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Form 3520: US Taxes on Gifts and Inheritances

Finance

February 12, 2025

You’ve probably heard the expression that ‘the only two things certain in life are death and taxes’. 

The Internal Revenue Service (IRS) works very hard to make the latter true, especially for expats and US foreign taxpayers. 

One example is Form 3520, yet another of the ‘Informational Returns’. This form is required to be filed by US persons who:

  • Are owners (grantors) of foreign trusts
  • Have transferred assets into a foreign trust
  • Received a distribution from a foreign trust
  • Or received a gift or bequest of US$100,000 or more from a foreign source (individual, trust or estate) during the current tax year.

Form 3520’s full designation is a mouthful: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

The word ‘certain’ in the form’s title means that while the foreign gift giver would be the one paying any tax due, typically, it’s the size of the gift that interests the IRS and thus may need to be reported. 

But you won’t know this until you plough your way through the documentation.

This article gives you a comprehensive overview of Form 3520, enough for you to determine whether or not it’s something you need to consider for your tax planning purposes. It will also alert you to a couple of situations that could prove costly in the form of penalties or additional taxes.

What Is Form 3520?

Form 3520 is an information return by which US persons, as well as executors of the estates of US decedents, report:

  • Certain transactions with foreign trusts
  • Ownership of foreign trusts
  • Receipt of large gifts or bequests from certain foreign persons (or trusts or estates).

Form 3520 is complex, consisting of six pages to fill out and 13 pages of instructions.

Page one is the basic informational section in which you indicate what type of filer you are (Individual, Partnership, Corporation, Trust or Executor) and which of the four types of ‘reportable events’ as designated under ‘purpose’ above you were involved in.

The following five pages, divided into sections titled Part I, Part II, Part III and Part IV, are each applicable to one of these types of events.

Important Form 3520 Terms to Know

To understand how to complete this form, it’s important to first understand the terms the IRS uses. 

US Person – a citizen or resident alien of the United States, a domestic partnership, a domestic corporation, any estate (other than a foreign estate) or any domestic trust.

Distribution – any gratuitous transfer of money or property from a foreign trust and without regard to whether the recipient is a beneficiary by the terms of the trust.

Grantor – any person who creates a trust and directly or indirectly makes a gratuitous transfer of cash or other property to a trust. This also includes any person who is treated as the owner of any part of the foreign trust’s assets.

Gratuitous Transfer – any transfer to the trust other than a transfer for fair market value (FMV) or a distribution to the trust from an interest held by the trust (say a corporation or partnership).

Owner – the person who is treated as owning any of the assets of a foreign trust under sections 671 and 679.

Obligation – any bond, note, debenture or certificate. Any evidence of indebtedness.

Qualified Obligation – for purposes of the 3520, it is an obligation with an express written whose term does not exceed 5 years. All payments are denominated in USD.

Reportable Event – the creation of a foreign trust by a US person, the transfer of money or property (including the transfer by death), death of a US citizen, if the decedent owned any portion of a foreign trust, or if any portion of a foreign trust was included in the gross estate of the decedent.

Responsible Party – the grantor, the transferor (other than by death) or the executor of a decedent’s estate.

Related Person – a member of your family, lineal descendants and spouses of any of these persons, or a corporation in which you, directly or indirectly, own more than 50% of the outstanding stock.

Person Related to a Foreign Trust – the grantor of the trust, a beneficiary of the trust, or is related to any grantor or beneficiary of the trust.

Who Must File Form 3520?

File Form 3520

You must file Form 3520 if:

(A) You are the responsible party for reporting a reportable event.

(B) You are a US person who transferred property into a related foreign trust in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding.

(C) You are a US person who, during the tax year, is treated as the owner of any part of the assets of a foreign trust.

(D) You are a US person who received a direct or indirect distribution from a foreign trust. It also includes cases where a person receives a loan of cash or marketable securities from the trust or the uncompensated use of trust property.

(E) You are a US person who received either US$100,000 or more from a non-resident alien individual or foreign estate that you treated as a gift or bequest. Or you received more than US$20,116 from foreign corporations or foreign partnerships, including persons related thereto, that you treated as gifts. The latter figure is adjusted each year for inflation. 

Which Part or Parts to Complete?

The type of US person you are and the type of ‘reportable event’ determines which part or parts of Form 3520 you must complete.

Below are brief descriptions of the types of ‘reportable events’ required by each of the four parts of Form 3520. You may need to complete only one part or more than one part. 

PART I – Transfers

Complete this section if you are a US person who made a transfer of assets (including cash) to a foreign trust during the year. 

A great deal of additional information about the transfer is required, such as to whom it was made, the country, whether it was a gift or bequest and whether it was in exchange for an obligation.

There are three schedules: A, B and C: 

  • Under Schedule A, report any obligations of a related trust 
  • Under Schedule B, report gratuitous transfers 
  • Under Schedule C, report any outstanding qualified obligations for the current tax year.

PART II – US Owner of a Foreign Trust

Complete this section if you are the US owner of a foreign trust. 

Here, you must indicate whether or not the foreign trust filed Form 3520-A (yet another information return).

Form 3520-A, ‘Annual Information Return of Foreign Trust with a US Owner’, is one of the special situations to be aware of when filing Form 3520. It’s the responsibility of the trust owner to make sure this form is filed on time. 

In it, you report basic information about the trust (such as trust name, date of creation, ID number).

In Part II, you provide an income statement, and in Part III, the balance sheet. 

