Foreign Trusts

Foreign Trusts

By: Martin M. Shenkman, CPA, MBA, JD

Distributions from foreign trusts are reportable on Form 3520, but the rules are broad and surprising, so caution is in order. If a foreign trust loans you money, it can be treated as a distribution if it doesn't meet a series of tough requirements to be a "qualified obligation". Notice 97-34. Before taking the loan, be sure you meet all prerequisites. A qualified obligation, is any obligation that meets certain criteria. Firstly, the conditions have to be stated in writing. The terms of the obligation must not exceed five years, the loan must also be repaid within five years, and the transaction must be done using US dollars. There are also certain percentages regarding the yield to maturity that must be adhered to, and the US citizen must report the status of the obligation for each year that the obligation is outstanding. There are other details that must be followed, so be sure to contact your financial advisor and be clear about all conditions before taking the loan.

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