By: Lynn K. Ching
Certain Tax Favored Foreign Trusts Exempt From 3520/3520A Reporting
Under (recently issued) IRS Revenue Procedure 2020-17 (“Rev Proc 2020-17”), certain U.S. persons having an interest in qualifying tax-favored foreign trusts established and operated exclusively or almost exclusively to provide pension or retirement, medical, disability, or educational benefits are exempt from Forms 3520 and 3520-A reporting.
The IRS and Treasury determined that because certain tax favored trusts are subject to written requirements under foreign local law (such as contribution limits, withdrawal limitations, and informational reporting), it would be appropriate to exempt U.S. individuals from the requirement to provide information about these trusts under IRC Sec. 6048
Only Eligible Individuals May Rely on Rev Proc 2020-17
For purposes of Rev Proc 2020-17, an eligible individual means an individual who is, or at any time was, a U.S. citizen or resident. and who is tax compliant (or comes into compliance) with all requirements for filing U.S. federal income tax return(s) covering the period such individual was a U.S. citizen or resident.
Eligible Tax Favored Foreign Retirement Trust:
– Must be established under the laws of a foreign jurisdiction to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits.
– The trust must be generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction.
– Annual information reporting with respect to the trust (or of its participants or beneficiaries) is provided to the relevant tax authorities in the trust’s jurisdiction.
– Only contributions with respect to income earned from the performance of personal services are permitted.
– Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust, or are subject to a lifetime limit of $1,000,000 or less to the trust.
– Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met.
– If the trust is employer maintained, additional requirements must be met:
(i) the trust must be nondiscriminatory insofar as a wide range of employees, including rank and file employees, must be eligible to make or receive contributions or accrue benefits under the terms of the trust,
(ii) the trust actually provides significant benefits for a substantial majority of eligible employees, and (iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory.
Eligible Tax Favored Foreign NON-Retirement Savings Trust:
– Must be established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits, and meets the following requirements:
(1) The trust must be exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction.
(2) Annual information reporting with respect to the trust (or about the beneficiary or participant) must be provided to the relevant tax authorities in the trust’s jurisdiction.
(3) Contributions to the trust are limited to $10,000 or less annually or $200,000 or less on a lifetime basis, determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year.
(4) Withdrawals, distributions, or payments from the trust are conditioned upon the provision of medical, disability, or educational benefits, or apply penalties to withdrawals, distributions, or payments made before such conditions are met.
Lynn K. Ching is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Lynn may be reached at (415) 318-3990 or by email at firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.