA’) or Self-Invested Personal
  Pension (‘SIPP’)
  Other Reportable Accounts
• Foreign annuities
• Foreign company sponsored retirement accounts where the U.S. beneficiary has
  control
• Foreign life insurance policies
• Foreign, self-administered retirement plan

HAPPY FILING:

Click to access f3520.pdf

Mailing address:

Internal Revenue Service Center
P.O. Box 409101
Ogden, Utah 84409

Penalties:

The late or non-filed penalty is the GREATER OF of $10,000 or:

• 35% of the gross value of any property transferred to a foreign trust
• 35% of the gross value of the distributions received from a foreign trust or
• 5% of the gross value of the foreign trust’s assets treated as owned by a U.S.
  person.
  Reasonable cause may allow the penalties to be abated but does not include the fact that
  the foreign country does not allow disclosure!