A family’s foreign trust holds a building bought decades ago for $100,000 that is now worth $1,000,000. The grantor, a U.S. citizen, is seriously ill. Advisers sometimes suggest that the grantor buy the building back from the trust before death. Here is why, and where the idea works and does not.
Why would anyone do this?
Two reasons. Property a person owns at death generally takes a basis equal to its value at death (IRC §1014), so the heirs could sell the building with little or no gain. And for a U.S. grantor, leaving the building in a foreign grantor trust that is not part of the estate can trigger a deemed sale at death under IRC §684 (see our §684 article). Buying it back can avoid both problems.
How does the repurchase work?
The grantor buys the asset from the trust for its full fair market value, paying with his own cash or by swapping other property of equal value. The trust ends up holding the cash; the grantor ends up holding the building. Using money that is already in the trust would accomplish nothing.
Is the purchase itself taxed?
Not if the trust is a grantor trust owned by that same grantor at the time. The IRS treats a sale between a grantor and his own grantor trust as a transaction with himself, so no gain is recognized (Rev. Rul. 85-13; IRC §671). If the trust has already stopped being a grantor trust, the sale is taxable to the trust like any other sale.
What happens at death for a U.S. grantor?
The building is now in the grantor’s gross estate, so the heirs get a $1,000,000 basis and $900,000 of gain disappears for income tax. In exchange, the building counts toward estate tax. For 2026 the basic exclusion is $15,000,000, so many families pay no estate tax at all. Above that, the rate is 40%. Whether the trade makes sense depends on the size of the estate.
Because it is a sale for full value, not a gift, it uses none of the grantor’s gift tax exemption.
Does the same idea work for a nonresident alien grantor?
Much less often. Two problems arise.
- The trust may not be a grantor trust at all. For a foreign grantor, IRC §672(f) allows grantor-trust treatment only if the trust is revocable by the grantor or pays only to the grantor and spouse during the grantor’s life. Many irrevocable family trusts fail that test, so the sale would be taxable to the trust.
- U.S. estate tax with almost no exemption. If the asset is U.S.-situs, such as U.S. real estate, bringing it into the nonresident’s estate exposes it to U.S. estate tax with only a $13,000 credit (IRC §2102(b)(1)). That can cost far more than the capital gains tax saved. The U.S. does not tax a nonresident’s foreign assets, so repurchasing a foreign asset changes little for U.S. purposes.
A nonresident’s heirs may receive a stepped-up basis under §1014 even for property that is not subject to U.S. estate tax, so check whether the repurchase is needed at all.
What else should be checked?
- Timing: the sale must be completed and documented before death, at an appraised value.
- The trust deed: whether the trustee may sell to the grantor, and any protector consent.
- Local transfer taxes and California property tax reassessment on real estate.
- Reporting: Forms 3520 and 3520-A for the year of the sale.
How is the price set?
At fair market value, supported by a qualified appraisal dated close to the sale. If the grantor pays too little, the difference can be treated as a distribution from the trust (with its own tax and reporting consequences) rather than a purchase. If the grantor pays too much, the excess can look like a gift to the trust. Neither result helps. For real estate, use a licensed appraiser; for a business interest, a business valuation that addresses minority and marketability discounts if they apply.
Can the grantor pay with a note instead of cash?
Often yes. The grantor can sign a promissory note to the trust at an interest rate at least equal to the applicable federal rate (AFR) for the month of the sale. While the trust is a grantor trust, interest paid on the note is ignored for income tax, as the sale was. At death, the note is a debt of the estate and reduces the taxable estate, while the building still gets a new basis. The note must be real: signed, secured where appropriate, and actually paid or enforced. A note that no one intends to collect invites the IRS to recharacterize the transaction.
What if the grantor dies before the deal closes?
Then the plan generally fails. The asset is still in the trust, the trust may lose grantor-trust status at death, and for a U.S. grantor §684 may treat the transfer as a sale at that moment. Families should not wait until the final weeks. If a grantor is ill, start the appraisal and paperwork early, and decide in advance who will sign if the grantor becomes unable to.
Does the trust deed allow it?
Many foreign trust deeds restrict sales to the settlor, require a protector’s consent, or require the trustee to act only in the beneficiaries’ interest. The trustee must be comfortable that selling for full value is consistent with its duties. A short written resolution from the trustee, with the appraisal attached, protects everyone.
A quick example
A U.S. grantor’s foreign grantor trust holds stock bought for $200,000, now worth $2,000,000. The grantor buys the stock for $2,000,000 with a note at the AFR. No gain is recognized on the sale. The grantor dies six months later. The stock is in his estate at $2,000,000 and the heirs’ basis is $2,000,000; the $2,000,000 note owed to the trust is deducted as a debt. If the estate is below the exclusion, there is no estate tax, and $1,800,000 of built-in gain is never taxed. Had the stock stayed in the trust, the outcome could have been a $1,800,000 gain under §684.
Who should be involved?
At a minimum: the trustee, the grantor’s estate-planning lawyer, a tax adviser who can model the income and estate tax results, and an independent appraiser. If the trust is governed by foreign law or has a foreign trustee, local counsel should confirm that the sale is permitted and properly documented under that law. Because these situations often arise when a family is already under strain, a clear checklist and a single person coordinating the steps make a real difference.
Sources: IRC §§671, 672(f), 684, 1014, 2010, 2102(b)(1); Rev. Rul. 85-13; Rev. Proc. 2025-32 (2026 exclusion). As of November 2026.
