Foreign Trusts 101: What US Beneficiaries Need to Know About Form 3520

In Plain Terms

If you've received money or property from a foreign trust, set one up yourself, are treated as its owner under the grantor trust rules, or received a large gift or inheritance from someone outside the U.S., there's a good chance you owe the IRS a form even if you owe no additional tax at all. The form is Form 3520 (and sometimes its companion, Form 3520-A) and missing it has historically been one of the most punishing paperwork mistakes a U.S. person with international ties can make: not because of unpaid tax, but because of the penalty for the missing form itself.

The short version:

●  Form 3520 reports creating or funding a foreign trust, receiving distributions from one, being treated as a foreign trust's owner, or receiving gifts/inheritances above a threshold from foreign individuals or entities.

●  Form 3520-A is a separate form the trust itself files (not the individual) when a U.S. person is treated as its owner due earlier than Form 3520, on March 15 for a calendar-year trust.

●  The foreign gift threshold that triggers filing is over $100,000 from a nonresident alien individual or foreign estate in a year (once past that, each gift over $5,000 must be itemized), or over $20,573 for 2026 from a foreign corporation or partnership (this figure adjusts for inflation every year).

●  Missing the deadline used to trigger an automatic penalty no questions asked often 25% or more of the gift or trust amount, regardless of whether any tax was owed. As of late 2024, that changed: the IRS now reviews a late filer's reasonable-cause explanation before a penalty is assessed, not after. This is a real, favorable shift worth knowing about if you've been avoiding this topic out of fear of the old regime.

If any of that applies to you or your family, here's what governs it.

Who Has to File What

Form 3520 ("Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts") is filed by the individual, and covers four distinct triggers:

●  Creating or transferring assets to a foreign trust

●  Receiving a distribution from a foreign trust

●  Being treated as the owner of a foreign trust under the grantor trust rules

●  Receiving gifts or bequests from foreign persons above the thresholds described below

Form 3520-A ("Annual Information Return of Foreign Trust With a U.S. Owner") is different in an important way: it's filed by the trust, not the individual, though the U.S. owner is ultimately responsible for making sure it happens. It's due earlier by the 15th day of the third month after the trust's tax year ends (March 15 for a calendar-year trust), with an automatic six-month extension available.

Form 3520 itself is due with your individual return the 15th day of the fourth month after your tax year ends (April 15 for most people), extendable to October 15 along with your regular filing extension.

The Foreign Gift Thresholds

This is the trigger that catches the most people off guard, because it applies even when nothing about the transaction resembles a "trust" at all a wedding gift from a relative abroad, an inheritance from a parent who never lived in the U.S., proceeds from selling property overseas that a foreign family member gives you.

●  From a nonresident alien individual or foreign estate: filing is required once the aggregate amount received in the year exceeds $100,000. Once you're past that threshold, each individual gift over $5,000 needs to be separately identified.

●   From a foreign corporation or foreign partnership: the threshold is much lower and adjusts for inflation each year $20,573 for 2026, up from $20,116 in 2025.

Both thresholds are aggregate, cumulative figures for the year not per-gift which is exactly what trips people up when a series of smaller transfers adds up over twelve months without anyone doing the math until it's too late.

What Changed in Late 2024 And Why It Matters

For years, the practical reality of Form 3520, Part IV (the foreign gift section) was harsher than the statute itself. The IRS's systems assessed penalties automatically the moment a Form 3520 was filed late before anyone reviewed whether the taxpayer had a legitimate reason, and often before anyone reviewed whether tax was even owed at all. The result, according to the IRS's own Taxpayer Advocate Service: an estimated 67% of these automatically-assessed penalties were later abated on appeal meaning two out of three were wrong from the start, but the taxpayer had to fight to prove it, sometimes for years. Between 2018 and 2021, people earning $400,000 or less received average penalties exceeding $235,000 for what was, in substance, a missed form.

That changed. IRS Commissioner Danny Werfel announced in October 2024 that the agency would end automatic penalty assessment for late-filed Form 3520 Part IV (foreign gift) reporting, with the reasonable-cause review process taking effect by the end of that year. Campus personnel now screen a late filer's reasonable-cause explanation before a penalty is allowed to post automatically, rather than assessing first and reviewing only on appeal reflected in the IRS's current penalty-relief procedures for these forms (Internal Revenue Manual 20.1.9.13.5 for Form 3520, 20.1.9.14.5 for Form 3520-A). A generic explanation still won't carry the day reasonable cause still calls for a clear showing of ordinary business care and prudence, with specifics on timeline and the actual obstacle to filing on time but the structural problem of being penalized first and heard second is, at least as of this writing, no longer the default.

Still worth flagging: the penalty exposure itself hasn't been repealed IRC §6677 (trust-related failures) and §6039F (foreign gift failures) still authorize penalties reaching well into the tens of percent of the amount involved. What changed is the sequence: reasonable cause now gets a hearing before the penalty lands, not only after.

What This Means in Practice

1.    Don't assume "no tax owed" means "no filing required." Gifts and inheritances from foreign persons generally aren't taxable income to the recipient but the reporting obligation exists independent of any tax due, and the historical penalty exposure attached to the missing form, not to unpaid tax.

2.    Track cumulative gifts across the year, not gift-by-gift. The $100,000 and $20,573 thresholds are aggregate annual figures. A handful of transfers that individually look unremarkable can cross the line collectively.

3.    If you've missed a filing in a prior year, this is a meaningfully better time to address it than it was before late 2024. The reasonable-cause process is no longer purely reactive.

4.    Form 3520-A's earlier deadline (March 15) is easy to miss because it doesn't align with the familiar April tax deadline. If you're the owner of a foreign trust, that date deserves its own place on the calendar, not a mental bundling with your personal return.

Form 3520 and 3520-A compliance isn't about aggressive tax planning it's about not letting a paperwork deadline become the most expensive mistake in an otherwise unremarkable family gift or inheritance. The rules are unforgiving in their thresholds and historically unforgiving in their enforcement; the second part, at least, is now a little less true than it used to be.

This article is intended solely for general educational and informational purposes and does not constitute formal tax, legal, or accounting advice for any specific situation. Tax law and administrative procedures are subject to change. Readers should consult a qualified tax professional or attorney regarding their specific facts and circumstances before taking action.