Grantor vs. non-grantor foreign trusts

Why the distinction matters

Under U.S. tax law, a foreign trust is either a grantor trust (where some person, U.S. or, in the §672(f)(2) cases, foreign, is treated as the owner of the trust for income tax purposes) or a non-grantor trust (where the trust is treated as a separate taxpayer). The classification affects three things:

• Which forms you file. A grantor trust with a U.S. owner requires Form 3520 (Part II) and Form 3520-A annually; a grantor trust with a foreign owner requires neither: its U.S. beneficiaries report distributions on Part III. A non-grantor trust requires Form 3520 only when specific events occur: distributions, loans, or uncompensated use of trust property (Part III, §643(i)), transfers to the trust or a U.S. owner’s death (Part I). Gifts from foreign individuals and estates (Part IV) are a separate regime, not a trust event.
• How income is taxed. Grantor trust income is taxed to the deemed owner in the year earned, as if the trust did not exist. Non-grantor trust income is taxed to the beneficiary only when distributed, potentially triggering the throwback tax (§§665–668) and interest charge (§668) if income accumulated over prior years.
• Penalty exposure. A grantor trust owner who fails to file faces penalties under §6677 for both Form 3520 and Form 3520-A every year. A non-grantor trust beneficiary faces penalties only in years a reportable event occurs.

Grantor foreign trusts

A grantor trust is one where the trust’s income, deductions, and credits are attributed to the grantor (or another person treated as the owner) rather than to the trust itself. The grantor trust rules are found in IRC §§671–679. Under these rules, a person is treated as the owner of a trust (or a portion of it) if they retain certain powers or interests:

• §673: Reversionary interests. The grantor retains a reversionary interest worth more than 5% of the trust’s value.
• §674: Power to control beneficial enjoyment. The grantor or a nonadverse party can control who benefits from the trust.
• §675: Administrative powers. The grantor retains certain administrative powers (e.g., power to deal with trust assets for less than adequate consideration).
• §676: Power to revoke. The grantor can revoke the trust and recover the corpus.
• §677: Income for benefit of grantor. Trust income may be distributed to or accumulated for the grantor or the grantor’s spouse.
• §678: Person other than grantor treated as owner. A person other than the grantor has a power to vest corpus or income in themselves.

For foreign trusts specifically, two additional provisions apply:

• §679: Foreign trust with U.S. beneficiary. A U.S. person who transfers property to a foreign trust with any U.S. beneficiary is treated as the owner. This is the provision that most often determines classification for foreign pensions and retirement accounts; see the next section.
• §672(f): Foreign-owned grantor trusts. Under §672(f)(1), the grantor trust rules apply only to the extent they result in income being taken into account by a U.S. person. This means the rules generally do not apply to treat a foreign person as the owner. However, §672(f)(2)(A) provides exceptions: the foreign grantor is treated as the owner if (i) the trust is revocable by the grantor, or (ii) the only amounts distributable during the grantor’s lifetime are to the grantor or spouse. When one of these exceptions applies, the trust is a grantor trust with a foreign owner. Distributions to U.S. beneficiaries from such a trust are treated as coming directly from the foreign owner, but only if the beneficiary obtains a complete Foreign Grantor Trust Beneficiary Statement (Form 3520 line 29). Without it, the default calculation on Schedule A applies and part of the distribution can be taxed as an accumulation distribution with the §668 interest charge. For example, a foreign parent who creates a revocable trust that benefits a U.S. child is the owner under §672(f)(2)(A)(i): the child is a beneficiary of a foreign grantor trust, not the owner. Separately, §672(f)(5) can treat the U.S. beneficiary as the grantor to the extent the beneficiary transferred property to the foreign person.

Section 679 is the more commonly encountered provision and often makes the classification straightforward; see the next section.

The practical effect: the deemed owner reports the trust’s income on their own Form 1040 each year, as though the trust were transparent. There is no deferral, no accumulation, and no throwback tax. The trade-off is an annual filing obligation for both Form 3520 and Form 3520-A, regardless of whether anything happened in the trust that year.

