Accumulation distribution

Where the term appears

The Form 3520 instructions use the term in Part III, which covers distributions to a U.S. person from a foreign trust. The instructions distinguish the current year's income from accumulated undistributed net income, or UNI, and explain that a distribution can include an amount from accumulated earnings. In simplified terms, UNI is distributable net income reduced by trust accounting income required to be distributed, other amounts properly paid or credited or required to be distributed, and trust taxes attributable to that income. Under the default method, UNI is treated as at least equal to the accumulation distribution, whether or not the trust actually has that much UNI.^[1]

The instructions connect this calculation to Form 4970, titled Tax on Accumulation Distribution of Trusts, and to an interest charge calculated on the tax amount. They direct the beneficiary to report the resulting additional tax on the appropriate line of the income tax return.^[1]

• For current-year reporting, Part III applies when a U.S. person receives a foreign trust distribution.^[1]
• The instructions describe distributions broadly, including cash or property received directly, indirectly, actually, or constructively, whether taxable or not.^[1]

When the beneficiary answers yes to line 30, Schedule A, the default calculation, or Schedule B, the actual calculation, may be available. Under the proposed regulations, the actual method requires receipt of a Foreign Nongrantor Trust Beneficiary Statement, and prior use of the default method requires continued use for later distributions from the same trust, except in its termination year. Schedule A generally uses preceding-year distributions to calculate an amount treated as ordinary income. A record of prior distributions can establish that a distribution up to a calculated amount is not an accumulation distribution for the current year.^[1]

The Schedule A choice generally continues for later years, even if line 30 can then be answered yes. The stated exception allows Schedule B in the year the trust terminates, if line 30 can be answered yes for that year.^[1]

For interest, the instructions use a mid-year date as the applicable date. If the beneficiary received only one distribution during the tax year that is treated as an accumulation distribution, the distribution date may be used instead.^[1]

How these terms relate

UNI is accumulated income that remains undistributed. Weighted UNI gives that amount a time weight based on the years it accumulated. These measures support Schedule B's actual calculation; Schedule A is the default calculation. A Foreign Nongrantor Trust Beneficiary Statement is a condition for using Schedule B.^[1]

Questions and answers

Related terms

• Distribution from a foreign trust: A foreign trust distribution triggers section 6048(c) reporting for the U.S. person who receives it. Related reporting and tax terms explain how it is treated.
• Foreign grantor trust beneficiary statement: A foreign grantor trust beneficiary statement appears on page 5 of Form 3520-A. It reports distributions to U.S. beneficiaries and identifies the trust's owner.
• Section 679: Section 679 addresses certain transfers by U.S. persons to foreign trusts. It treats some property transfers as ownership when the trust has a U.S. beneficiary.
• Uncompensated use of trust property: Uncompensated use of foreign trust property by a U.S. person or a related U.S. person is treated as a distribution at fair market value and is reportable.

Related guides and articles

• Foreign trust distributions: DNI and UNI: Foreign trust distributions can carry current distributable net income or accumulated undistributed net income, and each has its own U.S. tax treatment.
• Foreign grantor trusts after the grantor dies: A grantor's death generally ends grantor status for a foreign trust, which changes how income, distributions and U.S. reporting work for U.S. citizens.
• Section 679 and U.S. Transfers to Foreign Trusts: Section 679 may treat a U.S. transferor as owner of the foreign trust portion tied to transferred property when a U.S. beneficiary may benefit from the trust.

Related pages

• Glossary: All terms.
• Control test
• Court test
• Distribution from a foreign trust
• Domestic trust
• IRS forms