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.

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 if you receive:

• More than $100,000 in a year from a non-resident alien individual or foreign estate.
• More than $17,339 in 2026 (indexed annually) from a foreign corporation or foreign partnership.

Important: Gifts are aggregated across all donors. If you receive $60,000 from one foreign person and $50,000 from another, the total is $110,000 — you must report.

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 Non-Resident Aliens

• Threshold: $100,000 per year (aggregated across all donors).
• What counts: Cash, property, forgiveness of debt, below-market loans.
• 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 marital exclusion ($185,000 in 2026).

Gifts from Foreign Corporations or Partnerships

• Threshold: $17,339 in 2026 (indexed for inflation).
• Why lower: The IRS treats corporate gifts as potentially disguised income.

Inheritance from Foreign Estates

• Inheritances from foreign estates are treated as gifts for Form 3520 purposes.
• The $100,000 threshold applies.
• The estate's executor should provide documentation showing the distribution is from an estate, not a living donor.

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: The Most Severe in the Tax Code

The penalties for Form 3520 and 3520-A are among the highest for any information return:

Form 3520 Penalties

• Failure to file: The greater of $10,000 or:
  • 35% of the gross reportable amount for trust distributions.
  • 5% of the gross value of trust assets for trust ownership.
• Failure to report a foreign gift: $10,000 or 25% of the gift amount.

Form 3520-A Penalties

• Failure to file: The greater of $10,000 or 5% of the gross value of trust assets.
• If the trust has $1,000,000 in assets, the penalty could be $50,000 per year.

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.
• 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: file the forms even if you are unsure whether they are required.

Foreign Trusts and Pensions

One of the most contested areas is whether foreign pensions are foreign trusts.

UK SIPPs

Most UK tax specialists treat SIPPs as foreign grantor trusts for US taxpayers. This means:

• Form 3520 may be required for contributions and distributions.
• Form 3520-A may be required if the SIPP is treated as owned by the participant.
• The US-UK tax treaty provides some relief but does not eliminate trust reporting.

Australian Superannuation

Australian superannuation is sometimes treated as a foreign trust and sometimes as a social security arrangement. The IRS has issued limited guidance, and practitioners disagree. Some argue that employer contributions create a foreign trust; others argue the whole structure is exempt. This requires specialist analysis.

Canadian RRSPs and RRIFs

The US-Canada tax treaty explicitly defers US tax on RRSP and RRIF income until distribution. However, the treaty does not clearly exempt Form 3520 reporting. Many practitioners file protective Forms 3520 and 3520-A for RRSPs to avoid penalties, while others rely on the treaty and do not file. This is a gray area.

General Rule

If your foreign pension has characteristics of a trust — individual accounts, investment choices, employer and employee contributions, and distribution flexibility — it may be a foreign trust. The safest approach is to file protectively until you receive clear guidance or a private letter ruling.

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 the free intake and describe your trust or pension arrangement.