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