Estate & Trust Planning
Form 3520, Form 3520-A, Form 709, Treaty
Wills, trusts and estate planning for families with US and UK connections, including foreign trust reporting and the inheritance tax position.
What does Estate & Trust Planning involve?
A will or trust drafted for one country can produce unexpected results in the other. A US revocable trust may be a taxable settlement in the UK, and a UK discretionary trust with American beneficiaries brings US reporting and harsh rules on accumulated income. We review the structures with lawyers in both countries so they work under both systems.
Forms and filings involved
- Form 3520
Reporting for US persons who receive large gifts or inheritances from abroad or who deal with a foreign trust.
- Form 3520-A
The annual information return for a foreign trust treated as owned by a US person, normally filed by the trustee.
- Form 709
The US gift tax return, which Americans in the UK often need for gifts to a non-US spouse, children or property bought jointly.
- Treaty
How the US-UK income tax treaty allocates taxing rights, and where its saving clause limits what US citizens can claim.
Wills and trusts that work in both systems
The US classifies a trust as domestic or foreign using a court test and a control test, and a trust that fails either is foreign.
A UK trust with a US settlor or US beneficiaries is usually a foreign trust. If a US person is treated as its owner, the trust should file Form 3520-A each year and the owner Form 3520. US beneficiaries report distributions on Form 3520, and the penalty for failing to do so is the greater of $10,000 or 35% of the gross reportable amount.
Distributions from a foreign trust that is not a grantor trust carry a further cost. Where a trust accumulates income and pays it out in a later year, US beneficiaries can be taxed under the throwback rules, which add an interest charge and treat accumulated gains as ordinary income. A UK discretionary trust set up with no thought of American beneficiaries can therefore be expensive to distribute from. Paying out current income each year, where the trust deed allows, is one way to limit the problem.
On the UK side, most lifetime trusts fall within the relevant property regime where the settlor is within the scope of inheritance tax, with charges on creation, at each ten-year anniversary and when property leaves. A US revocable living trust, ignored for many US tax purposes, can be a settlement for inheritance tax and attract those charges. For US estate tax, assets left to a spouse who is not a US citizen qualify for the marital deduction only through a qualified domestic trust.
Structures we review with your lawyers
- 01
- Domestic or foreign trust status under the US court and control tests
- 02
- Grantor or non-grantor classification and the resulting Form 3520 and 3520-A duties
- 03
- Accumulated income in UK trusts measured before distributions to US beneficiaries
- 04
- US revocable trusts checked against the UK relevant property regime
- 05
- Qualified domestic trust provisions where a spouse is not a US citizen
Who this is for
UK trustees with one or more American beneficiaries
- US citizens living in the UK with a US living trust
- Mixed-nationality couples drafting wills in both countries
- Executors administering an estate with assets on both sides
Why US UK Tax Returns
Each return is prepared with the other country's return open beside it, so a credit, election or disclosure on one is supported by the other.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
My British grandmother's trust wants to make a payment to me in the US. What happens?
You report the distribution on Form 3520, and how it is taxed depends on the trust's history. Current-year income is taxed in the ordinary way, but a payment out of income accumulated in earlier years can fall under the throwback rules, with an interest charge added. The trustees can help by providing a foreign nongrantor trust beneficiary statement. Missing the form carries a proportional penalty, so it should not be skipped.
I set up a revocable living trust in the US before moving to London. Is that a problem?
It can be. For US tax the trust is usually disregarded during your lifetime, but UK inheritance tax treats many such trusts as settlements. Depending on your residence history and the assets involved, transfers into the trust and its later anniversaries could attract UK charges that have no US equivalent. The trust should be reviewed against your UK position, and some people choose to hold UK assets outside it.
My husband is not a US citizen. Can I leave him everything free of US estate tax?
Not automatically. The unlimited marital deduction applies only to property passing to a US citizen spouse. Property left to a non-citizen spouse is taxable in your estate above your $13.99 million basic exclusion unless it passes through a qualified domestic trust, which defers the tax rather than removing it. UK inheritance tax has its own spouse exemption, and its limits depend on both spouses' status.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
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