Foreign Trusts & Gifts: Form 3520 and 3520-A Filing Guide for Expats

Foreign trusts are one of the most misunderstood and most penalized areas of US expat tax compliance. The IRS does not care whether you call it a "family trust," "pension fund," or "inheritance structure." If it meets the legal definition of a foreign trust, you must file Form 3520 and possibly Form 3520-A — and the penalties for missing these forms are among the highest in the tax code.

This guide explains what foreign trusts are, when Form 3520 and 3520-A apply, how the foreign gift rules work, and how to protect yourself from penalties.

What Is a Foreign Trust?

A foreign trust is any trust that fails either of two tests:

Test 1: US Court Supervision

A court within the United States must be able to exercise primary supervision over the administration of the trust.

Test 2: US Control

One or more US persons must have the authority to control all substantial decisions of the trust.

If either test fails, the trust is foreign.

What This Means in Practice

Almost every trust established outside the US is a foreign trust:

• UK discretionary trusts
• Australian testamentary trusts
• Canadian family trusts
• Offshore asset protection trusts
• Foreign pension structures (in many cases)
• Inheritance structures in civil law countries

Even a trust established by a non-US person for the benefit of a US person can be a foreign trust.

Pensions require a separate first step. A foreign retirement label does not establish that the arrangement is a foreign trust or that Forms 3520/3520-A apply. Current Form 3520 instructions include exceptions for qualifying Canadian retirement plans, eligible individuals with qualifying tax-favored foreign trusts, and taxpayers consistently relying on the May 2024 proposed regulations when all conditions are met. Use the foreign pension consultation when the plan, contributions, distributions, treaty, or retirement reporting is the primary question. Use this trust guide only after the facts establish a genuine foreign-trust issue.

When Form 3520 Is Required

Form 3520 is required in four situations:

Situation 1: You Create or Fund a Foreign Trust

If you transfer assets to a foreign trust, you must report the transfer on Form 3520. This includes:

• Setting up an offshore trust.
• Transferring property to a foreign family trust.
• Contributing to a foreign pension that is treated as a trust.

Situation 2: You Receive a Distribution from a Foreign Trust

If you receive any distribution from a foreign trust — cash, property, loan, or use of trust property — you must report it. Distributions include:

• Cash distributions.
• In-kind distributions (property, stock, etc.).
• Loans from the trust at below-market rates.
• The use of trust property without fair market rent.

Situation 3: You Receive a Foreign Gift

You must report foreign gifts on Form 3520 Part IV when you receive:

• More than the applicable threshold from a nonresident alien individual or foreign estate in a year (the current instructions begin at $100,000 for that donor category), aggregated with persons known or reasonably known to be related to the donor.
• Transfers treated as gifts from a foreign corporation or foreign partnership exceeding the filing-year section 6039F amount (the IRS publishes $20,573 for tax year 2026; the figure is annually indexed and is not frozen here).

Important: Aggregation follows the related-person rules in the current instructions. Gifts from unrelated foreign individuals are not automatically pooled into one universal aggregate. The $10,000 minimum or 35% penalty figure sometimes summarized for Form 3520 belongs to the foreign-trust provisions under section 6048, not Part IV gifts under section 6039F. Part IV is for personal gifts and bequests; Part III is for foreign-trust distributions and is governed by separate instructions.

Situation 4: You Are Treated as the Owner of a Foreign Trust

Under the grantor trust rules (IRC Sections 671–679), a US person who creates a foreign trust and retains certain powers or benefits is treated as the owner of the trust. As the owner, you must report the trust's activities on Form 3520 and ensure Form 3520-A is filed.

When Form 3520-A Is Required

Form 3520-A is the foreign trust's annual information return. It is required when:

1. A US person is treated as the owner of a foreign trust under the grantor trust rules.
2. The foreign trust itself must file Form 3520-A.
3. If the trust does not file, the US owner must file a substitute Form 3520-A and attach it to Form 3520.

What Form 3520-A Reports

• The trust's income statement (like a mini tax return for the trust).
• The trust's balance sheet.
• Distributions to US beneficiaries.
• The US owner's share of trust income.

Foreign Gift Rules in Detail

Gifts from Nonresident Aliens or Foreign Estates

• Threshold: Generally more than $100,000 in a year from a single donor and parties known or reasonably known to be related to that donor. Gifts from unrelated foreign individuals are not automatically aggregated.
• What counts: Cash, property, forgiveness of debt, below-market loans, transfers recharacterized as gifts.
• What does not count: Qualified tuition payments made directly to the educational institution; qualified medical payments made directly to the provider; gifts from a foreign spouse up to the applicable marital exclusion; transfers that fall under current Form 3520 exceptions.

