State trusts and federal rules: grantor status and Form 3520

A U.S. citizen scenario

Consider a U.S. citizen who is a beneficiary of a trust governed by U.S. state law and is also considering a gift from a relative outside the United States. The trust arrangement and the proposed gift are examined separately. Federal domestic trust status depends on court supervision and decision-making control, while certain foreign gifts have their own Form 3520 reporting rules.^[1][2]

A payment from the relative personally is different from a distribution made through a foreign trust. Form 3520 addresses both certain foreign gifts and foreign trust distributions, but those receipts fall into different reporting categories. Calling a payment a family gift does not resolve which category applies when a foreign trust is involved.^[2]

State treatment: creation and administration

State law governs how a trust is created and administered. The useful documents to assemble include the trust instrument, amendments, trustee appointments and provisions assigning decision-making authority.

A state governing-law clause does not answer the federal classification question. The federal definition requires both qualifying U.S. court supervision and U.S. persons’ control of all substantial decisions. A state-law label therefore cannot replace examination of those requirements.^[1]

Federal U.S. treatment: domestic or foreign

The court test asks whether a court within the United States exercises primary supervision over the trust’s administration. The control test asks whether one or more U.S. persons have authority to control all substantial trust decisions. A trust is domestic only when both requirements are met; otherwise, it is foreign for this federal classification.^[1]

The analysis concerns authority, and the mailing address on an account statement does not settle it. The provisions assigning powers, and who can exercise them, decide the question. Majority voting and a requirement for unanimous consent can produce different control questions when a non-U.S. trustee participates.

Before trustees or decision-making provisions change, the change is assessed against both federal tests. The purpose is to identify the resulting classification and reporting duties before implementation. U.S. persons’ transactions with foreign trusts can carry both income tax consequences and information reporting obligations.^[1]

Grantor status answers a separate question

Domestic or foreign classification does not determine grantor or nongrantor status. The grantor trust rules ask whether trust assets are treated as owned by a person other than the trust. A nongrantor trust is treated as a taxable entity to the extent its assets are not treated as owned by another person, and the classification can apply to only part of its assets.^[1][4]

A U.S. person treated as the owner of a foreign trust generally reports that trust’s income on the person’s U.S. income tax return. A U.S. beneficiary receiving a distribution from a foreign nongrantor trust generally reports the beneficiary’s share of distributable net income. Ownership and beneficiary statements help connect the trust’s records with the recipient’s income reporting.^[1]

A domestic trust can involve a foreign grantor without making the grantor’s nationality the classification test. The domestic trust definition focuses on the court and control requirements, while ownership is analyzed under the separate grantor trust rules. A foreign contributor does not by that fact make the trust foreign or settle who owes income tax.^[1]

Form 3520 follows the relationship and transaction

Form 3520 generally addresses specified transfers to foreign trusts, U.S. ownership of foreign trusts, distributions from foreign trusts and certain large foreign gifts or bequests. Loans and uncompensated use of foreign trust property can also require reporting. The analysis therefore extends beyond cash distributions described as income.^[1][2]

A U.S. owner must complete the ownership portion of Form 3520 even when no transactions occurred during the tax year. A separate Form 3520 is required for transactions with each foreign trust. These requirements explain why an inactive year or a single consolidated family record does not necessarily settle the filing question.^[2]

A domestic trust classification does not eliminate a U.S. citizen’s separate foreign gift inquiry. If the citizen receives a reportable gift directly from a foreign person, the gift reporting rule applies independently of any domestic trust arrangement. The identity of the recipient, the transferor and the actual transfer path decide which rule applies. If a domestic trust is treated as owned by a foreign person, distributions to a U.S. person are reportable on Form 3520 as gifts from a foreign person once the threshold for that kind of donor is exceeded: more than $100,000 in aggregate for a nonresident alien individual or foreign estate, or the lower section 6039F amount for a foreign corporation or partnership ($20,116 for tax year 2025 and $20,573 for tax year 2026; Rev. Proc. 2024-40, section 3.48; Rev. Proc. 2025-32, section 3.47).^[2][8][9]

Foreign gifts and gift tax are different inquiries

Form 3520 reporting applies when gifts or bequests from a nonresident alien individual or foreign estate exceed $100,000 in aggregate, including amounts from related foreign persons as described in the instructions. Gifts from foreign corporations or foreign partnerships use a different threshold, which is set for each tax year in IRS inflation adjustment guidance. The individual-or-estate threshold does not apply to that separate threshold.^[2]

Reporting a receipt on Form 3520 does not answer every gift tax question. The donor is generally responsible for gift tax, while the recipient may have a separate information reporting duty. A receipt from a covered expatriate also raises a distinct recipient tax question under section 2801.^[5][2]

For federal gift tax purposes, residence concerns domicile and can differ from income tax residence; holding a green card is not conclusive evidence of U.S. domicile. Which status definition applies comes before any tax conclusion drawn from a residence document.^[6]

Form 3520-A and the remaining reporting work

A U.S. owner must ensure that a foreign trust timely files a complete and accurate Form 3520-A and furnishes the required annual statements. Form 3520-A is generally due on the fifteenth day of the third month after the foreign trust’s tax year ends. A substitute Form 3520-A attached to the U.S. owner’s Form 3520 follows the Form 3520 due date instead.^[1][7][2]

FBAR, Form 8938 and income tax reporting require separate consideration. Relief from foreign trust information reporting does not remove other reporting obligations. The classification analysis, the transaction records and the required returns each rest on the same facts.^[1][2]

Scope and status

Form 3520 and the state of administration. A domestic trust is not a foreign trust, so the foreign trust return requirements do not apply to it merely because of its state of administration. Classification follows the federal court test and control test, not the trust's location alone, and a trust with a foreign grantor, foreign trustee or foreign trust interaction can still create reporting. Separately, a U.S. person who receives gifts or bequests from foreign persons may have to report them on Form 3520: over $100,000 in aggregate from a nonresident alien individual or foreign estate, or more than the section 6039F threshold amount from foreign corporations or partnerships: $20,116 for tax year 2025 and $20,573 for tax year 2026 (Rev. Proc. 2024-40, section 3.48; Rev. Proc. 2025-32, section 3.47). Gifts over $5,000 are identified separately.^[8][9]

Questions and answers

Related pages

• How the IRS classifies trusts for U.S. tax purposes: U.S. trust classification for tax purposes: ordinary and investment trusts, U.S. person status, and the environmental remediation trust rule in the regulations.
• The court and control tests for foreign trusts: The court test and the control test classify a trust as domestic or foreign, and foreign trust status connects to U.S. reporting rules for U.S. citizens.
• Foreign gifts and trust distributions | OffshoreTrusts.com: Form 3520 reports foreign trust distributions and certain gifts from foreign persons. Reporting does not by itself determine whether a receipt is taxable.
• Grantor and nongrantor trust taxation | OffshoreTrusts.com: U.S. income tax rules distinguish grantor and nongrantor trusts for U.S. citizens. Sections 671 through 679 may assign ownership of all or part of a trust.
• Form 3520: foreign trusts and foreign gifts: Form 3520 reports U.S. persons' dealings with foreign trusts and certain foreign gifts: reporting categories, definitions, attachments and filing timing.