Foreign Grantor Trust
Published on December 17, 2024
Seth Hertz, a tax professional with 35 years of experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
*30-minutes US$437.
Table of Contents
Why should US citizens care about foreign grantor trusts?
When a super fund is labeled a foreign grantor trust, it adds significant complexity to your US tax return.
You’ll need to file Form 3520 and Form 3520-A each year to report the trust.
On top of that, most superannuation accounts invest in things like managed funds or ETFs, which the IRS considers Passive Foreign Investment Companies (PFICs). This means you’ll also need to file Form 8621 for each investment.
How does the IRS categorize superannuation funds?
The IRS views Australian superannuation as a trust, not a typical retirement plan like a 401(k). There are two types of trusts to consider:
- Employee Benefit Trust: This is when your employer contributes to your super account. In this case, the IRS typically won’t treat the trust as “transparent,” meaning fewer complicated filings are required.
- Foreign Grantor Trust: If you’re the one contributing more than your employer, the IRS may classify it as a foreign grantor trust. This comes with a whole bunch of extra paperwork and reporting requirements.
Why does this matter?
While being classified as a foreign grantor trust may not result in more tax, the extra reporting means higher tax preparation costs and more complexity.
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What happens when I roll over my superannuation to a new account?
As explained previously, if you move your superannuation from one account to another, the IRS doesn’t just see it as a simple transfer.
What seems like a simple transfer in Australia can turn into a complex tax issue with the IRS.
They don’t just see it as “super fund to super fund”; from the IRS’ viewpoint, there are two transactions happening.
First, you’re taking money out of one super account and then you’re putting that money into a new super account.
Why does the IRS treat it like a personal contribution?
For the IRS, superannuation isn’t treated like the retirement accounts you might be used to in the US, such as a 401(k). Instead, it’s seen as a foreign trust. So, when you move your money into a new super fund, the IRS classifies that as your personal contribution.
This is frustrating for many expats because they just see super funds as super funds.
But the IRS looks at it differently: there’s a transfer from super fund to you (as if you’re withdrawing the money), and then from you to the new super fund (as if you’re making a new investment).
This creates a situation where the new superannuation account becomes a foreign grantor trust.
Can this situation change over time?
Some tax professionals argue that once a super is a grantor trust, it stays that way. But others take a more lenient approach, saying that if your employer eventually contributes more than you did into the new super fund, the account could stop being treated as a foreign grantor trust.
However, this doesn’t happen overnight, and you can’t just top it up with voluntary contributions—it has to be employer contributions, like the mandatory superannuation guarantee.
This can be a useful strategy, but it’s important to be cautious. If you arrange for extra contributions from your employer to “catch up” on the balance, the IRS could still classify those as personal contributions, which would make things even worse.
