[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.679-2]

[Page 310-315]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.679-2  Trusts treated as having a U.S. beneficiary.

    (a) Existence of U.S. beneficiary--(1) In general. The determination 
of whether a foreign trust has a U.S. beneficiary is made on an annual 
basis. A foreign trust is treated as having a U.S. beneficiary unless 
during the taxable year of the U.S. transferor--
    (i) No part of the income or corpus of the trust may be paid or 
accumulated to or for the benefit of, directly or indirectly, a U.S. 
person; and
    (ii) If the trust is terminated at any time during the taxable year, 
no part of the income or corpus of the trust could be paid to or for the 
benefit of, directly or indirectly, a U.S. person.
    (2) Benefit to a U.S. person--(i) In general. For purposes of 
paragraph (a)(1) of this section, income or corpus may be paid or 
accumulated to or for the benefit of a U.S. person during a taxable year 
of the U.S. transferor if during that year, directly or indirectly, 
income may be distributed to, or accumulated for the benefit of, a U.S. 
person, or corpus may be distributed to, or held for the future benefit 
of, a U.S. person. This determination is made without regard to whether 
income or corpus is actually distributed to a U.S. person during that 
year, and without regard to whether a U.S. person's interest in the 
trust income or corpus is contingent on a future event.
    (ii) Certain unexpected beneficiaries. Notwithstanding paragraph 
(a)(2)(i) of this section, for purposes of paragraph (a)(1) of this 
section, a person who is not named as a beneficiary and is not a member 
of a class of beneficiaries as defined under the trust instrument is not 
taken into consideration if the U.S. transferor demonstrates to the 
satisfaction of the Commissioner that the person's contingent interest 
in the trust is so remote as to be negligible. The preceding sentence 
does not apply with respect to persons to whom distributions could be 
made pursuant to a grant of discretion to the trustee or any other 
person. A class of beneficiaries generally does not include heirs who 
will benefit from the trust under the laws of intestate succession in 
the event that the named beneficiaries (or members of the named class) 
have all deceased (whether or not stated as a named class in the trust 
instrument).
    (iii) Examples. The following examples illustrate the rules of 
paragraphs (a)(1) and (2) of this section. In these examples, A is a 
resident alien, B is A's son, who is a resident alien, C is A's 
daughter, who is a nonresident alien, and FT is a foreign trust. The 
examples are as follows:

    Example 1. Distribution of income to U.S. person. A transfers 
property to FT. The trust instrument provides that all trust income is 
to be distributed currently to B. Under paragraph (a)(1) of this 
section, FT is treated as having a U.S. beneficiary.
    Example 2. Income accumulation for the benefit of a U.S. person. In 
2001, A transfers property to FT. The trust instrument provides that 
from 2001 through 2010, the trustee of FT may distribute trust income to 
C or may accumulate the trust income. The trust instrument further 
provides that in 2011, the trust will terminate and the trustee may 
distribute the trust assets to either or both of B and C, in the 
trustee's discretion. If the trust terminates unexpectedly prior to 
2011, all trust assets must be distributed to C. Because it is possible 
that income may be accumulated in each year, and that the accumulated 
income ultimately may be distributed to B, a U.S. person, under 
paragraph (a)(1) of

[[Page 311]]

