26 U.S.C. § 679, foreign trusts with U.S. beneficiaries

What section 679 covers

Section 679 is a provision of the Internal Revenue Code concerning foreign trusts with one or more United States beneficiaries. Congress enacted the provision, and the Office of the Law Revision Counsel publishes its text in the United States Code Online under Title 26.^[1]

The section addresses when a U.S. person who transfers property to a foreign trust is treated as owning part of that trust. It also covers exceptions to that rule, changes in a transferor's U.S. status, trusts that acquire a U.S. beneficiary, and how the statute determines beneficiary status.^[1]

For a U.S. citizen, the statute is relevant when property is transferred directly or indirectly to a foreign trust. Its text refers to section 6048 in rules for certain status changes and trust changes, but section 679 itself does not identify particular forms or foreign-account reports.^[1]

When a transferor is treated as an owner

A U.S. person who directly or indirectly transfers property to a foreign trust is treated as the owner of the portion attributable to that property for a taxable year when the trust has a U.S. beneficiary. The rule does not apply to certain foreign deferred compensation and charitable trusts described in section 6048(a)(3)(B)(ii).^[1]

The statute lists transfers by reason of the transferor's death as an exception. It also excepts a transfer made for consideration worth at least the transferred property's fair market value, counting noncash consideration at its fair market value.^[1]

Special rules apply when a nonresident alien individual becomes a U.S. resident within five years after transferring property to a foreign trust. For the statute's application, the transfer is treated as occurring on the residency starting date for the portion attributable to that individual's property.^[1]

A related rule addresses a trust that was not foreign when a U.S. citizen or resident transferred property but becomes foreign during that person's life. The statute treats the relevant portion as transferred when the trust becomes foreign.^[1]

How the statute identifies a U.S. beneficiary

Section 679 generally treats a trust as having a U.S. beneficiary unless its terms prevent trust income or principal from benefiting a U.S. person during the taxable year, and termination during that year could not result in such a benefit. A contingent future interest is also treated as an accumulation for a U.S. person's benefit.^[1]

Payments or accumulations through some foreign entities can count as benefits to a U.S. person. The statute addresses a foreign corporation that is a controlled foreign corporation, a foreign partnership with a U.S. partner, and a foreign trust or estate with a U.S. beneficiary.^[1]

A beneficiary who first becomes a U.S. person more than five years after a property transfer is disregarded for that transfer under this section. Discretion over distributions may also cause a trust to be treated as having a U.S. beneficiary, subject to the statute's conditions about identifying the eligible class and whether any class member is a U.S. person.^[1]

An agreement involving a U.S. transferor can count as a trust term if it may lead to income or principal benefiting a U.S. person. A loan or use of trust property by or for a U.S. person generally counts as a benefit, with an exception for repayment at a market interest rate or payment of fair market value within a reasonable period.^[1]

Income and related reporting rules

If the ownership rule applies after a year in which it did not apply solely because the trust had no U.S. beneficiary, the transferor is treated as having income equal to specified undistributed net income from the prior year. The amount is tied to the portion of the trust covered by the ownership rule.^[1]

Section 679 links its treatment of certain transfers to section 6048, including for a nonresident alien who becomes a U.S. person and for a trust that becomes foreign.

The statute also allows the Secretary to presume a U.S. beneficiary for a trust receiving a transfer from a U.S. person, subject to the statutory information and demonstration conditions. Its final subsection directs the Secretary to prescribe regulations to carry out the section.^[1]

The official text is available through the United States Code Online, in Title 26 at section 679.

Questions and answers

Related resources

Related glossary terms

• Power to revoke: Section 676 defines a power to revest trust property in the grantor. When the power applies, the grantor is treated as owner of the covered trust portion.
• Power to control beneficial enjoyment: Section 674 describes when control over trust benefits causes a grantor to be treated as owner of a trust portion. The rule concerns beneficial enjoyment.
• Beneficiary other than the grantor treated as owner: Section 678 describes when a person other than the grantor is treated as owner of part of a trust, based on a power over trust corpus or income and exceptions.

Related articles and guides

• Section 679 and foreign trusts with U.S. beneficiaries: Section 679 covers ownership treatment, U.S. beneficiaries, transfer exceptions and related reporting rules for foreign trusts connected to U.S. citizens.
• 26 U.S.C. § 674, Power to control beneficial enjoyment: Section 674 treats a grantor as owner of part of a trust when the grantor or another person controls who enjoys principal or income, subject to exceptions.
• 26 U.S.C. § 678, substantial owner rules: 26 U.S.C. § 678 describes when a person other than a trust grantor is treated as owner of part of a trust, with exceptions and a related cross-reference.

Related pages

• Guidance library
• 26 C.F.R. § 301.7701-7, Trusts
• 26 CFR § 301.7701-4, Trusts
• 26 U.S.C. § 6048, Foreign trust information
• 26 U.S.C. § 672, Definitions and rules