Grantor and nongrantor trust taxation
U.S. income tax rules distinguish grantor and nongrantor trusts. The rules can assign ownership to a person for all or part of a trust.
How the rules identify an owner
For U.S. income tax purposes, a grantor trust is a trust to the extent its assets are treated as owned by a person other than the trust. The grantor trust rules are in sections 671 through 679 of the Internal Revenue Code. When a U.S. person is treated as owner of a foreign trust under those rules, the person is generally taxed on that trust's income.[1][6]
A nongrantor trust is the part whose assets are not treated as owned by another person under those grantor trust rules. A trust can have both grantor and nongrantor portions, so the classification may differ across its assets.[6]
The rules therefore focus on who is treated as owning the relevant portion, not simply on whether the trust was formed outside the United States. The IRS states that section 679 applies specifically to foreign trusts, while section 672(f) applies to domestic and foreign trusts.[1][2]
Section 679 and a U.S. transferor
The regulation states the rule in terms of a U.S. beneficiary of any portion of the trust, subject to exceptions for the transfer. It also says section 679 operates without regard to whether the U.S. transferor retained a power or interest described in sections 673 through 677.[10]
A U.S. person treated as owner generally reports the foreign trust's income as that person's own income. The Foreign Grantor Trust Owner Statement, part of Form 3520-A, gives the owner information about trust income to report on the owner's U.S. income tax return.[1]
Section 672(f) and foreign persons
Section 672(f) limits when grantor trust rules can treat a foreign person as owner. The general rule applies those rules only to the extent an amount is taken into account in computing income of a U.S. citizen or resident, or a domestic corporation.[2]
Accordingly, a portion treated as owned by someone other than a U.S. citizen or resident or domestic corporation generally is outside the grantor trust rules under this provision. The regulation identifies exceptions, including a trust where the grantor can revest trust assets and a trust where only the grantor or spouse can receive distributions. It also states that a portion not treated as owned by a grantor or another person is subject to the rules for taxable trusts.[2]
Foreign status and partial ownership
A foreign trust is not automatically a grantor trust. The classification turns on the grantor trust rules and the ownership they assign, including the limits in section 672(f). A foreign trust may therefore have a grantor portion and a nongrantor portion, or be treated as nongrantor to the extent no person is treated as owner.[2][6]
That portion-based approach means a trust's classification can depend on the terms and the application of the relevant rules to particular assets.[2][6]
Data table for this infographic
| Group | Question or label | Description or rule | Result or source |
|---|---|---|---|
| Reference diagram · Trust classification | Domestic or foreign trust, then who is treated as owner | Two separate U.S. tax questions, followed by local statutory labels for trusts created for a purpose. | |
| Step 1 · Domestic or foreign trust | Court test | Is a court within the United States able to exercise primary supervision over the administration of the trust? | |
| Step 1 · Domestic or foreign trust | Control test | Do one or more U.S. persons have the authority to control all substantial decisions of the trust? | |
| Step 1 · Domestic or foreign trust | Both questions answered yes | Domestic trust | |
| Step 1 · Domestic or foreign trust | Otherwise | Foreign trust, any trust other than a domestic trust | |
| Control, as defined in Treas. Reg. s. 301.7701-7(d)(1)(iii) | Control | "the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions." The test considers all persons who have authority to make a substantial decision, not only the trust fiduciaries. | Treas. Reg. s. 301.7701-7(d)(1)(iii) |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Grantor trust rules | Sections 671 through 679 (subpart E). The Form 3520 instructions count as a grantor any person treated as the owner of any part of a foreign trust's assets under these sections. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 679 | Section 679 generally treats a U.S. person who directly or indirectly transfers property to a foreign trust as owner of the portion attributable to that property for a taxable year in which income or corpus may be paid to or accumulated for the benefit of a U.S. person, including if the trust were terminated that year. Exceptions include transfers by reason of death and transfers for at least fair market value. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 672(f)(1) | The grantor trust rules apply only to the extent they result in an amount being "currently taken into account" in computing the income of a U.S. citizen or resident or a domestic corporation. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion treated as owned under subpart E | Grantor trust, as to that portion | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion not treated as owned by another person under the grantor trust rules | Nongrantor trust, as to that portion | |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Bahamas | Purpose Trusts Act: "authorised purpose trust", a trust declared for a non-charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | British Virgin Islands | "trust for any purpose", defined by exclusion as a trust other than certain listed kinds, which include a trust for the benefit of particular persons | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Jersey | Article 12, "Trusts for non-charitable purposes", with enforcers under Article 13 | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Mauritius | "non-charitable purpose trust", a trust having a purpose other than a charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Seychelles | "purpose trust", created for non-charitable purposes, whether or not it has any beneficiaries | statute |
| Notes | Commentary and statute | The domestic-or-foreign question concerns the trust; ownership treatment under the grantor trust rules can apply to a trust or to a portion. Local statutes use their own terms, which are not U.S. classifications. | commentary |
| Sources | U.S. sources | IRS Instructions for Form 3520 (domestic and foreign trust; grantor) · Treas. Reg. s. 301.7701-7(d)(1)(iii) (control) · Treasury proposed regulations on foreign trust reporting (nongrantor trust definition; s. 679 discussion) · Cassra Minai commentary on section 679 · 26 CFR s. 1.672(f)-1 | |
| Sources | Local statute sources | Bahamas Purpose Trusts Act s. 3 · BVI Trustee Act s. 84 (purpose trusts) · Jersey Trusts Law Arts. 12 and 13 · Mauritius Trusts Act s. 2 · Seychelles Trusts Act s. 2 | |
Questions and answers
Does a foreign trust automatically count as a grantor trust?