this section FT is treated as having a U.S. beneficiary during each of 
A's tax years from 2001 through 2011. This result applies even though no 
U.S. person may receive distributions from the trust during the tax 
years 2001 through 2010.
    Example 3. Corpus held for the benefit of a U.S. person. The facts 
are the same as in Example 2, except that from 2001 through 2011, all 
trust income must be distributed to C. In 2011, the trust will terminate 
and the trustee may distribute the trust corpus to either or both of B 
and C, in the trustee's discretion. If the trust terminates unexpectedly 
prior to 2011, all trust corpus must be distributed to C. Because during 
each of A's tax years from 2001 through 2011 trust corpus is held for 
possible future distribution to B, a U.S. person, under paragraph (a)(1) 
of this section FT is treated as having a U.S. beneficiary during each 
of those years. This result applies even though no U.S. person may 
receive distributions from the trust during the tax years 2001 through 
2010.
    Example 4. Distribution upon U.S. transferor's death. A transfers 
property to FT. The trust instrument provides that all trust income must 
be distributed currently to C and, upon A's death, the trust will 
terminate and the trustee may distribute the trust corpus to either or 
both of B and C. Because B may receive a distribution of corpus upon the 
termination of FT, and FT could terminate in any year, FT is treated as 
having a U.S. beneficiary in the year of the transfer and in subsequent 
years.
    Example 5. Distribution after U.S. transferor's death. The facts are 
the same as in Example 4, except the trust instrument provides that the 
trust will not terminate until the year following A's death. Upon 
termination, the trustee may distribute the trust assets to either or 
both of B and C, in the trustee's discretion. All trust assets are 
invested in the stock of X, a foreign corporation, and X makes no 
distributions to FT. Although no U.S. person may receive a distribution 
until the year after A's death, and FT has no realized income during any 
year of its existence, during each year in which A is living corpus may 
be held for future distribution to B, a U.S. person. Thus, under 
paragraph (a)(1) of this section FT is treated as having a U.S. 
beneficiary during each of A's tax years from 2001 through the year of 
A's death.
    Example 6. Constructive benefit to U.S. person. A transfers property 
to FT. The trust instrument provides that no income or corpus may be 
paid directly to a U.S. person. However, the trust instrument provides 
that trust corpus may be used to satisfy B's legal obligations to a 
third party by making a payment directly to the third party. Under 
paragraphs (a)(1) and (2) of this section, FT is treated as having a 
U.S. beneficiary.
    Example 7. U.S. person with negligible contingent interest. A 
transfers property to FT. The trust instrument provides that all income 
is to be distributed currently to C, and upon C's death, all corpus is 
to be distributed to whomever of C's three children is then living. All 
of C's children are nonresident aliens. Under the laws of intestate 
succession that would apply to FT, if all of C's children are deceased 
at the time of C's death, the corpus would be distributed to A's heirs. 
A's living relatives at the time of the transfer consist solely of two 
brothers and two nieces, all of whom are nonresident aliens, and two 
first cousins, one of whom, E, is a U.S. citizen. Although it is 
possible under certain circumstances that E could receive a corpus 
distribution under the applicable laws of intestate succession, for each 
year the trust is in existence A is able to demonstrate to the 
satisfaction of the Commissioner under paragraph (a)(2)(ii) of this 
section that E's contingent interest in FT is so remote as to be 
negligible. Provided that paragraph (a)(4) of this section does not 
require a different result, FT is not treated as having a U.S. 
beneficiary.
    Example 8. U.S. person with non-negligible contingent interest. A 
transfers property to FT. The trust instrument provides that all income 
is to be distributed currently to D, A's uncle, who is a nonresident 
alien, and upon A's death, the corpus is to be distributed to D if he is 
then living. Under the laws of intestate succession that would apply to 
FT, B and C would share equally in the trust corpus if D is not living 
at the time of A's death. A is unable to demonstrate to the satisfaction 
of the Commissioner that B's contingent interest in the trust is so 
remote as to be negligible. Under paragraph (a)(2)(ii) of this section, 
FT is treated as having a U.S. beneficiary as of the year of the 
transfer.
    Example 9. U.S. person as member of class of beneficiaries. A 
transfers property to FT. The trust instrument provides that all income 
is to be distributed currently to D, A's uncle, who is a nonresident 
alien, and upon A's death, the corpus is to be distributed to D if he is 
then living. If D is not then living, the corpus is to be distributed to 
D's descendants. D's grandson, E, is a resident alien. Under paragraph 
(a)(2)(ii) of this section, FT is treated as having a U.S. beneficiary 
as of the year of the transfer.
    Example 10. Trustee's discretion in choosing beneficiaries. A 
transfers property to FT. The trust instrument provides that the trustee 
may distribute income and corpus to, or accumulate income for the 
benefit of, any person who is pursuing the academic study of ancient 
Greek, in the trustee's discretion. Because it is possible that a U.S. 
person will receive distributions of income or corpus, or will have 
income accumulated for his benefit, FT is treated as having a U.S. 
beneficiary. This result applies even if, during a tax year, no 
distributions or accumulations are actually made to or for the benefit 
of a

