A US citizen in France who inherits assets from French parents, receives a large gift from French relatives, or has any connection to a foreign trust must file Form 3520 with the IRS. The form is a reporting document, not a tax return in the traditional sense: most foreign gifts and inheritances do not generate US income tax liability. The reporting obligation exists independently of any tax owed.
The penalties for missing Form 3520 are disproportionately severe relative to the complexity of the form. The penalty for failing to report a large foreign gift is 5% of the unreported amount per month, up to 25% of the gift’s value. On a $200,000 unreported inheritance, that is up to $50,000 in penalties on a receipt that generated no US tax. The severity of the penalties makes this a high-priority compliance item for US citizens with French family connections.
The Four Reporting Categories
Form 3520 covers four distinct situations, each reported in a different part of the form.
| Part | Situation |
|---|---|
| Part I | Transferred property to, or created, a foreign trust |
| Part II | Treated as a US owner of a foreign trust (grantor trust rules) |
| Part III | Received a distribution (or constructive distribution) from a foreign trust |
| Part IV | Received a large gift or bequest from a nonresident alien, foreign estate, foreign corporation, or foreign partnership |
For most US citizens in France, the most relevant category is Part IV (large foreign gifts and bequests). Trust-related reporting (Parts I-III) applies to those with direct connections to foreign trust structures.
Part IV: Foreign Gifts and Inheritances
Who Must File
Part IV is required when a US citizen receives, in a single tax year, gifts or bequests that exceed the applicable threshold from the same source.
| Source | Annual Threshold |
|---|---|
| Nonresident alien individual | Aggregate of all gifts from the same individual exceeds $100,000 |
| Foreign estate | Aggregate of all bequests from the same estate exceeds $100,000 |
| Foreign corporation or foreign partnership | Aggregate exceeds approximately $19,570 (indexed annually; verify current amount in the Form 3520 instructions) |
The $100,000 threshold is per-source and cumulative. Multiple transfers from the same nonresident alien during the year are aggregated. Gifts from different individuals are not aggregated. A US citizen who receives $60,000 from a French uncle and $70,000 from a French aunt in the same year has received below the threshold from each source separately and has no Part IV filing obligation for either.
French Inheritance as a Foreign Bequest
A US citizen who inherits assets from a French citizen or resident alien receives a bequest from a nonresident alien or from a foreign estate. If the total value of the inheritance received during the year exceeds $100,000, Form 3520 Part IV is required.
No US tax is owed on the receipt. Under IRC §102, inherited property is excluded from the beneficiary’s gross income. The Form 3520 obligation is purely a reporting requirement.
French droits de succession paid to the French government do not substitute for or reduce the US reporting obligation. They are separate legal requirements under separate legal systems.
What Is Reported
Part IV requires disclosure of:
- The identity and relationship of the foreign donor or estate
- The description and fair market value of each gift or bequest
- The date each item was received
- The aggregate total from each source
The IRS does not collect taxes on the reported amounts through Form 3520, but may use the information to verify that any income generated by the inherited assets is subsequently reported on the beneficiary’s income tax returns.
Parts I-III: Foreign Trust Reporting
When Foreign Trusts Are Relevant
US citizens in France may encounter foreign trust reporting in several situations:
- Being named as a beneficiary of a family trust established by French (or other non-US) relatives
- Inheriting a beneficial interest in a trust rather than assets directly
- Establishing their own trust using French-law structures
- Holding assets through structures that the IRS reclassifies as foreign trusts
What constitutes a foreign trust: A trust is foreign unless both conditions are met: (1) a US court exercises primary supervision over trust administration, and (2) US persons control all substantial decisions of the trust. A single non-US trustee with decision authority is sufficient to make an otherwise qualifying trust foreign.
Part I: Transferring Property to a Foreign Trust
A US person who creates a foreign trust or transfers property to one must file Part I. Transfers of appreciated property to a foreign nongrantor trust are treated as sales at fair market value, requiring gain recognition on the transfer, even if no cash is received.
Part II: US Ownership (Grantor Trust Status)
A US person treated as the owner of a foreign trust under IRC §§671-679 must file Part II annually, including years with no transactions. The US owner reports all trust income, deductions, and credits on their personal return as if the assets were held directly.
When grantor trust status arises: Beyond the traditional grantor trust rules (revocable trusts, retained powers), a foreign trust can become a grantor trust if it lends money to or permits a US person uncompensated use of trust property, even without the US person being named as a grantor or beneficiary.
Part III: Distributions from Foreign Trusts
Any US person who receives a distribution from a foreign trust must report it on Part III, regardless of the amount. Distributions include:
- Direct cash distributions
- In-kind distributions (property)
- Credit card charges paid by the trust
- Payments by the trust discharging the US person’s obligations
- Use of trust property without compensation
- Loans of cash or marketable securities (unless the loan meets all six qualified obligation criteria)
Form 3520-A: The Trust’s Companion Filing
A foreign trust with a US owner must also file Form 3520-A, a trust-level annual information return. The trust files Form 3520-A separately from the US owner’s Form 3520.
| Form | Filed By | Due Date |
|---|---|---|
| Form 3520-A | The foreign trust | 15th day of the 3rd month after the trust’s tax year ends (March 15 for calendar-year trusts) |
| Form 3520 | The US owner, beneficiary, or recipient | April 15 (or extended date) |
If the foreign trust does not file Form 3520-A, the US owner must attach a complete substitute Form 3520-A to their Form 3520. A partial substitute is treated as unfiled. The US owner bears the penalty for the trust’s failure even if the owner had no control over the foreign trustee’s actions.