Non-grantor foreign trusts

A non-grantor trust is one where no person is treated as the owner under §§671–679. The trust is a separate taxpayer. Income earned by the trust is generally not taxed in the U.S. until it is distributed to a beneficiary, except that the trust itself is taxed on its U.S.-source income in the same way as a nonresident alien (§641(b)).

When a U.S. beneficiary receives a distribution from a non-grantor foreign trust, the distribution carries out the trust’s distributable net income (DNI) under IRC §643(a). If the distribution exceeds the current year’s DNI, meaning the trust is paying out income it accumulated in prior years, the excess is an accumulation distribution subject to the throwback tax under §§665–668.

The throwback tax uses a three-year averaging method under §667(b): the accumulation distribution is divided by the number of trust years it is thrown back to, that amount is added to the beneficiary’s taxable income in three of the five preceding years (dropping the years with the highest and lowest taxable income), the average resulting tax increase is multiplied by the number of throwback years, and an interest charge under §668 applies for the deferral period. This can produce a substantial tax bill on a single distribution, especially if the trust accumulated income over many years. The computation is performed on Form 4970.

A non-grantor trust beneficiary files Form 3520 (Part III) in years they receive a distribution, loan, or uncompensated use of trust property (§643(i)). They do not file Form 3520-A; that obligation falls on the trust’s owner, not its beneficiaries. If the trustee provides a Foreign Nongrantor Trust Beneficiary Statement, the beneficiary may use the “actual method” (Schedule B) to compute the taxable portion; without it, the “default method” (Schedule A) applies. Under the default method the whole distribution is taxable and the portion above 125% of the three-year average is treated as an accumulation distribution with an interest charge.

IRC §679: the foreign trust rule

Section 679 is the provision that most often determines whether a U.S. person is the owner of a foreign trust. It provides:

A United States person who directly or indirectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)) shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust.

In plain English: if you (a U.S. person) put money or property into a foreign trust, and the trust has any U.S. beneficiary (which includes you), you are the grantor/owner for tax purposes.

Section 679(c) defines “United States beneficiary” broadly: a trust is treated as having a U.S. beneficiary unless no part of the trust’s income or corpus may be paid to or accumulated for a U.S. person, and no part of the income or corpus could be paid to a U.S. person if the trust were terminated. This is a high bar to clear. Most foreign trusts with any U.S. connection have a U.S. beneficiary under this definition.

Section 679(a) has three exceptions: transfers by reason of death (§679(a)(2)(A)), transfers for at least fair-market-value consideration (§679(a)(2)(B)), and transfers to employer plan trusts described in §402(b), §404(a)(4), or §404A (§679(a)(1), cross-referencing §6048(a)(3)(B)(ii)). For an individually funded foreign retirement account the general rule usually applies and the account holder is the owner; whether reporting is then excused under Rev. Proc. 2014-55 or 2020-17 is a separate question.

Common examples

Grantor trust examples

• Australian superannuation. A U.S. citizen working in Australia contributes to a super fund. The fund is a foreign trust (it fails the court test, which alone makes it foreign under Treas. Reg. §301.7701-7). Where an employer contributes, the fund’s trust is described in §402(b): no transfer to it goes on Part I, and §679 doesn’t apply (§6048(a)(3)(B)(ii); §679(a)(1)). The employee owns the portion attributable to their own contributions, salary sacrifice included, once their total is more than the employer’s (Treas. Reg. §1.402(b)-1(b)(6)). File: Form 3520-A + Form 3520 Part II for that portion, each year it’s owned. Payouts you report as pension income stay off Part III, except what comes from a portion you own (lines 24 and 27).
• UK workplace pension. Same analysis for a trust-based scheme. The scheme is a foreign trust described in §402(b), so no transfer to it goes on Part I and §679 doesn’t apply (§6048(a)(3)(B)(ii); §679(a)(1)); it is the employee’s own contributions that make the employee the owner of the corresponding portion, once they are more than the employer’s (Treas. Reg. §1.402(b)-1(b)(6)). Whether the scheme qualifies for the Rev. Proc. 2020-17 exemption is the next question. File: 3520-A + 3520 Part II for that portion, each year it’s owned.
• Canadian RRSP. An RRSP is generally treated as a foreign trust. However, Rev. Proc. 2014-55 exempts all RRSP and RRIF holders from both Form 3520 and Form 3520-A; no election or protective filing is required.
• New Zealand KiwiSaver. A KiwiSaver account is a foreign trust. If its trust is treated as described in §402(b) because an employer contributes, the member owns only the portion their own contributions fund, once those are more than the employer’s (Treas. Reg. §1.402(b)-1(b)(6)); if not, the member’s contributions make the member the owner of the corresponding portion (§679). Whether KiwiSaver qualifies for the Rev. Proc. 2020-17 exemption requires plan-specific analysis.
• Self-settled foreign trust. A U.S. person creates a trust in a foreign jurisdiction and transfers assets to it. If the trust has any U.S. beneficiary (including the settlor, their spouse, or their descendants who are U.S. persons), §679 applies.