[[Page 312]]

U.S. person. A may not invoke paragraph (a)(2)(ii) of this section 
because a U.S. person could benefit pursuant to a grant of discretion in 
the trust instrument.
    Example 11. Appointment of remainder beneficiary. A transfers 
property to FT. The trust instrument provides that the trustee may 
distribute current income to C, or may accumulate income, and, upon 
termination of the trust, trust assets are to be distributed to C. 
However, the trust instrument further provides that D, A's uncle, may 
appoint a different remainder beneficiary. Because it is possible that a 
U.S. person could be named as the remainder beneficiary, and because 
corpus could be held in each year for the future benefit of that U.S. 
person, FT is treated as having a U.S. beneficiary for each year.
    Example 12. Trust not treated as having a U.S. beneficiary. A 
transfers property to FT. The trust instrument provides that the trustee 
may distribute income and corpus to, or accumulate income for the 
benefit of C. Upon termination of the trust, all income and corpus must 
be distributed to C. Assume that paragraph (a)(4) of this section is not 
applicable under the facts and circumstances and that A establishes to 
the satisfaction of the Commissioner under paragraph (a)(2)(ii) of this 
section that no U.S. persons are reasonably expected to benefit from the 
trust. Because no part of the income or corpus of the trust may be paid 
or accumulated to or for the benefit of, either directly or indirectly, 
a U.S. person, and if the trust is terminated no part of the income or 
corpus of the trust could be paid to or for the benefit of, either 
directly or indirectly, a U.S. person, FT is not treated as having a 
U.S. beneficiary.
    Example 13. U.S. beneficiary becomes non-U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that, as long as 
B remains a U.S. resident, no distributions of income or corpus may be 
made from the trust to B. The trust instrument further provides that if 
B becomes a nonresident alien, distributions of income (including 
previously accumulated income) and corpus may be made to him. If B 
remains a U.S. resident at the time of FT's termination, all accumulated 
income and corpus is to be distributed to C. In 2007, B becomes a 
nonresident alien and remains so thereafter. Because income may be 
accumulated during the years 2001 through 2007 for the benefit of a 
person who is a U.S. person during those years, FT is treated as having 
a U.S. beneficiary under paragraph (a)(1) of this section during each of 
those years. This result applies even though B cannot receive 
distributions from FT during the years he is a resident alien and even 
though B might remain a resident alien who is not entitled to any 
distribution from FT. Provided that paragraph (a)(4) of this section 
does not require a different result and that A establishes to the 
satisfaction of the Commissioner under paragraph (a)(2)(ii) of this 
section that no other U.S. persons are reasonably expected to benefit 
from the trust, FT is not treated as having a U.S. beneficiary under 
paragraph (a)(1) of this section during tax years after 2007.

