Are you getting the classification of your trust correct for US tax purposes?

In 2018 the Internal Revenue Service started a campaign targeting foreign trusts’ failure to comply with the filing requirements of US owners[1] of foreign trusts, including ownership, and transactions with a foreign trust.


For US expats it is a minefield requiring an experienced US tax practitioner to guide them through.

In the field of US taxation, there are four categories of trust:

  1. foreign grantor trust
  2. foreign non-grantor trust
  3. grantor trust
  4. non-grantor trust.


Why is getting the classification correct so important?

If the classification is incorrect it can result in forms not being filed that should be filed. It can also result in transactions such as contributions to, and distributions from a foreign trust being unreported.

In times of FATCA, this can have disastrous consequences. Not filing the requisite information return can result in penalties of up to 35% of the gross value of the trust, and/or a $10,000 penalty[2].



Sections 672-679 of the Internal Revenue Code deal with US tax treatment of trusts whether domestic or foreign. The bottom line is that as soon as a US person has any influence over or benefits from a foreign trust there will usually be reporting required.

In the case of a grantor trust, the trust is looked through. If it is foreign, then to the extent to which US persons have transferred property to a foreign trust that person will be treated as the owner of the trust.

Accordingly, income, gains, expenses and losses flow through to the person’s US tax return as though derived themselves.

In the case of a foreign non-grantor trust, the trust is not looked through. However, any distributions are taxable to the US person by way of one of two methods[3].

The key difference is therefore in who gets taxed. A trust is effectively taxed on everything or the US person only, when (at the time the income is earned by the trust versus later upon distribution), and on what (gross income minus allowable deductions versus distributable net income).


Review your trusts’ compliance

There has never been a better time to review your trust’s filing compliance with the Internal Revenue Service.  You will need the expertise of your US expatriate tax advisors, NZ US Tax Specialists. Contact us for an initial complimentary consultation to discuss further.



[1] ‘US owners’ means ‘United States persons’ including 1. A citizen or resident of the United States. 2. A domestic partnership. 3. A domestic corporation. 4. Any estate other than a foreign estate. 5. Any trust if 1. A court within the United States is able to exercise primary supervision over the administration of the trust, and 2. One or more United States persons have the authority to control all substantial decisions of the trust. 6.Any other person that is not a foreign person.

[2] §6677(a)(2) Failure to timely file any information return with respect to certain foreign trusts imposes a penalty equal to the greater of $10,000 or 35 per cent of the gross reportable amount.

[3] Part III of form 3520 provides for a calculation involving the average distribution over the previous three years split into current year ordinary income and the balance accumulated distribution (Schedule A – default calculation). Alternatively, if the distribution can be classified into ordinary income, net short-term capital gain, net long-term capital gain, unrecaptured §1250 capital gain, aggregate undistributed net income and weighted undistributed net income (Schedule B Actual Calculation of Trust Distributions). If Schedule B is used an interest charge and tax on the interest charge is then calculable on Schedule C