Penalties
Part IV (Foreign Gifts)
| Status | Penalty |
|---|---|
| Failure to file or incomplete filing | 5% of the unreported gift amount per month, maximum 25% |
A $300,000 unreported gift can generate penalties of up to $75,000, accruing monthly until the reporting obligation is satisfied or the cap is reached.
Parts I-III (Trust Transactions)
| Violation | Penalty |
|---|---|
| Failure to report transfer to or creation of foreign trust (Part I) | Greater of $10,000 or 35% of the gross value of the property transferred |
| Failure to report distribution received from foreign trust (Part III) | Greater of $10,000 or 35% of the gross value of the distribution |
| Failure to file Part II or substitute Form 3520-A | Greater of $10,000 or 5% of the gross value of trust assets treated as owned by the US person at year-end |
Reasonable cause: Penalties may be avoided if the failure was due to reasonable cause and not willful neglect. Foreign law prohibitions and foreign fiduciary reluctance to provide information do not constitute reasonable cause under IRS guidance.
Technical References
Statutory authority: IRC §6048 imposes the reporting requirements for foreign trusts. IRC §6039F imposes reporting requirements for large foreign gifts and bequests.
Part IV threshold: IRC §6039F(a) requires reporting when the aggregate value of gifts from a nonresident alien or foreign estate exceeds $100,000. The threshold for foreign corporations and partnerships is set by regulation and indexed annually; verify the current amount in the Form 3520 instructions each filing season.
Part I: Section 684 gain recognition: IRC §684 requires recognition of gain (but not loss) on transfers of appreciated property to foreign nongrantor trusts. The amount recognized equals the excess of fair market value over adjusted basis at the time of transfer.
Part II: Grantor trust rules: IRC §§671-679 establish when a US person is treated as the owner of trust assets. IRC §679 applies to foreign trusts funded by US transferors and treats the trust as having a US beneficiary in various circumstances, including post-March 18, 2010 loans and property-use arrangements.
Form 3520-A: Filed under IRC §6048(b), Form 3520-A is the trust-level information return. The US owner’s obligation to file a substitute when the trust fails is established under Treasury Regulations §1.6048-2.
Qualified obligation: For a loan from a foreign trust to avoid treatment as a distribution, it must meet all six criteria under Reg. §1.643(i)-1: written agreement, five-year maximum term, US dollar denomination, yield within 100%-130% of the applicable federal rate, IRS assessment period extension, and annual reporting.
Form 8938 interaction: Foreign trust interests are specified foreign financial assets under IRC §6038D and count toward the Form 8938 filing threshold. Assets reported on Form 3520 may be exempt from detailed disclosure on Form 8938 Part IV, but their value must still be counted toward the threshold.
Form 3520 instructions: https://www.irs.gov/instructions/i3520
Frequently Asked Questions
Do I have to report an inheritance I received from my French parents?
Yes, if the aggregate value received from that individual or estate exceeded $100,000 during the year. The inheritance is reported on Form 3520 Part IV. No US income tax is owed on the receipt; inheritances are excluded from gross income under IRC §102. The reporting obligation exists regardless of tax liability. Multiple transfers from the same source during the year are aggregated.
Is receiving a large gift from French relatives subject to US tax?
No. Gifts received are excluded from the recipient’s gross income under IRC §102. A US citizen who receives a $300,000 gift from a French grandparent owes no US income tax on the receipt. Form 3520 Part IV must be filed if the gift exceeds $100,000, but the form is a reporting document, not a tax assessment. Payment of French droits de donation is a separate obligation.
What is the penalty for failing to file Form 3520 for a large foreign gift?
The penalty is 5% of the unreported amount per month, up to a maximum of 25% of the gift’s value. On a $200,000 unreported gift, the maximum penalty is $50,000. The penalty applies regardless of whether any US tax would have been owed on the gift.
Do I have to file Form 3520 just because I am a beneficiary of a French family trust?
Yes, if you received a distribution from the trust during the year. Receiving any distribution from a foreign trust requires reporting on Form 3520 Part III. If you are treated as a US owner of the trust under the grantor trust rules, Part II must also be filed annually, even in years with no transactions.
What is Form 3520-A and do I need to file it?
Form 3520-A is the annual information return filed by the foreign trust itself when it has a US owner. If the trust fails to file, the US owner must attach a complete substitute Form 3520-A to their Form 3520 by the Form 3520 due date. A partial substitute is treated as unfiled. The US owner bears the penalty for the trust’s non-compliance.
Is a loan from a foreign trust treated as a distribution?
Yes, in most cases. Loans of cash or marketable securities from a foreign trust to a US person are treated as taxable distributions reportable on Form 3520 Part III, unless all six qualified obligation criteria are satisfied. The criteria include a written agreement, a term of five years or less, US dollar denomination, interest within the prescribed range, an IRS assessment period extension agreement, and annual reporting on Form 3520.