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Section 679

The Internal Revenue Code describes Section 679 as a rule for certain transfers by U.S. persons to foreign trusts. It connects ownership treatment with beneficiary status and foreign trust reporting.

Definition and scope

Section 679 treats a U.S. person who transfers property to a foreign trust as the owner of the portion attributable to that property when the trust has a U.S. beneficiary for the taxable year, subject to stated exceptions. Section 679 is one of the grantor trust rules in Sections 671 through 679.[1][5]

The rule excludes a transfer made by reason of the transferor's death and a transfer in exchange for consideration at least equal to the property's fair market value. Special rules limit how certain obligations are counted when applying the fair market value exception, including obligations of the trust or persons connected to it.[5]

How beneficiary status is determined

IRS instructions generally treat a foreign trust receiving property directly or indirectly from a U.S. person as having a U.S. beneficiary unless the trust instrument specifically prohibits distributions of income or corpus to U.S. persons at any time, including after the transferor's death or termination of the trust, and cannot be amended to permit them. A contingent interest still counts when income is accumulated for a U.S. person's benefit.[5]

Payments routed through certain foreign entities can count as benefits to U.S. persons. Discretion over distributions also generally causes the trust to be treated as having a U.S. beneficiary, unless the trust names the eligible class and no one in that class is a U.S. person during the taxable year.[5]

The statute disregards a beneficiary who first became a U.S. person more than five years after the transfer for purposes of applying the section to that transfer. It also treats a transferor's related agreement or understanding that could lead to a U.S. person benefiting as a trust term. A foreign trust not already treated as having a U.S. beneficiary is treated as having one if it directly or indirectly loans cash or marketable securities to a U.S. person who does not repay the loan at a market rate of interest within a reasonable period. The rule also covers a U.S. person's direct or indirect use of other trust property without paying fair market value for that use within a reasonable period.[5]

Section 679 works alongside the definition of a foreign trust and other grantor trust rules. It also addresses a trust that acquires U.S. beneficiaries after a preceding year without one. In that situation, the transferor is treated as having income equal to specified undistributed net income attributable to the relevant portion.[5]

Under proposed regulations, the Commissioner generally may treat a foreign trust as having a U.S. beneficiary after a U.S. person's direct or indirect transfer unless that person satisfies the transfer-reporting requirements and attaches an explanatory statement to the person's Federal income tax return demonstrating to the Commissioner's satisfaction that no U.S. person may benefit. IRS instructions say U.S. persons treated as owners under Sections 671 through 679 report foreign trust ownership on Form 3520, Part II. A U.S. owner may also have to attach a substitute Form 3520-A if the trust does not file that return.[1][5]

Questions and answers

When does Section 679 treat a transferor as an owner?

It applies when a U.S. person directly or indirectly transfers property to a foreign trust and there is a U.S. beneficiary for the taxable year. The person is treated as owner of the portion attributable to the property, subject to exceptions.[5]

Does a contingent beneficiary count?

Yes. For the accumulation rule, an amount can count as accumulated for a U.S. person's benefit even when that person's interest depends on a future event.[5]

When may a transfer be excepted?

The ownership rule does not apply to transfers by reason of death or qualifying transfers for consideration at least equal to fair market value. Specific rules address certain obligations in assessing the latter exception.[5]

What does Section 679 say about discretionary distributions?

A trust is generally treated as having a U.S. beneficiary when someone has discretion to distribute trust property to any person. The exception requires the trust to identify the class and no person in that class to be a U.S. person during the taxable year.[5]

Which IRS form relates to ownership under Section 679?

The Form 3520 instructions direct a U.S. person treated as owner of any part of a foreign trust under Sections 671 through 679 to complete Part II. A substitute Form 3520-A may also be required when the trust does not file its return.[1]

What if the trust gains a U.S. beneficiary after a year without one?

If Section 679 applies in the current taxable year and would have applied in the preceding year but for the absence of a U.S. beneficiary, the transferor is treated as having income. The amount is the relevant undistributed net income at the prior year end.[5]

  • U.S. person: A U.S. person includes a U.S. citizen or resident alien, a domestic partnership or corporation, a domestic trust, or an estate other than a foreign estate.
  • U.S. owner of a foreign trust: The Form 3520 instructions define a U.S. owner as a person treated as owning trust assets under grantor trust rules. Ownership can apply to part of a trust.
  • U.S. beneficiary of a foreign trust: A foreign trust has a U.S. beneficiary when income or corpus may be paid to or accumulated for the benefit of a U.S. person, and that status affects ownership treatment and reporting.
  • Transfer to a foreign trust: Form 3520 covers direct and indirect transfers of money or property to a foreign trust, including gratuitous transfers, alongside the U.S. ownership rules.

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Sources and data notes
  1. Internal Revenue Service, Instructions for Form 3520. https://www.irs.gov/instructions/i3520. Retrieved .
  2. Internal Revenue Service, Instructions for Form 3520-A. https://www.irs.gov/instructions/i3520a. Retrieved .
  3. Internal Revenue Service, 26 CFR 301.7701-7 Trusts, domestic and foreign. https://ecfr.io/Title-26/Section-301.7701-7. Retrieved .
  4. Internal Revenue Service, 26 CFR 301.7701-4 Trusts. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 679. https://uscode.house.gov/us/usc/119-118/t26/s679/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 6048. https://uscode.house.gov/us/usc/119-118/t26/s6048/. Retrieved .
  7. Internal Revenue Service, Foreign trust reporting requirements and tax consequences. https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences. Retrieved .

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