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My wife and I are US green card holders with an annual income of around $270,000. All of her family is in the UK. Her father passed away in 2016 in the UK and left a will where all his money would be invested, with the proceedings to be used by his ex-wife until her death, when the money would be equally split between my wife and her brother, around £50,000. Therefore, she is currently part of a trust with her brother and stepmom.

My wife's brother's financial advisor suggested that my wife be removed from the trust in order to avoid taxation in the US. However, this doesn't make sense to me. From what I've read, this money would only be subject to taxation in the US when it is distributed, that is, after her stepmom dies and my wife actually receives the money. In this situation, my wife would prefer to get the money and pay any due US taxes.

Would there be any reason for the US to tax her foreign trust before any of the money is distributed to her? Or was the financial advisor just too generic with the knowledge that "the US government taxes foreign income"? Also, due to the relatively low amount of the trust, would this money be taxed at all? I believe there is a minimum threshold for foreign income to start being taxed in the USA.

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There's a reporting requirement which may be onerous and with very stiff penalties (IIRC something like $10K penalty for non-compliance). It is reported using form 3520 and form 3520-A.

If there's no income attributed to the US beneficiary then I don't believe there's any tax due. There's no tax on the inheritance itself.

Forms 3520 and 3520-A may be a bit too complicated to self-file. I suggest engaging a professional. That said, probably not good enough a reason to give up on the inheritance. Up to her, of course.

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  • If I understand correctly, what you're saying is that even though we don't have to pay taxes, we still have to provide information about the trust. Is that correct?
    – MisterStrickland
    Sep 29, 2022 at 21:57
  • @MisterStrickland yes. And the IRS can be very aggressive in enforcing this because a lot of rich(er) folks try to use foreign trusts as a vehicle for tax evasion or aggressive tax avoidance. Also, don't forget your FBARs (form 114) etc
    – littleadv
    Sep 29, 2022 at 22:18

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