No. Grantor status depends on whether the grantor trust rules treat a person as owning trust assets, and section 672(f) limits when those rules apply to foreign persons. Ownership can apply to only a portion of a trust.[2][6]
What does section 679 say about a U.S. transferor?
It can treat a U.S. person who transfers property to a foreign trust as owner of the attributable portion when there is a U.S. beneficiary, unless an exception applies. The IRS describes the rule as covering income or corpus that may benefit a U.S. person during the taxable year.[3][10]
When can a foreign person be treated as owner under section 672(f)?
The general rule limits grantor trust treatment to the extent an amount is taken into account in computing income of a U.S. citizen or resident, or a domestic corporation. The regulation also sets out exceptions, including certain revocable trusts and trusts limited to distributions to the grantor or spouse.[2]
Can one trust be partly grantor and partly nongrantor?
Yes. The IRS instructions say a portion may be treated as grantor when only some assets are treated as owned by another person. They also describe a nongrantor portion where the assets are not treated as owned by another person.[6]
Who is taxed on income attributed to a foreign grantor trust?
The IRS says a U.S. person treated as owner under the grantor trust rules is generally taxed on the trust's income. The IRS also says the owner's statement includes trust income to report on the person's U.S. income tax return.[1]
Related resources
Related glossary terms
- 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.
- 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.
- Section 679: Section 679 addresses certain transfers by U.S. persons to foreign trusts. It treats a U.S. person who transfers property to a foreign trust as owner of the portion attributable to that property when the trust has a U.S. beneficiary.
Related articles and guides
- 26 U.S.C. § 679, foreign trusts with U.S. beneficiaries: 26 U.S.C. § 679 sets an ownership rule for foreign trusts with U.S. beneficiaries, defines a U.S. beneficiary and is linked to section 6048 reporting.
- 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.
Tools and official documents
- Form 926: transfers of property to a foreign corporation: the return a U.S. person files under section 6038B after transferring property to a foreign corporation. It comes up with trusts when property moves into a foreign company held under the trust, and with a grantor trust the grantor is treated as the transferor.
Related pages
Sources and data notes
- irs.gov, Foreign trust reporting requirements and tax consequences | Internal Revenue Service. https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences. Retrieved .
- law.cornell.edu, 26 CFR § 1.672(f)-1, Foreign persons not treated as owners. https://www.law.cornell.edu/cfr/text/26/1.672%28f%29-1. Retrieved .
- govinfo.gov, Federal Register, Volume 89 Issue 90 (Wednesday, May 8, 2024). https://www.govinfo.gov/content/pkg/FR-2024-05-08/html/2024-09434.htm. Retrieved .
- picpa.org, Foreign Trusts: Income Tax and the Nonresident Noncitizen Grantor. https://www.picpa.org/professional-resources/research-publications/cpa-now-blog-archive/cpa-now/2023/11/01/foreign-trusts-income-tax-and-nonresident-noncitizen-grantor. Retrieved .
- blakeharrislaw.com, Questions to Ask Before You Set Up an Offshore Trust. https://blakeharrislaw.com/blog/questions-you-must-ask-before-creating-an-offshore-trust. Retrieved .
- irs.gov, Instructions for Form 3520-A (12/2025) | Internal Revenue Service. https://www.irs.gov/instructions/i3520a. Retrieved .
- irs.gov, Instructions for Form 3520 (12/2025) | Internal Revenue Service. https://www.irs.gov/instructions/i3520. Retrieved .
- law.cornell.edu, 26 U.S. Code § 674, Power to control beneficial enjoyment. https://www.law.cornell.edu/uscode/text/26/674. Retrieved .
- irs.gov, Notice 97-24, Certain Trust Arrangements (1997). https://www.irs.gov/pub/irs-drop/pub_n_97.24.pdf. Retrieved .
- law.cornell.edu, 26 CFR § 1.679-1, U.S. transferor treated as owner of foreign trust. https://www.law.cornell.edu/cfr/text/26/1.679-1. Retrieved .
- irs.gov, Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025) | Internal Revenue Service. https://www.irs.gov/instructions/i1041. Retrieved .
- irs.gov, SOI Tax Stats, 2006 Foreign trust metadata | Internal Revenue Service. https://www.irs.gov/statistics/soi-tax-stats-2006-foreign-trust-metadata. Retrieved .
Dates in this block record when each source was read for this page.