Foreign Trusts &
Foreign Inheritances
When an estate or family trust you are responsible for has a connection to a foreign trust or an inheritance from abroad, the IRS requires reporting on Form 3520. The penalties for missing it start at $10,000 and are based on the amounts involved, not on any tax owed. It is one of the most complex areas of tax law, and most situations need a careful look at the trust’s full history.
Last reviewed
When this comes up for executors and trustees
- The person who died had a trust overseas. If they were treated as the owner of any part of a foreign trust, or part of one is included in their estate, the executor must report the death on Form 3520.
- The estate or family trust receives money from a foreign trust. The estate or trust must report the distribution on Form 3520, whatever the amount, and may owe tax on it.
- The estate receives an inheritance or gift from a foreign person. Reporting is required above $100,000 from foreign individuals and estates (counting gifts from related foreign persons together), or above $20,573 from a foreign corporation or partnership (2026). What matters is whether the giver was a U.S. citizen or resident, not where they lived.
- You find forms that were never filed. It is common to discover during probate that the person who died never reported a foreign trust. Those years need to be addressed before the estate is closed.
Is the trust actually foreign?
It is not about where the trust was signed or where the money sits. For U.S. tax purposes, a trust is foreign unless a U.S. court can supervise its administration and U.S. persons control all of its substantial decisions. What matters is whether each decision-maker is a U.S. person (a U.S. citizen or resident), not where they live. A family trust set up here can become a foreign trust if someone who is not a U.S. person, such as a relative who is a citizen of another country, is named a co-trustee with a vote or veto on major decisions. That brings Form 3520 reporting and, for some trusts, tax on built-in gains. If a change like a trustee’s death or resignation would make the trust foreign by accident, the rules allow 12 months to fix it. If a non-U.S. co-trustee is being considered, check first.
Which forms and when
Who files what
| Form | Who files | When it is due |
|---|---|---|
| Form 3520 | U.S. owners of a foreign trust, anyone who transfers property to one, anyone (including an estate or trust) receiving a distribution, and recipients of large foreign gifts or bequests | 15th day of the 4th month after the filer’s year end; the 15th day of the 10th month with an extension. Filed separately, on paper |
| Form 3520, at death | The executor, when the person who died owned part of a foreign trust or had one included in the estate | April 15 after the final tax year (October 15 with an extension) |
| Form 3520-A | The foreign trust, when it has a U.S. owner; the owner files a substitute if the trust does not | 15th day of the 3rd month after the trust’s year end (March 15 for a calendar year) |
The penalties
These penalties are not based on tax owed. They are based on the amount of the distribution, transfer, gift, or trust assets, so they can be far larger than any tax.
Penalties for missing or late filings
| Failure | Penalty |
|---|---|
| Distribution from a foreign trust not reported on Form 3520 | Greater of $10,000 or 35% of the gross distribution |
| Transfer to a foreign trust not reported on Form 3520 | Greater of $10,000 or 35% of the gross value transferred |
| Form 3520-A not filed for a trust with a U.S. owner | Greater of $10,000 or 5% of the gross value of the U.S.-owned portion |
| Large foreign gift or bequest not reported | 5% of the gift for each month late, up to 25% |
| Trust reporting failure continues after an IRS notice | An additional $10,000 for each 30 days beyond 90 days after the notice; total trust reporting penalties cannot exceed the gross amount that should have been reported |
Relief is available when the failure was due to reasonable cause and not willful neglect. A foreign country’s rules against disclosing the information do not count as reasonable cause.
When the foreign trust distributes to the family
If a U.S. person is treated as the owner of the foreign trust, its income was already taxed to that owner, and distributions generally are not taxed again. If the foreign person who created the trust is treated as its owner, which the rules allow only in limited cases, a distribution is generally treated as a gift from that person. Otherwise, distributions are taxable to the extent they carry out the trust’s income. A distribution first carries out the trust’s income for the current year; anything above that is treated as coming from income the trust accumulated in past years. That part is subject to the throwback tax, which adds an interest charge for the years the income sat in the trust.
The foreign trustee can provide a statement showing the trust’s actual income. Without it, a default method on Form 3520 treats the part of a distribution above 125% of the average from the prior three years as accumulated income, which can raise the tax. Asking the foreign trustee for the statement early is usually worth it.
Catching up on forms that were never filed
If the person who died, or the trust, missed these forms in past years, the IRS has procedures for getting current, and the right one depends on the facts, including whether the IRS has already made contact. Dealing with it during the estate administration protects the executor and the beneficiaries from penalties surfacing after the estate has been distributed.
Why these situations need careful review
Foreign trust reporting is one of the most complex areas of tax law. The same payment can be tax-free, taxed normally, or taxed with years of interest added, depending on details that are often buried in foreign-language documents. Among the situations that need a close look:
- Foreign foundations and similar arrangements that may or may not count as trusts for U.S. purposes
- Trusts where part is treated as owned by someone and part is not
- Foreign trustees who cannot or will not provide complete records
- Several years of forms that were never filed
- The death of the person who owned the foreign trust, which can change how it is taxed going forward
- Foreign mutual funds held inside the trust, which bring their own punitive tax rules
- Loans from the trust, or gifts from relatives that were really funded by the trust
An early decision, such as which method is used to calculate the tax on a distribution, can lock in how every later year is handled for the estate or family trust. We review the full history before anything is filed.
What we handle
- Determining whether a trust is foreign and who, if anyone, is treated as its owner
- Form 3520 for the estate, the family trust, or the executor at death
- Form 3520-A, or the substitute when the foreign trust does not file
- Throwback tax calculations when a foreign trust distributes to the family
- Reporting foreign inheritances and gifts received by the estate
- Catching up on prior years, with reasonable cause statements
- Coordinating FBAR and Form 8938 filings for foreign accounts
Frequently Asked Questions
The person who died had a trust overseas. What does the executor need to do?
If the person was treated as the owner of any part of a foreign trust, or any part of a foreign trust is included in their estate, the executor must report the death on Form 3520. It is due April 15 after the end of the person’s final tax year, or October 15 with an extension. If the person was treated as the trust’s owner, the trust’s annual return, Form 3520-A, is also needed for the year of death, and any forms the person failed to file in earlier years should be addressed as part of settling the estate.
Our family trust received money from a trust in another country. Is that taxable?
The distribution must be reported on Form 3520 whatever the amount. Whether it is taxable depends on the type of foreign trust. If someone is treated as the trust's owner (usually a U.S. person, and in limited cases the foreign person who created it), the distribution generally is not taxed again to the family. Otherwise, it is taxable to the extent it carries out the trust's income, and any part that comes from income the foreign trust accumulated in past years can carry the throwback tax and an interest charge.
The estate received an inheritance from a relative abroad. Does it have to be reported?
Yes, if the relative was not a U.S. citizen or resident and bequests and gifts from foreign individuals and foreign estates (counting related persons together) total more than $100,000 for the year, or gifts from a foreign corporation or partnership total more than $20,573 in 2026. The inheritance itself is generally not taxable income, but missing the Form 3520 can cost 5% of the amount for each month it is late, up to 25%.
Can a trust set up in the U.S. be treated as foreign?
Yes. A trust is foreign for U.S. tax purposes unless a U.S. court can supervise its administration and U.S. persons control all of its substantial decisions. Naming someone who is not a U.S. citizen or resident as a co-trustee with a vote or veto on major decisions can make an otherwise American trust a foreign trust, with all of the reporting that comes with it. Where the person lives does not matter; their U.S. tax status does.