Foreign Trusts for US Citizens What You Need to Know

If you are a US citizen or Green Card holder and are the beneficiary, grantor, or trustee of a foreign trust, the IRS likely considers you subject to complex reporting requirements. Many taxpayers are unaware that certain Canadian structures, such as RESPs or even some family-owned corporations, could be treated as foreign trusts under US tax law.

Failure to report properly can result in severe penalties, even when no income is earned.

What Is a Foreign Trust?

A foreign trust is any trust that is not governed by US law and not controlled by US persons. Common examples include:

• Canadian family trusts
• Certain retirement or education savings plans
• Offshore estate planning vehicles

You might be involved with a foreign trust even if you did not create it or receive income from it.

Who Must Report?

U S persons must file if they:

• Create or transfer money to a foreign trust
• Receive distributions from a foreign trust
• Are a US owner or have certain powers or rights over the trust

Required Forms

Failure to file the correct forms can result in penalties starting at ten thousand dollars per year. Required forms may include:

• Form 3520: Annual return to report transactions with foreign trusts and receipt of certain gifts
• Form 3520 A: Annual information return of the foreign trust with a U S owner
• Form 8938: For specified foreign financial assets under FATCA
• FBAR: If the trust holds non U S bank accounts exceeding ten thousand dollars

Are Canadian Trusts Affected?

Yes. Canadian family trusts, trust owned private corporations, and even certain RESP or TFSA plans may be treated as foreign trusts for US tax purposes.

If you are unsure whether a Canadian legal entity is a foreign trust under US law, it is best to consult a cross border tax advisor.

Final Thoughts

Foreign trusts are a complex area of US tax law. Even if you receive no income, failing to report your interest can lead to large penalties. If you think you may be involved with a foreign trust, take action now.

At Nordfiscus, we help US citizens in Canada meet their foreign trust reporting obligations and avoid costly mistakes. Contact us today to assess your situation.