    (3) Changes in beneficiary's status--(i) In general. For purposes of 
paragraph (a)(1) of this section, the possibility that a person that is 
not a U.S. person could become a U.S. person will not cause that person 
to be treated as a U.S. person for purposes of paragraph (a)(1) of this 
section until the tax year of the U.S. transferor in which that 
individual actually becomes a U.S. person. However, if a person who is 
not a U.S. person becomes a U.S. person for the first time more than 5 
years after the date of a transfer to the foreign trust by a U.S. 
transferor, that person is not treated as a U.S. person for purposes of 
applying paragraph (a)(1) of this section with respect to that transfer.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (a)(3) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Non-U.S. beneficiary becomes U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that all income 
is to be distributed currently to C and that, upon the termination of 
FT, all corpus is to be distributed to C. Assume that paragraph (a)(4) 
of this section is not applicable under the facts and circumstances and 
that A establishes to the satisfaction of the Commissioner under 
paragraph (a)(2)(ii) of this section that no U.S. persons are reasonably 
expected to benefit from the trust. Under paragraph (a)(3)(i) of this 
section, FT is not treated as having a U.S. beneficiary during the tax 
years of A in which C remains a nonresident alien. If C first becomes a 
resident alien in 2004, FT is treated as having a U.S. beneficiary 
commencing in that year under paragraph (a)(3) of this section. See 
paragraph (c) of this section regarding the treatment of A upon FT's 
acquisition of a U.S. beneficiary.
    Example 2. Non-U.S. beneficiary becomes U.S. person more than 5 
years after transfer. The facts are the same as in Example 1, except C 
first becomes a resident alien in 2007. FT is treated as not having a 
U.S. beneficiary under paragraph (a)(3)(i) of this section with respect 
to the property transfer by A. However, if C had previously been a U.S. 
person

[[Page 313]]

during any prior period, the 5-year exception in paragraph (a)(3)(i) of 
this section would not apply in 2007 because it would not have been the 
first time C became a U.S. person.

    (4) General rules--(i) Records and documents. Even if, based on the 
terms of the trust instrument, a foreign trust is not treated as having 
a U.S. beneficiary within the meaning of paragraph (a)(1) of this 
section, the trust may nevertheless be treated as having a U.S. 
beneficiary pursuant to paragraph (a)(1) of this section based on the 
following--
    (A) All written and oral agreements and understandings relating to 
the trust;
    (B) Memoranda or letters of wishes;
    (C) All records that relate to the actual distribution of income and 
corpus; and
    (D) All other documents that relate to the trust, whether or not of 
any purported legal effect.
    (ii) Additional factors. For purposes of determining whether a 
foreign trust is treated as having a U.S. beneficiary within the meaning 
of paragraph (a)(1) of this section, the following additional factors 
are taken into account--
    (A) If the terms of the trust instrument allow the trust to be 
amended to benefit a U.S. person, all potential benefits that could be 
provided to a U.S. person pursuant to an amendment must be taken into 
account;
    (B) If the terms of the trust instrument do not allow the trust to 
be amended to benefit a U.S. person, but the law applicable to a foreign 
trust may require payments or accumulations of income or corpus to or 
for the benefit of a U.S. person (by judicial reformation or otherwise), 
all potential benefits that could be provided to a U.S. person pursuant 
to the law must be taken into account, unless the U.S. transferor 
demonstrates to the satisfaction of the Commissioner that the law is not 
reasonably expected to be applied or invoked under the facts and 
circumstances; and
    (C) If the parties to the trust ignore the terms of the trust 
instrument, or if it is reasonably expected that they will do so, all 
benefits that have been, or are reasonably expected to be, provided to a 
U.S. person must be taken into account.
    (iii) Examples. The following examples illustrate the rules of 
paragraph (a)(4) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Amendment pursuant to local law. A creates and funds FT 
for the benefit of C. The terms of FT (which, according to the trust 
instrument, cannot be amended) provide that no part of the income or 
corpus of FT may be paid or accumulated during the taxable year to or 
for the benefit of any U.S. person, either during the existence of FT or 
at the time of its termination. However, pursuant to the applicable 
foreign law, FT can be amended to provide for additional beneficiaries, 
and there is an oral understanding between A and the trustee that B can 
be added as a beneficiary. Under paragraphs (a)(1) and (a)(4)(ii)(B) of 
this section, FT is treated as having a U.S. beneficiary.
    Example 2. Actions in violation of the terms of the trust. A 
transfers property to FT. The trust instrument provides that no U.S. 
person can receive income or corpus from FT during the term of the trust 
or at the termination of FT. Notwithstanding the terms of the trust 
instrument, a letter of wishes directs the trustee of FT to provide for 
the educational needs of B, who is about to begin college. The letter of 
wishes contains a disclaimer to the effect that its contents are only 
suggestions and recommendations and that the trustee is at all times 
bound by the terms of the trust as set forth in the trust instrument. 
Under paragraphs (a)(1) and (a)(4)(ii)(C) of this section, FT is treated 
as having a U.S. beneficiary.

