Form 3520-A: the trust annual information return

What Form 3520-A covers

Formally titled the Annual Information Return of Foreign Trust with a US Owner, Form 3520-A takes a different angle from Form 3520. Whereas Form 3520 documents the settlor's dealings with the trust, this return sets out the trust's own finances: year-end assets and liabilities, income earned and expenses incurred over the year, any distributions paid to US beneficiaries, and the names and addresses of US persons holding an interest. In essence it is the trust's tax information return, drawn up from its yearly accounts.

Who files it and when

Strictly speaking, the obligation to lodge Form 3520-A sits with the foreign trust itself. Realistically, though, since the Cook Islands trustee is a foreign entity carrying no direct duty to the IRS, that obligation shifts to the US owner under the grantor trust rules. Should the trustee not file, it is the US owner who must do so or otherwise absorb the penalties for the omission.

Filing is due March 15 â a full month ahead of the April 15 deadline for personal returns. That earlier date takes many settlors off guard, especially in years when the trustee has not finished the annual accounts by March. Filing Form 7004 secures an extension out to September 15.

The consequences when a trustee fails to file

Responsibility rests with the US owner, who must therefore either see to it that the trustee files or else assemble and submit the form personally using figures from the trust accounts. Typically the CPA who manages the settlor's foreign trust returns builds Form 3520-A out of the trust accounts supplied by the trustee, then lodges it for the settlor as deemed owner. At onboarding, pin down with both the trustee and the CPA precisely who is accountable for getting Form 3520-A filed every year, and check that the trustee's schedule for preparing accounts lines up with the March 15 deadline.

The penalty regime

Fail to file Form 3520-A and the penalty is whichever is larger: $10,000 or 5 percent of the gross value of the trust's assets. Where the trust is sizeable, 5 percent of assets adds up quickly, and it bites for each year left unfiled. This charge stands entirely apart from â and stacks on top of â any penalty tied to a missed Form 3520. Miss both returns in one year and both penalties land together.

Because it keys off 5 percent of assets, the Form 3520-A penalty grows with the size of the trust portfolio in a way the Form 3520 penalty simply does not. With a large trust, the yearly cost of skipping this return towers over the cost of actually filing it.

General information only. Verify the current rules and your own particular filing duties with a CPA experienced in Cook Islands trusts. Reconfirm the March 15 due date and the extension procedure each year.