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Uncompensated use of trust property

The Form 3520 instructions describe uncompensated use of foreign trust property and its reporting treatment. The term concerns use by the person or a related U.S. person.

Definition and reporting treatment

The IRS instructions for Form 3520 describe uncompensated use as direct or indirect use of foreign trust property by a U.S. person or a related U.S. person. The instructions treat the fair market value of that use as a reportable distribution, whether or not taxable.[1]

Uncompensated use is reported on line 25 of Form 3520. That line covers certain loans and use of trust property. The instructions separately place such use in Part III, which concerns distributions from a foreign trust.[1]

For the use entry, Form 3520 calls for the fair market value of the use and the date of first use. It directs the filer to skip columns for property received and loan terms, then show the amount paid for the use.

The instructions for Form 3520-A discuss a separate U.S. beneficiary rule. If a foreign trust is not already treated as having a U.S. beneficiary, use of trust property without paying its fair market value within a reasonable period can cause it to be treated as having one. This rule also covers indirect use.[2]

The IRS overview of foreign trust reporting also lists receipt of uncompensated property use among circumstances requiring Form 3520 filing by a U.S. person. This places the term alongside distributions and loans as a reporting category, while the Form 3520 instructions distinguish its calculation from cash or other property received.[7]

For ordinary property distributions, the instructions generally refer to cash or the fair market value of property received. They direct uncompensated use to line 25 instead, where the use value and amount paid are recorded separately. Thus, the reporting category is a distribution, with a particular method for valuing use and accounting for payment.[1]

Questions and answers

Does use of foreign trust property count as a distribution?

The Form 3520 instructions treat the fair market value of use by a U.S. person or related U.S. person as a reportable distribution. They state that this applies whether or not the amount is taxable.[1]

What information does Form 3520 request for property use?

The instructions call for the fair market value of use and the date of first use. They also call for the amount paid, which is subtracted from the use value to calculate the amount treated as a taxable distribution.[1]

Can unpaid use affect whether a foreign trust has a U.S. beneficiary?

Yes. The Form 3520-A instructions state that a trust not already treated as having a U.S. beneficiary can be treated as having one when a U.S. person uses its property and does not pay fair market value within a reasonable period.[2]

Is the use value always treated as a taxable distribution?

No. Form 3520 generally reports the fair market value of use and subtracts the amount paid to determine the amount treated as taxable. In the specified grantor-trust circumstance, the instructions say the use is not treated as taxable under section 643(i), while it remains reportable.[1]

  • Foreign trust loan: Form 3520 filing rules address a loan received by an owner or beneficiary, or a related U.S. person, and outstanding qualified obligations from the trust.
  • Trust property: The IRS defines property broadly, including cash, and uses trust property in rules on foreign trust assets and transfers, plus distributions to U.S. persons.
  • Distribution from a foreign trust: A foreign trust distribution triggers section 6048(c) reporting for the U.S. person who receives it.
  • U.S. beneficiary of a foreign trust: The Form 3520 instructions explain who is a U.S. beneficiary of a foreign trust and how that status relates to distributions and ownership, plus reporting.

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Sources and data notes
  1. Internal Revenue Service, Instructions for Form 3520. https://www.irs.gov/instructions/i3520. Retrieved .
  2. Internal Revenue Service, Instructions for Form 3520-A. https://www.irs.gov/instructions/i3520a. Retrieved .
  3. Internal Revenue Service, 26 CFR 301.7701-7 Trusts, domestic and foreign. https://ecfr.io/Title-26/Section-301.7701-7. Retrieved .
  4. Internal Revenue Service, 26 CFR 301.7701-4 Trusts. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 679. https://uscode.house.gov/us/usc/119-118/t26/s679/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 6048. https://uscode.house.gov/us/usc/119-118/t26/s6048/. Retrieved .
  7. Internal Revenue Service, Foreign trust reporting requirements and tax consequences. https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences. Retrieved .

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