    (b) Indirect U.S. beneficiaries--(1) Certain foreign entities. For 
purposes of paragraph (a)(1) of this section, an amount is treated as 
paid or accumulated to or for the benefit of a U.S. person if the amount 
is paid to or accumulated for the benefit of--
    (i) A controlled foreign corporation, as defined in section 957(a);
    (ii) A foreign partnership, if a U.S. person is a partner of such 
partnership; or
    (iii) A foreign trust or estate, if such trust or estate has a U.S. 
beneficiary (within the meaning of paragraph (a)(1) of this section).
    (2) Other indirect beneficiaries. For purposes of paragraph (a)(1) 
of this section, an amount is treated as paid or accumulated to or for 
the benefit of a U.S. person if the amount is paid to or

[[Page 314]]

accumulated for the benefit of a U.S. person through an intermediary, 
such as an agent or nominee, or by any other means where a U.S. person 
may obtain an actual or constructive benefit.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b). Unless otherwise noted, A is a resident alien. B is A's 
son and is a resident alien. FT is a foreign trust. The examples are as 
follows:

    Example 1. Trust benefitting foreign corporation. A transfers 
property to FT. The beneficiary of FT is FC, a foreign corporation. FC 
has outstanding solely 100 shares of common stock. B owns 49 shares of 
the FC stock and FC2, also a foreign corporation, owns the remaining 51 
shares. FC2 has outstanding solely 100 shares of common stock. B owns 49 
shares of FC2 and nonresident alien individuals own the remaining 51 FC2 
shares. FC is a controlled foreign corporation (as defined in section 
957(a), after the application of section 958(a)(2)). Under paragraphs 
(a)(1) and (b)(1)(i) of this section, FT is treated as having a U.S. 
beneficiary.
    Example 2. Trust benefitting another trust. A transfers property to 
FT. The terms of FT permit current distributions of income to B. A 
transfers property to another foreign trust, FT2. The terms of FT2 
provide that no U.S. person can benefit either as to income or corpus, 
but permit current distributions of income to FT. Under paragraph (a)(1) 
of this section, FT is treated as having a U.S. beneficiary and, under 
paragraphs (a)(1) and (b)(1)(iii) of this section, FT2 is treated as 
having a U.S. beneficiary.
    Example 3. Trust benefitting another trust after transferor's death. 
A transfers property to FT. The terms of FT require that all income from 
FT be accumulated during A's lifetime. In the year following A's death, 
a share of FT is to be distributed to FT2, another foreign trust, for 
the benefit of B. Under paragraphs (a)(1) and (b)(1)(iii) of this 
section, FT is treated as having a U.S. beneficiary beginning with the 
year of A's transfer of property to FT.
    Example 4. Indirect benefit through use of debit card. A transfers 
property to FT. The trust instrument provides that no U.S. person can 
benefit either as to income or corpus. However, FT maintains an account 
with FB, a foreign bank, and FB issues a debit card to B against the 
account maintained by FT and B is allowed to make withdrawals. Under 
paragraphs (a)(1) and (b)(2) of this section, FT is treated as having a 
U.S. beneficiary.
    Example 5. Other indirect benefit. A transfers property to FT. FT is 
administered by FTC, a foreign trust company. FTC forms IBC, an 
international business corporation formed under the laws of a foreign 
jurisdiction. IBC is the beneficiary of FT. IBC maintains an account 
with FB, a foreign bank. FB issues a debit card to B against the account 
maintained by IBC and B is allowed to make withdrawals. Under paragraphs 
(a)(1) and (b)(2) of this section, FT is treated as having a U.S. 
beneficiary.

