Form 3520: reporting transactions with your Cook Islands trust

What Form 3520 covers

Titled the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520 captures three kinds of reportable event for someone who settles a Cook Islands trust. First, establishing and initially funding the trust, disclosed in the year of formation. Second, any later contributions in subsequent years, be they cash, securities, or other property. Third, distributions taken as a beneficiary over the course of the year.

A return is required for each year in which one of these events took place. Beyond that, a filing is owed for every year following formation, since the ongoing existence of the trust remains a reportable fact regardless of whether anything moved. Even a year without contributions or distributions still calls for a return confirming that nothing occurred.

When it is due

It shares the deadline of the personal income tax return — April 15 for most people — and carries the same automatic extension to October 15. Extending the personal return pushes back the Form 3520 deadline as well, so requesting an extension on your personal return means no separate extension is needed for Form 3520.

There is a notable catch: should the trust itself owe a Form 3520-A and neglect to file it, the settlor can be hit with penalties on both returns. Verify with your CPA that both are going in on schedule, not merely the one the CPA prepares directly.

What information you need

Required details include the trust's name, the name and address of the trustee, the trust's taxpayer identification number where one exists, the formation date, and the amounts of any transfers into or distributions out of the trust that year. These figures are drawn from the annual accounts the trustee draws up. Line things up early in the year with both the trustee and the CPA so the accounts are ready in time for the return to be prepared ahead of the deadline.

In the first year the form additionally asks for details of the trust's terms, supplied as a copy of the trust deed or a summary of its material terms. This applies once, at formation, rather than every year.

The penalty regime

Failing to file Form 3520 when it is due carries a penalty equal to the greater of $10,000 or 35 percent of the gross reportable amount on transfers to foreign trusts, plus 35 percent of the gross reportable amount on distributions received from them. Each missed or inaccurate return draws its own penalty. Where the trust is sizeable, applying the 35 percent rate to a year of contributions or distributions yields a figure that usually dwarfs several years' worth of CPA fees.

These penalties are ones the IRS will in fact impose. Enforcement around offshore accounts has been a priority for years, and a Cook Islands trust falls neatly into the foreign financial arrangements the IRS examines closely. Complying voluntarily with accurate returns costs far less than having a missed filing surface through CRS data or the IRS's other information channels.

General information only. Verify the current rules and your own filing duties with a CPA experienced in Cook Islands trusts. IRS forms and their instructions are revised from time to time.