Form 3520 Foreign Trust Guide for US-UK Clients

Reporting Foreign Trusts on Form 3520: What Wealthy US-UK Clients Should Know

Form 3520, Foreign Trust Return, is the form a US person uses to report dealings with a non-US trust or a large gift from abroad. For wealthy US-UK families holding UK family trusts, will trusts, or offshore structures, filing them correctly protects you from penalties that once started at 35% of the amount involved.

Why does a UK trust land on a US tax form at all?

US tax law follows the person, not the postcode. If you are a US citizen or green card holder living in London, Washington still expects a full picture of your worldwide affairs, including any interests you hold in trusts outside the United States. 

A perfectly ordinary British arrangement — a discretionary family trust set up by your grandparents, a will trust created when a parent died, a bare trust holding shares for a child, or an offshore trust in Jersey or Guernsey — counts as a “foreign trust” the moment a US beneficiary or settlor is attached to it.

The reporting vehicle is Form 3520, formerly the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Congress built the rules into Internal Revenue Code section 6048, and the IRS explains the mechanics in its official Form 3520 overview and the detailed Instructions for Form 3520. What trips people up is that the same form covers four very different situations, each with its own logic. Sorting out which one applies to you is the whole game, and it is where our foreign trust reporting guide starts every client conversation.

Which four situations does Form 3520, Foreign Trust Return, cover?

Form 3520, Foreign Trust Return, is divided into parts; complete only the parts that apply to the year. A UK family with an offshore trust and an inheritance from a late relative might file two parts on one return; a young professional who simply received money from parents abroad files only one.

Part I — creating or funding a foreign trust

If you set up a non-US trust, transferred cash or assets into one, or your death would cause US property to pass to a foreign trust, Part I is where you report it. Settlors of New Jersey or Cayman structures live here, as do US residents who add funds to a trust established by a relative years ago.

Part II — a US owner of a foreign grantor trust

When the grantor-trust rules treat you as the owner of trust assets, you report through Part II. The trust itself is also expected to file Form 3520-A, the annual information return for a foreign trust with a US owner. A foreign trustee rarely volunteers to do this, so the US owner must ensure it happens or file a substitute Form 3520-A. The distinction between a grantor and a non-grantor trust drives the entire US tax outcome, a point we unpack in our grantor versus non-grantor trust explainer.

Part III — receiving a distribution

Beneficiaries who take money or property out of a foreign trust report in Part III. This is also where the notorious “throwback” rules bite: income the trust accumulated over past years and then pays out can attract an interest charge, and the default calculation method the IRS offers is deliberately punishing when no records exist.

 In actuality, a blind distribution can differ from a well-documented one by tens of thousands of pounds since the default technique treats accumulated revenue as though it built up evenly across the life of the trust and then layers interest on top. Trustees of older UK and offshore trusts often hold decades of accounts, and getting those figures before you file is usually the single most valuable thing a beneficiary can do. Our note on being a US beneficiary of a foreign trust explains how accumulation distributions are taxed.

Part IV — large foreign gifts and inheritances

Part IV has nothing to do with trusts as such. It captures gifts and inheritances from foreign people. You report if you receive more than $100,000 in a year from a foreign individual or estate, or more than roughly $19,570 (the 2024 indexed figure) from a foreign corporation or partnership. The IRS maintains the current thresholds on its Gifts from a Foreign Person page. A UK inheritance from a late parent frequently lands here, as our foreign inheritance and Form 3520 guide describes.

How do I know which part applies to my situation?

Most confusion disappears once you map the event to the person’s role. The table below is the quick sort we used in the first meeting.

The Form 3520 foreign trust rules also apply to arrangements that Britons never think of as trusts. A UK pension can meet the US definition of a foreign trust. However, many advisers argue that the common workplace and personal pensions are exempt under the US-UK tax treaty or under IRS notices that spare certain tax-favored accounts. 

The answer turns on the exact scheme and the guidance in force, so pensions deserve their own review rather than a blanket assumption. HMRC sets out the domestic UK trust treatment on its trusts and taxes pages, which we cross-reference against the US position for every client. For the family-trust angle specifically, our UK family trust and US tax guide covers the recurring traps.

What are the deadlines, and how severe are the penalties?

Timing is where good intentions unravel. The Form 3520 foreign trust return is filed separately from your Form 1040 but shares its due date, while Form 3520-A runs on the trust’s calendar and is due earlier. The consequences of missing either were, for years, among the harshest in the code — set out in IRC section 6677 and the Instructions for Form 3520-A.

Read those figures carefully, because the penalty attaches to the gross amount, not to any tax due. A US owner who never took a penny out of a trust can still face a five-figure charge simply for a missing information return, and the 35% figure on a large transfer can eclipse the value most families expected to keep. 

That severity is exactly why the numbers drew criticism from the Taxpayer Advocate and from practitioners for the best part of a decade.

There is real relief in recent history. In late 2024, the IRS stopped automatically assessing Part IV foreign-gift penalties before reading a taxpayer’s reasonable-cause statement, and extended similar review to the trust parts and to Form 3520-A. 

That change matters because the Taxpayer Advocate had shown the IRS was abating the majority of these penalties on appeal anyway. Reasonable cause — showing you acted with ordinary care and prudence — remains the core defense, and it is far easier to argue before a penalty is assessed than after. Because policy here keeps shifting, we confirm the live position on each filing rather than relying on last season’s memo.

A worked example: the Ashworth family

A Form 3520 foreign trust filing rarely involves a single tidy event. Consider Diane Ashworth, a US citizen who has lived in Edinburgh for two decades. When her mother died in 2024, Diane inherited £480,000 outright and became a discretionary beneficiary of a family trust her father had settled in Guernsey in the 1990s. In 2025, the trustees paid her a £60,000 distribution to help with a house purchase.

Diane’s return carried two parts. The outright inheritance, well above the $100,000 threshold, went into Part IV as a foreign gift from a foreign estate — reportable but not itself taxable. The £60,000 trustee payment fell within Part III, where the throwback rules applied because the Guernsey trust had accumulated income over the years. 

With no historical trust accounting available, the default method would have produced an inflated tax figure plus an interest charge. By obtaining the trustee’s records and preparing a proper foreign non-grantor trust beneficiary statement, we cut the taxable slice to the genuine accumulation and filed both parts on time. Had Diane assumed an inheritance was invisible to the IRS, a late Part IV alone could have exposed her to the 25% cap before any reasonable-cause argument could be made.

Talk to Jungle Tax

Foreign trusts and gifts are the sharp end of US-UK tax, and the reporting is unforgiving of guesswork. If you settle, own, or benefit from a UK or offshore trust, or have received a substantial gift or inheritance from abroad, let our cross-border specialists map the right parts, calculate the exposure, and file with confidence. Email hello@jungletax.co.uk, call 0333 880 7974, or visit jungletax.co.uk to arrange a consultation.