Hello, I’m Cr. Maximiliano Mira Salas, and today in our Technical Wednesday we’ll talk about Foreign Trusts and their tax implications. If you have an international trust structure or are considering creating one, this topic is essential for you!

What is a Foreign Trust?

A trust is a legal entity where a trustee manages assets to benefit others. The classification of a trust as domestic or foreign directly affects its tax treatment.

📌 A trust is considered foreign if:

It is not supervised by a U.S. court.
It does not have a U.S. person controlling all key decisions.

If it fails either criterion, it is classified as a Foreign Trust and has specific tax obligations.

Key Tax Obligations

Foreign Trusts must comply with strict IRS rules to avoid severe penalties:

• Form 3520: Reports transfers to the trust and distributions received.

• Form 3520-A: Filed by the trustee, reporting the trust’s income and expenses.

💡 Important fact: Failure to comply can result in fines up to 35% of the value of the transferred assets.

Grantor Trust vs. Nongrantor Trust

• Grantor Trust: The grantor reports the trust’s income as their own, even if no distributions are received.

• Nongrantor Trust: The trust pays taxes, and distributions to beneficiaries are subject to additional taxation.

👉 Foreign Grantor Trusts are useful tools but must be structured carefully to comply with regulations.

Real Case: Consequences of Not Reporting

Imagine transferring assets to a foreign trust and failing to file Form 3520. The IRS can impose a 35% penalty on the transferred amount. Additionally, distributions to beneficiaries in the U.S. may be heavily taxed.

📌 Conclusion:

Foreign Trusts offer advantages in tax planning but require strict compliance. Proper filing of forms is key to avoiding penalties and optimizing tax burden.

At FINANCERS, we handle your tax compliance so you can focus on what matters: your business.

👉 If this applies to you or you know someone who needs it, share this information and work peacefully!

Cr. Maximiliano Mira Salas
International Tax Advisor | FINANCERS