A common family picture: parents in China or Taiwan set up a trust offshore, and some of the children now live in the United States. Whether that trust is a “grantor trust” decides almost everything — who pays tax on its income, how distributions to the U.S. children are treated, and what happens when the parent dies.
When is a trust “foreign”?
A trust is a U.S. trust only if it passes two tests: a U.S. court can exercise primary supervision over its administration, and one or more U.S. persons control all substantial decisions. Fail either one and the trust is foreign (IRC §7701(a)(30)(E), (31)(B); Treas. Reg. §301.7701-7). A trust with a trustee in Hong Kong, or with a foreign protector who can veto distributions, is usually foreign.
What makes it a grantor trust?
A grantor trust is one whose income is taxed to the person who set it up, as if the trust did not exist (IRC §§671–679). The rules depend on who the grantor is.
- U.S. grantor. The usual grantor-trust powers apply. In addition, IRC §679 treats a U.S. person who transfers property to a foreign trust with a U.S. beneficiary as its owner, almost automatically.
- Foreign (non-U.S.) grantor. IRC §672(f) allows grantor-trust status in only two cases: the grantor alone (or with a related or subordinate party) can take the assets back; or, during the grantor’s life, distributions can go only to the grantor or the grantor’s spouse. Other retained powers are not enough.
Who pays tax on the trust’s income?
If a U.S. person is the owner, that person reports all the trust’s income on his or her own return, whether or not anything is distributed. If a foreign person is the owner, the U.S. taxes the income only to the extent it is U.S.-source or connected with a U.S. business — the same way it would tax that foreign person directly.
My parent’s foreign trust sent me money. Is it taxable?
While the trust is a grantor trust owned by your foreign parent, a distribution to you is generally treated as a gift from your parent, not as income. It is not taxed, but it is reported: you file Form 3520 for distributions from a foreign trust (IRC §6048(c)), and gifts from foreign persons that total more than $100,000 in a year are reported on the same form (IRC §6039F). There is an anti-abuse exception if you previously gave money to the foreign grantor (IRC §672(f)(5)).
What changes when the foreign grantor dies?
The trust usually stops being a grantor trust and becomes a foreign non-grantor trust. From then on, distributions to U.S. beneficiaries carry out the trust’s income. Current-year income (distributable net income) keeps its character, and for foreign trusts that includes capital gains (IRC §643(a)(6)(C)). Income the trust accumulated in earlier years and distributes later is an “accumulation distribution”: it is taxed as ordinary income under the throwback rules, plus an interest charge (IRC §§665–668). The longer income sits in the trust, the more expensive it becomes, so many families plan distributions in the years right after the grantor’s death.
And when a U.S. grantor dies?
Different rule. When a foreign trust stops being owned by a U.S. person, IRC §684 treats the U.S. owner as having sold the trust’s appreciated property to the trust, so gain is recognized on the grantor’s final return (Treas. Reg. §1.684-2(e)). The main exception is property that is included in the grantor’s U.S. estate and gets a stepped-up basis (Treas. Reg. §1.684-3(c)).
Is the trust in the grantor’s estate?
For a U.S. citizen or domiciliary, trust assets are included if the grantor kept interests or powers such as the right to income or the power to revoke (IRC §§2036, 2038). For a foreign grantor, inclusion reaches only assets that are U.S.-situs — for example, U.S. real estate or U.S. company stock — and only where such retained interests exist. A trust holding foreign assets, or a foreign holding company, generally stays outside the U.S. estate.
Which forms are involved, and what are the penalties?
- Form 3520: transfers to and distributions from foreign trusts, and large foreign gifts. Penalty for unreported transfers or distributions: the greater of $10,000 or 35% of the amount (IRC §6677(a)). Unreported foreign gifts: 5% a month, up to 25% (IRC §6039F(c)).
- Form 3520-A: the trust’s annual return when a U.S. person is the owner. Penalty: the greater of $10,000 or 5% of the trust assets treated as owned by the U.S. person (IRC §6677(b)).
- FBAR and Form 8938 where the U.S. person has a reportable interest in the trust’s accounts.
What should a family do now?
Get the trust deed translated, confirm who the grantor is and what powers are reserved, and work out whether §672(f) is met. Then plan for the grantor’s death before it happens. The tax result often depends on decisions made in the year or two after.
Can a U.S. beneficiary just receive the money and do nothing?
No. A U.S. person who receives a distribution from a foreign trust must report it on Form 3520, Part III, even if it is not taxable. The trustee should provide a Foreign Grantor Trust Beneficiary Statement; without it, the IRS may treat the whole distribution as taxable accumulation distribution under default rules. Ask the trustee for that statement every year a distribution is made.
What if the U.S. beneficiary uses trust property?
Living in a trust-owned apartment or using a trust-owned car without paying fair value can be treated as a distribution equal to the fair rental value (§643(i)). A loan from the foreign trust to a U.S. beneficiary is also treated as a distribution unless it is a “qualified obligation” with proper terms. Keep leases and loan papers in writing, at market terms.
Does the trust need a U.S. agent?
If the trust has a U.S. owner, the trust is expected to file Form 3520-A and to appoint a U.S. agent for IRS purposes; otherwise the IRS can determine the owner’s tax itself. For a foreign grantor trust whose grantor is a nonresident, the U.S. beneficiary’s reporting is the main concern, but appointing an agent can simplify document requests.
Common mistakes
- Assuming that because the grantor lives abroad, a U.S. beneficiary has nothing to report.
- Letting the trust lose grantor-trust status at the grantor’s death without a plan for accumulated income.
- Moving trust assets into a U.S. beneficiary’s name without documenting whether it is a distribution, a gift or a loan.
Sources: IRC §§643, 665–668, 671–679, 684, 2036, 2038, 6039F, 6048, 6677, 7701(a)(30)–(31); Treas. Reg. §§1.684-2, 1.684-3, 301.7701-7. As of November 2026.