The final section, the ‘Foreign Grantor Trust Owner Statement’, should be prepared by the trustee, and a copy should be provided for each US owner. This statement must be attached to the US owner’s Form 3520 filing.

PART III – Distributions to a US Person from a Foreign Trust

Again, very detailed information about the distributions is required: dates, descriptions, and FMV received or transferred. Under this section, you must also describe any loans received from a foreign trust.

Following the recording of any distributions or loans, you must calculate the amounts of the trust distributions, whether they are ordinary income, qualified dividends, short-term or long-term capital gains (or losses). 

This also covers unrecaptured section 1250 gains, which is a type of depreciation-recapture income that is realised on the sale of depreciable real estate and taxable at a maximum 25% capital gains rate.

In Part III, there is another situation to be aware of. In this section, the trust’s undistributed net income (UNI) must be reported. 

Annually, the income earned by a trust is known as DNI or Distributable Net Income. DNI is used to allocate income between a trust and its beneficiaries. 

To prevent double taxation on income, estates and trusts are allowed to deduct the lesser of distributable net income or the sum of the trust income required to be distributed and other amounts ‘properly paid or credited or required to be distributed’ to beneficiaries.

The caveat with UNI is that it could trigger something called ‘the throwback rule’. The IRS uses a complex process to calculate the base tax on accumulation distributions from foreign trusts on Part III of Form 3520.

The value of these accumulated distributions can trigger additional taxes, and it’s even possible these rules could add an additional tax of 100% of the value of accumulated distributions. 

With hidden traps such as these, it makes sense to engage a tax attorney with experience in foreign trusts and expat taxation rules.

PART IV – US Recipients of Gifts or Bequests Received from Foreign Persons

Complete this section if you have received gifts or bequests of US$100,000 or more from foreign persons. 

Only gifts of US$5,000 or more need to be itemised. Gifts or bequests can be from individuals, trusts or estates.

Gifts received from a foreign corporation or partnership need to be reported if they exceed US$19570.

Penalties for Late Filing or Failure to File

IRS Tax Penalties

Form 3520 carries severe penalties for failure to file, the first being the greater of US$10,000 or 35% of the gross value of any property transferred to a foreign trust, as reported in Part I. 

The 35% of the gross value of the distributions received as reported in Part III or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a US person under the grantor trust rules in sections 671 through 679, for failure to report the US Owner information.

If you recall the brief discussion of Form 3520-A above, the US owner is subject to an additional 5% penalty (or US$10,000, whichever is greater) if this person fails to ensure that Form 3520-A is timely filed by the trust and that each US owner and beneficiary is provided with the required annual statements. 

Also, of course, all information required by the Form must be complete and accurate.

If non-compliance continues for more than 90 days after the first notice of failure to comply, additional penalties will be imposed according to Section 6677, ‘Failure to File Certain Information with Respect to Certain Foreign Trusts’.

The rules under this section impose an additional US$10,000 penalty for each 30-day period in which non-compliance continues. However, the total penalties imposed cannot exceed the gross reportable amount.

There are somewhat less severe penalties if the failure to report involves a foreign gift, being 5% of the amount of the gift. This penalty accumulates 5% each 30-day period of non-compliance but tops out at 25%, which, of course, can be substantial in the case of large gifts.

It may be possible to have penalties waived if you can show a reasonable cause for a failure to file was not due to wilful neglect. 

One interesting caveat here is that even if the country in which the trust was formed imposes penalties for disclosure of certain information about the trust, or if there are specific provisions contained within the trust to prevent disclosure of such information, these are not considered a sufficient reason for failure to file by the IRS.

Clearly, Form 3520 and 3520-A are highly complex tax forms, requiring an intimate knowledge and understanding of foreign taxation rules for US persons, as well as for foreign trusts and foreign gifts received. With failure-to-file penalties starting at US$10,000, the stakes are too high to leave it to chance. 

So, it’s recommended that you work with a tax professional who’s experienced in international tax to help you prepare these forms.

How to File Form 3520: FAQs

Where can I find Form 3520 instructions?

The official instructions for filling out Form 3520 can be found on the IRS website

Can Form 3520 be filed electronically?

No, it can now be signed electronically but you must send the completed form by post to: Internal Revenue Service Center, P.O. Box 409101, Ogden, UT, 84409.

What is the Form 3520 due date?

The deadline for submitting Form 3520 is 15 April of the following tax year.  

Can I get a Form 3520 extension?

Yes, you can apply for a six-month extension via Form 7004. In this case, your deadline will be 15 October of the following tax year. 

What is the difference between gift tax and inheritance tax?

Gift tax is charged on assets transferred while the giver is still alive, and the giver pays the tax. Inheritance tax is charged on assets transferred after someone’s death and is paid by the beneficiary. There are different exclusions and regulations associated with each tax.

Do I need to file Form 3520 if I didn’t receive any gifts or inheritances?

No, you only need to file if you received gifts or bequests from foreign parties that exceed specific thresholds. 

Don’t Get Penalised for Form 3520

Filing Form 3520 correctly is crucial to avoid steep penalties, which can quickly escalate for late or incomplete reporting. 

Whether you’re receiving a foreign gift or inheritance or dealing with a foreign trust, the IRS expects full compliance, regardless of the complexities involved. 

Given the high financial stakes and intricate reporting requirements, working with a tax professional experienced in international tax law is always a smart investment. 

A single mistake can be costly – but with expert guidance, you can stay compliant and keep your finances secure. 

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Tom Kotze
Written by Tom Kotze
Fact-checked by:
Emily Concannon
Reviewed by:
Kevin MacDermot

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