This series of blog posts concerns US tax filing and reporting requirements with regard to foreign (i.e., non-US) trusts. Part I provided a general overview of foreign trusts, Part II covered the US tax filing and reporting requirements for US grantors to the foreign trust. This post provides a summary of relevant US tax filings imposed on the trustee or fiduciary (and this includes a “foreign” trustee/fiduciary):
1. IRS Form 3520-A: Annual Information Return of Foreign Trust with a US Owner
This form is fully discussed in Part I of this blog post series, “Filings by Grantor”. The trustee of a foreign “grantor” trust that has a US owner is the party that must prepare and file the information required by this form. If the trustee does not complete a Form 3520-A, the US owner must complete and attach a substitute Form 3520-A to the Form 3520, otherwise the US owner may be liable for the penalties. Thus, as a practical matter, liability for compliance failure can be imposed on the US grantor.
Form 3520-A is filed annually and should provide the IRS with a complete accounting of the activities of the foreign trust for the year; the identity of the limited agent designated to receive requests for information from the IRS, and any other information required by law. The trustee is required to file this form by the 15th day of the third month following the end of the taxable year of the foreign trust.
Generally, the Form requires the reporting of trust income and expenses, trust activities, as well as provision to the IRS of a balance sheet. The Form itself also includes two statements that the trust is obligated to furnish. One statement must be furnished to each US person treated (or deemed treated) as an “owner” of the foreign trust and the other to each US beneficiary who receives a distribution from the foreign trust during the tax year. Both of these statements, as well as the Form itself, require the signature of the trustee under penalties of perjury.
In my discussions with Nilar Chan, CPA, and Ami Leng, CPA, both tax partners at East Asia Sentinel in Hong Kong I understand that one of the most common problems they encounter with foreign trusts is a failure to keep the financial statements up-to-date when the trustee is not a professional trustee. They encounter this problem whether the grantor himself is a trustee in a grantor trust or a friend or a relative is a trustee in non-grantor trust situations. It becomes very difficult to determine the current year’s income or loss and thus, the trustees find themselves in the unenviable position of being unable to provide the proper tax reporting documentation to the US owner or the US beneficiaries of the trust (more on this topic in Part IV). Bear in mind that when this situation arises, it can involve many years of financial statements, all of which must be prepared in accordance with US tax law and accounting principles.
2. IRS Form 56: Notice Concerning Fiduciary Relationship
The IRS Form 56 involves a notice to the IRS of “fiduciary” authority over a foreign trust with US income. A “fiduciary” is any person in a position of confidence acting on behalf of any other person. A fiduciary assumes the powers, rights, duties, and privileges of the person or entity on whose behalf he or she is acting. Form 56 should be filed by a fiduciary (as relevant here, the trustee) to notify the IRS of the creation or termination of the fiduciary relationship.
3. IRS Form SS-4
This is the form used to obtain an Employer Identification Number (EIN) from the IRS for a foreign trust with US income. You can access the form, instructions and IRS EIN online application here.
4. Form W-9: Request for Taxpayer Identification Number and Certification
The trustee may file this form to obtain the correct Employer Identification Number or Taxpayer Identification Number of the US agent, the US beneficiaries, and the US owner. You can access the form, instructions and other IRS information concerning Form W-9 here.
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