Offshore Trust Reporting Requirements – Alper Law

Offshore trusts are powerful tools for asset protection. They work by placing assets outside the jurisdiction of U.S. courts. We often recommend offshore trusts for clients who need more protection than Florida’s asset protection laws provide.

However, offshore trusts come with strict U.S. reporting requirements. While they are entirely legal, noncompliance can lead to serious penalties. Below is an overview of the key IRS regulations for offshore trusts.

Preliminary Paperwork

Appointment of a U.S. Agent

To simplify reporting, appointing a U.S. Agent is recommended. This person, who can be the trust settlor, trustee, CPA, or an attorney, communicates with the IRS on behalf of the trust. Although not mandatory, having a U.S. Agent helps maintain privacy and streamline compliance.

Offshore Trust Tax Identification Number (TIN)

Your offshore trust needs a TIN. This number does not create additional tax liability, as offshore trusts are typically “grantor trusts.” Instead, trust income and losses are reported on the trustmaker’s tax return.

Gift Tax Considerations

If an offshore trust has family beneficiaries, transferring assets may be considered a taxable gift. A CPA can determine whether a gift tax applies. If required, the trustmaker must file IRS Form 709.

Required IRS Forms

Form 3520-A: Annual Information Return of Foreign Trust With U.S. Owner

This form reports trust assets, sub-entities, and income or losses. It is filed by the trust (not the trustmaker or trustee) and is due by March 15. A U.S. Agent can sign this form, but it must be mailed—it cannot be e-filed.

Form 3520: Annual Return to Report Transactions with Foreign Trusts

Each trustmaker and beneficiary must file Form 3520 to report trust distributions and related transactions. This form must include a copy of Form 3520-A and is due with the individual’s tax return, including extensions.

FinCEN Form 114 (FBAR): Report of Foreign Bank and Financial Accounts

If an offshore trust has a financial account exceeding $10,000 at any time during the year, the trustmaker must file an FBAR. This form is due by April 15 and must be submitted electronically.

Additional Tax Filings

Individual Tax Return Reporting

Offshore trust income and losses appear on Schedule B of the trustmaker’s personal tax return. Schedule B reports interest and dividend income from both U.S. and foreign sources.

Form 8938: Foreign Asset Reporting

If an offshore trust holds assets worth $50,000 or more, the trustmaker must file Form 8938 with their tax return. This form ensures the IRS receives detailed information about foreign assets.

Forms 5471 and 8858: Reporting for Trust-Owned Entities

If an offshore trust owns an entity taxed as a corporation, the trustmaker must file Form 5471. If the entity is a disregarded entity, such as a single-member LLC, Form 8858 is required. Trustmakers can elect business taxation treatment using Form 8832.

Compliance and Penalties

Strict compliance with IRS offshore trust reporting is essential. Failure to file required forms can lead to significant penalties:

• Form 3520-A: Failure to file this form or providing inaccurate information on the form results in a penalty of at least $10,000 or 5% of the trust’s assets.
• Form 3520: Failure to file results in an additional penalty of $10,000 or 5% of trust assets.
• FBAR (Form 114): A non-willful violation carries a $10,000 penalty per instance. Willful violations result in a penalty of the greater of $100,000 or 50% of the trust’s account value.

About the Author

Gideon Alper is an attorney who specializes in asset protection planning. He graduated with honors from Emory University Law School and has been practicing law for almost 15 years.

Gideon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.