Revenue Procedure update for US owners of Tax-Favored Foreign Trusts

The IRS requires an annual written notice of reportable events such as the transfer of money or property to a foreign trust, the creation of a foreign trust, or the death of a U.S. citizen who was an owner of a foreign trust. In addition, the identity of each trustee, each trust and each beneficiary, also needs to be included on an annual basis and there are heavy penalties in place for those who fail to comply.

However, tax-favored foreign trusts (TFFT) are frequently bound by a number of restrictions including information reporting obligations, withdrawal and deposit limitations and Section 6038D annual notification remit on the value of the assets held in each trust. In recognition of these existing reporting procedures, the IRS have waived the need for ‘eligible individuals’ to provide the information again on Forms 3520 or 3520-A.

In general, an eligible individual is classified as a U.S. citizen or resident who complies with the filing of federal income tax returns with declared income from contributions, earnings or distribution from any applicable tax-favored foreign trusts.

There are two types of TFFTs. The first is a foreign pension or retirement trust – a tax-favored foreign retirement trust- and the second, is a foreign medical, disability, or educational trust - a tax-favored foreign non-retirement savings trust.

The published revenue procedure document clarifies that a tax-favored foreign trust includes those trusts formed to provide an income for retirement and its related welfares. In addition, some selected trusts that have been implemented to provide funding for specific educational requirements and benefits or medical disabilities, are also included.

To qualify, both types of TFFTs must be ‘tax favored’ and therefore will usually be exempt from income tax, or be tax favored under the laws of the trusts jurisdiction. A trust is deemed tax favored if:

· The taxable funds deposited in the trust are excluded from income or are tax deductible, are taxed at a reduced rate, enable a tax credit, or are eligible other tax benefits such as a government subsidy or contribution.

· The income earned by the trust is taxed at a reduced rate, or deferred until later distribution.

In addition, the new regulations provide a route to apply for a refund or discount for penalties already applied prior to the new Revenue Procedure 2000-17 legislation; as the penalty abatement under the new regulations do not require the taxpayer to prove reasonable cause for failure to file.

The IRS has not yet however provided any detailed guidance detailing which come under the reporting exemption, and taxpayers are therefore required to evaluate the accounts and plans for each individual trust to determine if the reporting liability is exempt. It is not clear for example if Self Invested Pension Plans or SIPPS fall within these new rules.

For further information on Tax Favored Foreign Trusts, or for assistance in managing your tax compliance and reporting obligations please contact our dedicated team on 01932 320800 or email

Recent Posts
Search By Tags