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Definitions

Foreign Trust and Domestic Trust

A foreign trust is any trust other than a domestic trust.

Distribution

A domestic trust is any trust if:

A distribution is any gratuitous transfer of money or other

1. A court within the United States is able to exercise

property from a trust, whether or not the trust is treated as

primary supervision over the administration of the trust; and

owned by another person under the rules of sections 671

2. One or more U.S. persons have the authority to

through 679, and without regard to whether the recipient is

control all substantial decisions of the trust.

designated as a beneficiary by the terms of the trust. A

distribution includes the receipt of trust corpus and the

Grantor

receipt of a gift or bequest described in section 663(a).

A grantor includes any person who creates a trust or directly

A distribution also includes constructive transfers from a

or indirectly makes a gratuitous transfer of cash or other

trust. For example, if charges you make on a credit card are

property to a trust. A grantor includes any person treated as

paid by a foreign trust or guaranteed or secured by the

the owner of any part of a foreign trust’s assets under

assets of a foreign trust, the amount charged will be treated

sections 671 through 679, excluding section 678.

as a distribution to you by the foreign trust. Similarly, if you

Note. If a partnership or corporation makes a gratuitous

write checks on a foreign trust’s bank account, the amount

transfer to a trust, the partners or shareholders are generally

will be treated as a distribution.

treated as the grantors of the trust, unless the partnership or

Also, if you receive a payment from a foreign trust in

corporation made the transfer for a business purpose of the

exchange for property transferred to the trust or services

partnership or corporation.

rendered to the trust, and the FMV of the payment received

If a trust makes a gratuitous transfer to another trust, the

exceeds the FMV of the property transferred or services

grantor of the transferor trust is treated as the grantor of the

rendered, the excess will be treated as a distribution to you.

transferee trust, except that if a person with a general power

of appointment over the transferor trust exercises that power

Examples

in favor of another trust, such person is treated as the

1. If you sell stock with an FMV of $100 to a foreign trust

grantor of the transferee trust, even if the grantor of the

and receive $150 in exchange, you have received a

transferor trust is treated as the owner of the transferor trust.

distribution of $50.

2. If you receive $100 from the trust for services

Grantor Trust

performed by you for the trust, and the services have an

A grantor trust is any trust to the extent that the assets of the

FMV of $20, you have received a distribution of $80.

trust are treated as owned by a person other than the trust.

See the grantor trust rules in sections 671 through 679. A

Note. Due to changes to section 679(c) made by the HIRE

part of the trust may be treated as a grantor trust to the

Act, effective after March 18, 2010, a loan of cash or

extent that only a portion of the trust assets are owned by a

marketable securities from a foreign trust with a U.S.

person other than the trust.

grantor, directly or indirectly, to a U.S. person, or the use of

Gratuitous Transfer

any other trust property, directly or indirectly, by any U.S.

person (whether or not a beneficiary under the terms of the

A gratuitous transfer to a foreign trust is any transfer to the

trust) will cause a foreign trust to be treated as a grantor

trust other than (a) a transfer for FMV or (b) a distribution to

trust, unless the U.S. person repays the loan at a market

the trust with respect to an interest held by the trust (i) in an

rate of interest or pays the FMV of the use of such property

entity other than a trust (e.g., a corporation or a partnership)

within a reasonable period of time. Thus, in the case of a

or (ii) in an investment trust described in Regulations section

trust with a U.S. grantor that is treated as a grantor trust, the

301.7701-4(c), a liquidating trust described in Regulations

following two paragraphs will generally not apply to loans

section 301.7701-4(d), or an environmental remediation

made to U.S. persons from such a foreign trust or to the use

trust described in Regulations section 301.7701-4(e).

of other trust property by U.S. persons from such a foreign

A transfer of property to a trust may be considered a

trust after March 18, 2010.

gratuitous transfer without regard to whether the transfer is a

gift for gift tax purposes. See Chapter 12 of Subtitle B of the

If a U.S. grantor, a U.S. beneficiary, or a U.S. person

Code (i.e., sections 2501 through 2524).

related to the U.S. grantor or U.S. beneficiary, directly or

indirectly, receive(s) a loan of cash or marketable securities

For purposes of this determination, if a U.S. person

from a foreign nongrantor trust, the amount of such loan will

contributes property to a trust in exchange for any type of

be treated as a distribution to the U.S. grantor or U.S.

interest in the trust, such interest in the trust will be

beneficiary, unless the obligation issued by the U.S. grantor,

disregarded in determining whether FMV has been received.

U.S. beneficiary, or U.S. person related to the U.S. grantor

In addition, a U.S. person will not be treated as making a

or U.S. beneficiary, in exchange for the loan is a qualified

transfer for FMV merely because the transferor is deemed to

obligation. For this purpose, a loan by an unrelated third

recognize gain on the transaction.

party that is guaranteed by a foreign trust is generally

If you transfer property to a foreign trust in exchange for

treated as a loan from the trust. See section V(A) of Notice

an obligation of the trust (or a person related to the trust), it

97-34, 1997-25 I.R.B. 22.

will be a gratuitous transfer unless the obligation is a

qualified obligation. Obligation and qualified obligation are

After March 18, 2010, if a U.S. grantor, a U.S.

beneficiary, or any U.S. person related to the U.S. grantor or

defined on page 4.

U.S. beneficiary, directly or indirectly, use(s) any property of

Gross Reportable Amount

a foreign nongrantor trust, and the U.S. grantor, U.S.

beneficiary, or U.S. person related to the U.S. grantor or the

Gross reportable amount is:

•

U.S. beneficiary, does not compensate such trust at FMV for

The gross value of property involved in the creation of a

the use of such property within a reasonable period of time,

foreign trust or the transfer of property to a foreign trust

the FMV of such use will be treated as a distribution by the

(including a transfer by reason of death);

•

foreign nongrantor trust to the U.S. grantor or the U.S.

The gross value of any portion of a foreign trust treated as

beneficiary, as the case may be.

owned by a U.S. person under the rules of sections 671

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Instructions For Form 3520 - Annual Return To Report Transactions With Foreign Trusts And Receipt Of Certain Foreign Gifts - 2010 Page 3

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