My family consists solely of U.S. citizens. I formed a foreign trust and transferred assets into it, years ago, to plan for my family's future. The trust hasn't distributed anything yet. I don't have special trust information-reporting requirements at this point. Right?
Your situation is common. Unfortunately, though, your assumption is mistaken.
The thrust of your question appears to concern I.R.C. § 6048. To be sure, other reporting requirements may apply.(1) But we'll simplify the inquiry here and set those issues aside.
As discussed elsewhere, you may be treated as the “owner” of part or all of the trust. With that understanding, let's look at Code section 6048(b). When applicable, paragraph (1) generally requires reporting through Forms 3520 and 3520-A. The paragraph applies “[i]f, at any time during any taxable year of a United States person, such person is treated as the owner of any portion of a foreign trust under [the grantor trust rules] . . . .”
Thus, for U.S. persons, the reporting requirement effectively anchors itself to the grantor trust rules, with virtually no other condition attached. That is, regarding foreign trusts, deemed “owners” assume reporting responsibility, even if, as you suggest, “[t]he trust hasn't distributed anything yet.”
The questioner's faulty reasoning may have arisen, understandably, from conflating subsections within Code section 6048. That is, each of subsections (a) through (c) imposes discrete information-reporting requirements. Thus, in the context of foreign trusts, reporting for “reportable events,” under subsection (a), and that for U.S. person distributions, under subsection (c), are distinct from “owner” reporting under subsection (b). Indeed, reporting conditions and the persons subject to the requirements will often vary significantly. As suggested, confusion is understandable, given the complexity of the subject matter. Information reporting, especially when it concerns foreign trusts, is not beach reading. Of course, the lesson is to avoid speculation, particularly when penalties for noncompliance may be severe.
To offer a generalized observation, uninformed reporting assumptions can saddle people, including well-intentioned taxpayers, with devastating liabilities. In my practice, I've flagged numerous misguided positions, sometimes lacking even a coherent basis in law (let alone a reasonable one). These positions have foreseeably and needlessly created penalty exposure. Disappointingly, they've occasionally been recommended by tax preparers. As a common thread, they've been founded on unresearched assumptions or simplifications. Please don't fall into this trap, which I believe ensnares far too many taxpayers. Seek help from qualified professionals if there is any doubt.
(1) For example, consider Code section 6038D, which generally relies on full and accurate reporting on Form 8938. If you're the “owner” of the trust under I.R.C. § 679(a)(1), you'll be “treated as having an interest in any specified foreign financial assets held by the trust . . . .” Treas. Reg. § 1.6038D-2(b)(4)(ii) (boldface added). As a result, depending on whether the trust assets meet relevant conditions, Form 8938 reporting may be required. Even so, in this circumstance, under Treas. Reg. § 1.6038D-7(a)(2), you may limit the extent of asset-reporting obligations for the taxable year. Conditions apply, though: (i) You report the trust on a timely filed Form 3520; (ii) The foreign trust timely files Form 3520-A; and (iii) You file Form 8938 for the taxable year and report in it the filings in “(i)” and “(ii).” Thus, this simplified Form 8938 requirement relies on your compliance with Code section 6048.
Content posted June 17, 2023.