    (c) Treatment of U.S. transferor upon foreign trust's acquisition or 
loss of U.S. beneficiary--(1) Trusts acquiring a U.S. beneficiary. If a 
foreign trust to which a U.S. transferor has transferred property is not 
treated as having a U.S. beneficiary (within the meaning of paragraph 
(a) of this section) for any taxable year of the U.S. transferor, but 
the trust is treated as having a U.S. beneficiary (within the meaning of 
paragraph (a) of this section) in any subsequent taxable year, the U.S. 
transferor is treated as having additional income in the first such 
taxable year of the U.S. transferor in which the trust is treated as 
having a U.S. beneficiary. The amount of the additional income is equal 
to the trust's undistributed net income, as defined in section 665(a), 
at the end of the U.S. transferor's immediately preceding taxable year 
and is subject to the rules of section 668, providing for an interest 
charge on accumulation distributions from foreign trusts.
    (2) Trusts ceasing to have a U.S. beneficiary. If, for any taxable 
year of a U.S. transferor, a foreign trust that has received a transfer 
of property from the U.S. transferor ceases to be treated as having a 
U.S. beneficiary, the U.S. transferor ceases to be treated as the owner 
of the portion of the trust attributable to the transfer beginning in 
the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary (unless the U.S. transferor is treated as an owner thereof 
pursuant to sections 673 through 677). The U.S. transferor is treated as 
making a transfer of property to the foreign trust on the first day of 
the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary. The amount of the property deemed to be transferred to the 
trust is the portion of the trust attributable to the prior transfer to 
which paragraph (a)(1) of this section

[[Page 315]]

applied. For rules regarding the recognition of gain on transfers to 
foreign trusts, see section 684.
    (3) Examples. The rules of this paragraph (c) are illustrated by the 
following examples. A is a resident alien, B is A's son, and FT is a 
foreign trust. The examples are as follows:

    Example 1. Trust acquiring U.S. beneficiary. (i) In 2001, A 
transfers stock with a fair market value of $100,000 to FT. The stock 
has an adjusted basis of $50,000 at the time of the transfer. The trust 
instrument provides that income may be paid currently to, or accumulated 
for the benefit of, B and that, upon the termination of the trust, all 
income and corpus is to be distributed to B. At the time of the 
transfer, B is a nonresident alien. A is not treated as the owner of any 
portion of FT under sections 673 through 677. FT accumulates a total of 
$30,000 of income during the taxable years 2001 through 2003. In 2004, B 
moves to the United States and becomes a resident alien. Assume 
paragraph (a)(4) of this section is not applicable under the facts and 
circumstances.
    (ii) Under paragraph (c)(1) of this section, A is treated as 
receiving an accumulation distribution in the amount of $30,000 in 2004 
and immediately transferring that amount back to the trust. The 
accumulation distribution is subject to the rules of section 668, 
providing for an interest charge on accumulation distributions.
    (iii) Under paragraphs (a)(1) and (3) of this section, beginning in 
2005, A is treated as the owner of the portion of FT attributable to the 
stock transferred by A to FT in 2001 (which includes the portion 
attributable to the accumulated income deemed to be retransferred in 
2004).
    Example 2. Trust ceasing to have U.S. beneficiary. (i) The facts are 
the same as in Example 1. In 2008, B becomes a nonresident alien. On the 
date B becomes a nonresident alien, the stock transferred by A to FT in 
2001 has a fair market value of $125,000 and an adjusted basis of 
$50,000.
    (ii) Under paragraph (c)(2) of this section, beginning in 2009, FT 
is not treated as having a U.S. beneficiary, and A is not treated as the 
owner of the portion of the trust attributable to the prior transfer of 
stock. For rules regarding the recognition of gain on the termination of 
ownership status, see section 684.

[T.D. 8955, 66 FR 37889, July 20, 2001]