Gifts Treated as from Foreign Corporations or Partnerships

• Threshold: The filing-year section 6039F amount; the IRS publishes $20,573 for tax year 2026. Do not freeze the figure into evergreen copy.
• Why lower: The IRS treats entity gifts as potentially disguised income and may recharacterize the transfer.

Inheritance from Foreign Estates

• A direct bequest from a foreign estate is reported on Form 3520 Part IV once the threshold and related-party aggregation rules are met for the foreign-estate donor category. The death, valuation date, receipt date, basis, and later income are separate questions.
• A direct foreign-estate bequest and a distribution from a foreign trust are different reporting paths. If estate documents show a direct inheritance, use the foreign inheritance consultation. If a trust made the distribution or continues to hold the inherited interest, use the foreign trust consultation.
• A lifetime gift from a foreign individual or estate — not from a trust — uses the foreign gift consultation.

Reporting Even When No Tax Is Due

Form 3520 is an information return — it does not calculate tax. Even if the gift or trust distribution is not taxable, you must still file the form. The IRS uses Form 3520 to track the flow of money into the US and identify potential unreported income.

Penalties: Distinguish Part IV from the Foreign-Trust Framework

Form 3520 penalties differ by Part and provision. Do not collapse them into a single dollar amount:

Part IV — Foreign Gifts and Bequests (IRC § 6039F)

• Failure to report: 5% of the gift or bequest for each month the failure continues, capped at 25%, subject to reasonable cause.

Foreign-Trust Transactions, Ownership, and Distributions (IRC § 6048)

• Failure to file or report a distribution, loan, or ownership event: Greater of $10,000 or 35% of the gross reportable amount (or 5% of the gross value of trust assets for ownership), subject to reasonable cause.

Form 3520-A Penalties

• Failure to file: Greater of $10,000 or 5% of the gross value of trust assets, subject to reasonable cause. Continued-failure amounts under section 6677 may add further penalties.

Multiple Years and Multiple Trusts

Penalties apply per form per year. If you have 3 trusts and missed 3 years:

• 3 trusts × 3 years × $10,000 = $90,000 minimum under the section 6048 framework.
• If any trust has significant assets, the 5% rule could push penalties into the hundreds of thousands.

Reasonable Cause Abatement

You can request penalty abatement for reasonable cause, but the standard is high:

• You must demonstrate that you exercised ordinary business care and prudence.
• Ignorance of the law is generally not reasonable cause.
• Hiring a tax professional who misses the filing is not automatically reasonable cause.
• The best defense is proactive compliance: identify the correct Part before filing, and use the current instructions for the applicable filing year.

Common Scenarios for Expats

Scenario 1: Inheritance from a Foreign Parent

You receive $200,000 from your parent's estate in Germany. The estate is a foreign estate. You must file Form 3520 to report the inheritance. No US tax is due on the inheritance itself, but the form must be filed.

Scenario 2: Foreign Family Trust Distribution

Your grandparents established a trust in the UK. You receive $50,000 per year in distributions. You must file Form 3520 annually to report the distributions. The distributions may be taxable as income (depending on the trust's DNI), but the form reports the flow regardless of taxability.

Scenario 3: Offshore Asset Protection Trust

You establish a trust in the Cook Islands to protect assets from litigation. You are the grantor and beneficiary. You must file Form 3520 for the creation and funding, and Form 3520-A annually as the deemed owner. The trust's income is reported on your personal return.

Scenario 4: Foreign Pension Contributions

You work in Australia and your employer contributes to a superannuation fund. If the superannuation is treated as a foreign trust, your employer's contributions may be reportable as trust funding. This is one of the most complex areas and requires specialist analysis.

How FileAbroad Handles Foreign Trust Reporting

Foreign trust analysis is one of FileAbroad's highest-value services. We provide:

• Trust classification: We determine whether your foreign arrangement is a trust under US rules.
• Form 3520 preparation: We prepare and file Form 3520 for trust transactions, distributions, and foreign gifts.
• Form 3520-A preparation: We prepare the trust's annual information return or a substitute return if the trust does not file.
• Penalty abatement: If you have missed prior-year filings, we analyze reasonable cause and prepare penalty abatement requests.
• Pension trust analysis: We evaluate whether your foreign pension triggers trust reporting and recommend a compliance strategy.
• Streamlined disclosure: If you are a non-willful non-filer, we may recommend the Streamlined Foreign Offshore Procedures to catch up.

For foreign trust analysis, start with a consultation and describe your trust or pension arrangement.

Official IRS sources

• Instructions for Form 3520
• About Form 3520-A
• Foreign trust reporting requirements and tax consequences