Frequently Asked Questions
Who is eligible for the Foreign Grantor Trust Income Exclusion?
Applies to foreign trusts where the power to revest title is exercisable solely by the foreign grantor or distributions are restricted to the grantor/spouse.
How does the Foreign Grantor Trust Income Exclusion work?
U.S. beneficiaries of a foreign trust may avoid being taxed on trust income if the trust is revocable solely by a foreign grantor or if distributions are limited to the grantor and their spouse, effectively keeping the income out of the U.S. tax net until distributed.
What law authorizes the Foreign Grantor Trust Income Exclusion?
The Foreign Grantor Trust Income Exclusion is authorized under IRC §672(f)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §672
Source: Internal Revenue Code, Title 26, United States Code
§ 672. Definitions and rules(a) Adverse partyFor purposes of this subpart, the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.
(b) Nonadverse partyFor purposes of this subpart, the term “nonadverse party” means any person who is not an adverse party.
(c) Related or subordinate partyFor purposes of this subpart, the term “related or subordinate party” means any nonadverse party who is—(1) the grantor’s spouse if living with the grantor;
(2) any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive.
For purposes of subsection (f) and sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence.
(d) Rule where power is subject to condition precedentA person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent giving of notice or takes effect only on the expiration of a certain period after the exercise of the power.
(e) Grantor treated as holding any power or interest of grantor’s spouse(1) In generalFor purposes of this subpart, a grantor shall be treated as holding any power or interest held by—(A) any individual who was the spouse of the grantor at the time of the creation of such power or interest, or
(B) any individual who became the spouse of the grantor after the creation of such power or interest, but only with respect to periods after such individual became the spouse of the grantor.
(2) Marital statusFor purposes of paragraph (1)(A), an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.
(f) Subpart not to result in foreign ownership(1) In generalNotwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount (if any) being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation.
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