SO YOU WANT TO BE A FOREIGN GRANTOR TRUST: SPECIAL RULES
By Nancy E. Howard, Esq.*
Most planners are familiar with the grantor trust rules of Internal Revenue Code (IRC) sections 671-6791 and incorporate them in their practices.2 However, planners who do not regularly represent foreign clients may not be familiar with the special rules that apply if the grantor of a trust is not a U.S. citizen or resident. In an increasingly mobile and international society, all of us are likely to encounter non-U.S. clients at least occasionally, and many U.S. clients have non-U.S. parents or grandparents who may want to create a trust for their U.S. beneficiaries. Foreign grantor trusts can be an important element of the planning for these clients.3
This article focuses on the special rules under IRC sections 672(f)(1) and 672(f)(2) that must be satisfied for a trust created by a foreign grantor4 to be classified as a grantor trust for U.S. tax purposes. It explains the special requirements that apply for qualification, discusses some important uses for a foreign grantor trust, and warns of some traps for the unwary.
I. BENEFITS OF FOREIGN GRANTOR TRUST STATUS