U.S. Beneficiaries
The pattern is a family in Latin America, a trust settled by a parent or grandparent who is not a U.S. person, and a son or daughter who lives in Miami or studies here. While the trust is a true foreign grantor trust, a distribution is often a gift from the grantor. When it is a foreign non-grantor trust, the same wire can carry current income or accumulated income, and the throwback rules can apply. We read the deed with the adviser the family already trusts, so the trustee, the custodian, and the tax preparer are describing one trust.
The beneficiary does not elect the regime. The instrument, the grantor's powers, and whether the grantor is alive decide it. This page is the beneficiary's side of that file. The trust practice as a whole is Foreign Trusts. The forms are Form 3520 and Form 3520-A.
For a non-U.S. settlor, section 672(f) allows grantor-trust treatment in narrow cases, most often a power to revoke that the grantor can exercise alone. During a true FGT, income is attributed to the grantor. A distribution to a U.S. child is often treated as a gift from that foreign grantor, reportable on Form 3520 if it crosses the foreign-gift threshold, not as a distribution of trust income. An FNGT is a separate taxpayer. Distributable net income can come out currently, and undistributed net income can follow a later distribution. The beneficiary does not get to pick which of those the wire was. The comparison is in FGT vs. FNGT for International Families and in U.S. Beneficiaries of Foreign Trusts.
Distributable net income is the measure of a non-grantor trust's current-year income available for distribution. Undistributed net income is DNI from earlier years that was not distributed when it was earned. An accumulation distribution is a distribution above current-year DNI, and sections 665 through 668 tax that amount to a U.S. beneficiary of a foreign non-grantor trust with an interest charge for the years the income was deferred. The computation belongs to the tax adviser. It can consume a large part of what was distributed when income has accumulated for a long time. Distributing current income, so that UNI does not build, is a trustee decision that has to be made with that adviser before the accumulation exists. The mechanics are in The Throwback Rule. We do not tell a family what a future distribution will cost.
A U.S. person who receives a distribution from a foreign trust generally files Form 3520 for that year. The penalty under section 6677 for failing to report the distribution is the greater of $10,000 or 35 percent of the gross reportable amount, and it can apply when no extra income tax is due. Form 3520-A is the annual information return when a U.S. person is treated as the owner. U.S. beneficiaries, without more, do not make the trust file Form 3520-A. Without a Foreign Non-Grantor Trust Beneficiary Statement, the instructions can treat the whole distribution as an accumulation distribution. Getting the trustee to a statement the preparer can use is part of the legal work. A late form, and the reasonable-cause process the IRS has published, are on Form 3520 penalties. We do not describe that process as relief.
Grantor status that depends on a lifetime power under section 672(f) ends at death. If the trust is still foreign and no one else is the owner, it becomes an FNGT. Income attributed to the grantor in earlier years is not, in the ordinary case, a pool of undistributed net income. Accumulation starts when non-grantor status starts. Distributions to U.S. beneficiaries after that point are trust distributions, not gifts from a living grantor. In the year of death, a bequest from the foreign estate can still be a section 6039F item. The trust's own post-death distributions are not that bequest merely because they happen in the same year. Someone has to separate them on the form. See When the Foreign Grantor Dies.
Section 643(i) can treat a loan of cash or marketable securities from a foreign trust to a U.S. person, and the uncompensated use of trust property, as a distribution. A wire the family called a loan, or a Miami apartment the trust lets a U.S. beneficiary occupy, can be a Form 3520 item and an income item. A loan that qualifies as a qualified obligation is outside that treatment. Whether a note meets that standard is a question for the tax adviser on the document that was actually signed, not on the family's description of it. Repayment later does not, by itself, undo a distribution the statute has already treated as made.
The U.S. beneficiary often learns the shape of the trust when a wire arrives or a bank asks for the deed. The family's wealth adviser keeps the relationship. We help put the instrument, the trustee's authority, and the account title in a form a U.S. custodian can accept, and we work with the trustee toward a beneficiary statement the preparer can file from. If the person is about to become a U.S. person, rather than already one, that review belongs before the status change, on Pre-Immigration Planning. A deed that no bank will administer is not a plan for the child who lives here.
Parents frequently describe the trust as unchanged because the settlor still lives abroad and the assets were never "moved." The U.S. tax file does not follow that description. A child born a U.S. citizen, or a child who meets the substantial presence test while at school or at work in South Florida, is a U.S. person whether or not the parents have relocated. From that point, a distribution, a loan, or the use of trust property can be reportable, and an FNGT that has been accumulating income can meet the throwback rules when the money is finally sent. The parents' plan and the child's return have to be read together. The adviser who has the family's accounts is usually the person who sees the wire first. We support that adviser with the classification and the documents, and we coordinate with the CPA who computes DNI, UNI, and the form.
Two dates change the file even when nobody new moves. The day the grantor dies, covered in When the Foreign Grantor Dies, ends the lifetime FGT and starts FNGT accounting. The day a distribution exceeds current income, covered in The Throwback Rule, is when accumulated income can come out with the interest charge. Form 3520 is how the beneficiary reports either event. The filing map is Form 3520 and Form 3520-A and U.S. Beneficiaries of Foreign Trusts. The practice that holds the deed is Foreign Trusts.
Tell us who in the family is a U.S. person and whether money, a loan, or the use of property has already moved. If you are the family's adviser, say so. We will follow up to schedule a conversation. No commitment required.