Form 3520: UK trusts, inheritances and large gifts on a US return

Form 3520 is an information return, filed separately from Form 1040 but on the same due date, that catches two very different things: dealings with foreign trusts, and large gifts or inheritances from people outside the US. Nothing is usually taxable; the penalties for not filing are nonetheless among the highest in the code.

The four parts

• Part I — you transferred money or property to a foreign trust.
• Part II — you are treated as the owner of a foreign trust under the grantor trust rules (sections 671–679).
• Part III — you received a distribution from a foreign trust.
• Part IV — you received gifts or bequests from a non-US individual or estate totalling more than US$100,000 in the year, or from a foreign company or partnership above the indexed threshold (about US$20,000).

UK situations that trigger it

Inheritances from UK family. A bequest from a parent's UK estate above US$100,000 is a Part IV report. It is not taxed in the US; it must still be reported.

Gifts from UK parents. A house deposit from non-US parents above US$100,000 in a year is reportable. Several smaller gifts from related people are aggregated.

UK discretionary and interest-in-possession trusts. A US beneficiary receiving a distribution files Part III, and the distribution may carry out accumulated income taxed under the throwback rules. A US settlor or someone treated as owner files Part II, and the trust (or the owner, by substitute) files Form 3520-A.

Bare trusts and nominee arrangements often are not trusts for US purposes; the facts decide.

UK pensions and ISAs. Rev. Proc. 2020-17 exempts most tax-favoured foreign retirement and certain savings trusts from Forms 3520 and 3520-A where the conditions are met. Whether a particular ISA is a trust at all is unsettled; we take and document a position rather than ignoring the question.

Penalties

• Unreported transfer to or distribution from a foreign trust: 35% of the amount.
• Unreported ownership of a foreign trust: 5% of the trust assets treated as yours, per year.
• Unreported foreign gift: 5% of the gift per month late, up to 25%.

Reasonable cause can remove them but the standard is high and the statement needs facts.

Due date and where it goes

Form 3520 is due on the due date of your income tax return including extensions (15 April; 15 June for people abroad; 15 October with Form 4868) and is posted to the IRS campus in Ogden, Utah, not attached to the return. Form 3520-A for a grantor trust is due on the 15th day of the third month after the trust's year end, with its own extension on Form 7004.

Catching up

Missed Forms 3520 with no unreported income can usually be filed under the Delinquent International Information Return Submission Procedures with a reasonable-cause statement. Where income was also missed, the Streamlined procedures include the forms (no penalty on the Foreign Offshore route for people living abroad).

Frequently asked questions

My inheritance was not taxable. Do I still file?

Yes, if it exceeded US$100,000 from a foreign estate or individual in the year. The report is about disclosure, not tax.

Does inheritance tax paid in the UK matter?

Not for Form 3520. UK inheritance tax is a charge on the estate; the US generally does not tax the beneficiary on receipt.