Liechtenstein trusts for U.S. citizens

Trustee legislation and legal texts

The Financial Market Authority describes its authority over professional trustees by reference to the Professional Trustees Act. The Professional Trustees Act underpins the authority's responsibilities for professional examinations, licensing, and the register of licence holders.^[2]

Lilex presents domestic legislation and treaty law in consolidated form, with amendments incorporated into the underlying enactment. Its search tools allow searches across the full text or within a law's title or abbreviation.^[3]

The database also supports searches using publication and legislative classification numbers, including searches for legislation within a legal subject. Lilex states that its consolidated texts serve an informational purpose and do not themselves have legal effect.^[3]

Professional supervision and the licence register

The Financial Market Authority, or FMA, supervises trustees and trust companies for due diligence purposes. The authority also grants licences and checks compliance with the conditions attached to licensing.^[2]

The FMA maintains a register of licence holders and issues certifications. Its professional qualification responsibilities include announcing examinations, admitting candidates, and issuing diplomas.^[2]

The FMA also responds to inquiries.^[2]

FATCA agreement and account information

Treasury lists Liechtenstein's FATCA agreement as in force under Model 1.^[5]

Treasury describes FATCA as requiring foreign financial institutions to report information about financial accounts held by U.S. taxpayers. FATCA reporting also covers accounts held by foreign entities in which U.S. taxpayers have a substantial ownership interest.^[5]

Foreign financial institutions comply through FATCA regulations and applicable institution agreements, or through intergovernmental agreements treated as effective in the institution's jurisdiction.^[5]

U.S. classifications, tax treatment, and reporting

A U.S. citizen falls within the IRS definition of a U.S. person for foreign trust reporting. The IRS explains that creating a foreign trust or conducting transactions with one can produce both income tax consequences and information reporting obligations.^[7][8]

Foreign trust and ownership classifications

The IRS defines a foreign trust by reference to whether it qualifies as domestic. Domestic status requires both primary administrative supervision by a U.S. court and authority in one or more U.S. persons to control all substantial trust decisions.^[8]

For U.S. tax purposes, grantor trust treatment applies to the extent that someone other than the trust is treated as owning its assets. Nongrantor treatment applies to the extent that this ownership treatment does not apply, and the IRS describes that portion as a taxable entity.^[8]

These classifications can apply to only part of a trust's assets. The IRS definition of grantor includes a person who establishes a trust or directly or indirectly contributes cash or other property without receiving equivalent value.^[8]

The IRS definition of a U.S. beneficiary generally includes a U.S. person who could benefit directly or indirectly at any time. It applies even when the trust instrument does not name that person as a beneficiary or distributions cannot be received during the reporting period.^[8]

Income tax treatment

A U.S. person treated as a foreign trust's owner under the grantor trust rules is generally taxed on its income. Section 679 specifically addresses a U.S. person's transfer of assets to a foreign trust that has, or is presumed to have, a U.S. beneficiary.^[7]

A U.S. beneficiary receiving a distribution from a foreign nongrantor trust generally reports the beneficiary's share of distributable net income. The IRS also identifies gain recognition under section 684 for certain transfers of appreciated property by U.S. persons to foreign nongrantor trusts.^[7]

Form 3520

Form 3520 reports specified foreign trust transactions and ownership under sections 671 through 679. The instructions divide reporting between Part I for relevant transfers, Part II for ownership, and Part III for distributions.^[8]

Part II remains required for a person treated as an owner even when the trust has had no transactions during the reporting period. The instructions also permit a joint Form 3520 when spouses file a joint income tax return and both are transferors, grantors, or beneficiaries of the same foreign trust.^[8]

Distribution reporting extends beyond cash payments expressly described as beneficiary distributions. The IRS definition includes gratuitous transfers of property whether or not the recipient is designated as a beneficiary, and includes constructive transfers such as trust payment of personal credit card charges.^[8]

For grantors or beneficiaries, specified loans and use of trust property without payment of fair market value within a reasonable time can also be treated as distributions for reporting purposes. The instructions extend these provisions to specified transactions involving related U.S. persons.^[8]

The Form 3520 instructions contain exceptions, including distributions taxable as compensation when the recipient reports them as compensation income. They also list exceptions for certain eligible individuals' interests in qualifying retirement and nonretirement savings trusts under Rev. Proc. 2020-17.^[8]

Form 3520-A and annual statements

Form 3520-A is the annual information return filed by the foreign trust, and a U.S. person treated as its owner is responsible for its timely filing under the IRS rules. The trust also has to furnish the required annual statements to its U.S. owners and beneficiaries.^[7]

If the foreign trust does not file Form 3520-A, the U.S. owner has to complete a substitute and attach it to the owner's timely Form 3520. The substitute includes the owner and beneficiary statements, with copies furnished to the relevant U.S. owners and beneficiaries by the Form 3520 deadline.^[7][8]

Form 3520-A uses the foreign trust's employer identification number. The Form 3520 instructions also require an employer identification number for the foreign trust when reporting ownership in Part II.^[7][8]

Form 8938 and FBAR

Form 8938 may apply when the combined value of specified foreign financial assets in which a person has an interest exceeds the applicable reporting threshold. The IRS identifies this obligation separately from foreign trust reporting on Forms 3520 and 3520-A.^[7]

FBAR reporting may apply to a person with a financial interest in, or signature authority over, a foreign financial account. FBAR account types include bank accounts, brokerage accounts, mutual funds, and trusts.^[7]

An exception from Forms 3520 and 3520-A does not remove an independently applicable Form 8938 or FBAR obligation.^[7]

Court structure

Liechtenstein's ordinary judiciary has three levels, the Landgericht, Obergericht, and Oberster Gerichtshof. The Landgericht is the first level, the Obergericht the second, and the Oberster Gerichtshof the third and final level.^[4]

The courts are seated in Vaduz.^[4]

Trust registration and filing

A Liechtenstein trust arises without entry in the commercial register.^[9]

Under Art. 900 ff. PGR, registration in the commercial register or a corresponding filing is required if the trust exists for longer than one year.^[9]

Reported information exchange commitment

Liechtenstein announced that it had decided to adopt the OECD standard for tax information exchange.^[10]

Liechtenstein also announced its readiness to enter into tax information exchange agreements, referred to as TIEAs, with other countries.^[10]

These are historical announcements. Liechtenstein's current exchange arrangements rest on later agreements such as the FATCA agreement noted above.

More on Liechtenstein

Questions and answers

Related resources

Related glossary terms

• Trust register: A trust register is an official record of trusts, their parties or trustees, such as the UK Trust Registration Service and EU beneficial-ownership registers.
• Domestic trust: The IRS defines a domestic trust through its court test and control test, and the term appears in U.S. foreign trust reporting rules for U.S. citizens.
• Qualified obligation: The Form 3520 instructions define a qualified obligation through written terms, a maximum term, U.S. dollar payments, an interest yield, and ongoing reporting.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.