Non-grantor trust examples

• Family trust created by a non-U.S. person. A foreign grandparent establishes a trust for the benefit of children and grandchildren, some of whom are U.S. persons. The grantor is not a U.S. person, so §679 does not apply to them. The U.S. beneficiaries are not treated as owners, unless a §672(f)(2) exception applies (for example, a revocable trust), in which case it is a grantor trust with a foreign owner. Otherwise, the trust is a non-grantor trust from their perspective. They file Form 3520 Part III only when they receive a distribution.
• Testamentary trust under a foreign will. A non-U.S. decedent’s will creates a trust for a U.S. beneficiary. Since the transfer was by reason of death and the transferor was not a U.S. person, §679 does not apply. The U.S. beneficiary reports distributions on Part III.
• Foreign charitable or institutional trust. A trust established by a foreign institution with no U.S. transferor. Distributions to U.S. beneficiaries are reported on Part III.

Filing comparison

When status changes

A trust’s classification can change over time:

• Grantor dies or ceases to be a U.S. person. If the deemed owner of a grantor trust dies, the trust may become a non-grantor trust from that point forward. The death is itself a reportable event under §6048(a)(3)(A)(iii). The owner’s death may also be treated as a transfer of the trust assets to a foreign non-grantor trust, with gain recognized under §684 unless the assets receive a §1014 basis adjustment (Reg. §1.684-2(e); §1.684-3(c)). Future distributions to U.S. beneficiaries would be reported on Part III, and the throwback rules would begin to apply to any subsequently accumulated income.
• Beneficiary becomes a U.S. person. If a trust that had no U.S. beneficiary later acquires one, §679(b) treats the U.S. transferor as having income equal to the trust’s undistributed net income for that year, and §679(a) applies from then on, but only if the beneficiary became a U.S. person within five years of the transfer; a beneficiary who first becomes a U.S. person more than five years after the transfer is disregarded for that transfer (§679(c)(3)).
• Trust terminates or distributes all assets. A final distribution ends the trust. The grantor trust owner files a final Form 3520-A and checks the “Final return” box.

These transitions can create complex filing situations, particularly around the year of death, where the trust may be a grantor trust for part of the year and a non-grantor trust for the remainder.

Sources

This page summarizes the law as of its last update and is not tax advice. The primary authorities are:

• IRC §§671–679 - Grantor trust rules (subparts A–F of subchapter J, part I).
• IRC §679 - Foreign trusts having one or more United States beneficiaries.
• IRC §6048 - Reporting requirements for foreign trusts (transfers, annual returns, distributions).
• IRC §6677 - Penalties for failure to file.
• IRC §§665–668 - Accumulation distribution / throwback rules.
• IRC §643(a) - Distributable net income.
• Treas. Reg. §301.7701-7 - Court test and control test for domestic vs. foreign trust classification.
• Treas. Reg. §1.679-1 through 1.679-6 - Regulations under §679.
• Rev. Proc. 2014-55 - Exemption from both Form 3520 and Form 3520-A for Canadian RRSPs, RRIFs, RPPs, and other Article XVIII(7) plans (no election required).
• Form 3520 Instructions (Rev. December 2025).
• Form 3520-A Instructions (Rev. December 2025).