International families routinely hold U.S. real estate, brokerage accounts, and operating interests in trusts organized outside the United States. The first U.S. question is not the name on the trust deed. It is classification: is the trust a foreign grantor trust (FGT) or a foreign non-grantor trust (FNGT) for U.S. income tax purposes? That answer determines who is taxed on the income, how distributions to U.S. beneficiaries are treated, whether the throwback rules apply, and which information returns must be filed. The classification is a function of the Code — primarily Sections 671 through 679, and the foreign-trust rules in Sections 7701(a)(30) and (31) — not of the label the family prefers.
This article describes the structural difference and when each classification is typically used. It is not tax advice. Outcomes depend on the trust instrument, the settlor's residence and citizenship, the beneficiaries, and the assets. We advise on legal structure and coordinate with tax advisers on the tax implications of each approach.
Two Threshold Questions: Foreign vs. Domestic, Grantor vs. Non-Grantor
A trust is a foreign trust unless it satisfies both the court test and the control test under Section 7701(a)(30)(E). The court test requires that a court within the United States be able to exercise primary supervision over the administration of the trust. The control test requires that one or more U.S. persons have the authority to control all substantial decisions. Fail either test and the trust is foreign — even if it holds only U.S. assets or was drafted by U.S. counsel.
Separately, a trust is a grantor trust if a person is treated as the owner of all or a portion of the trust under Sections 671 through 679. If no one is treated as the owner, the trust is a non-grantor trust: a separate taxpayer, with its own distributable net income (DNI) and, if foreign, a pool of undistributed net income (UNI) that can follow a later distribution to a U.S. beneficiary.
A foreign grantor trust is therefore a trust that is foreign under the court and control tests and that has a grantor-owner. A foreign non-grantor trust is foreign and has no grantor-owner. Those are U.S. tax classifications. They can diverge from how the same instrument is treated in the settlor's home country.
When an FGT Fits — Non-U.S. Settlors, U.S. Beneficiaries, and Current Income
For a non-U.S. settlor, grantor-trust treatment is narrower than many families expect. Section 672(f) generally prevents a foreign person from being treated as the owner of a trust except in limited cases — most importantly, where the grantor has the power to revoke the trust and revest the assets in the grantor, or where the only amounts distributable during the grantor's lifetime are income or corpus to the grantor or the grantor's spouse. Those powers must exist in substance, not merely in a recital.
Where those conditions are met, the FGT is typically useful while the settlor is living and remains a non-U.S. person. Trust income is attributed to the grantor. If that income is not U.S.-source and is not effectively connected with a U.S. trade or business, the grantor often has no U.S. income tax on it — a conclusion your tax adviser must confirm on the facts. Distributions to U.S. beneficiaries from an FGT are generally treated as gifts rather than as taxable trust distributions, which is why families with children studying or working in the United States often start here.
The trade-off is control and estate inclusion. Powers sufficient to support grantor status can also keep assets in the settlor's estate, including for U.S. estate tax if the trust holds U.S.-situs property. An FGT that solves the income-tax reporting for U.S. children can leave the Miami condominium or the U.S. brokerage account exposed at the settlor's death. That tension — simpler lifetime income treatment versus estate-tax inclusion — is the central design choice. See Trusts for Latin American Families with U.S. Assets and Irrevocable Trusts and U.S. Estate Planning for Non-Citizens.
When an FNGT Is Chosen — and Why Throwback Matters
Families choose an FNGT when the objective is to complete a transfer during life: remove assets from the settlor's estate, vest discretion in an independent trustee, or hold wealth for multiple generations after the settlor can no longer be treated as owner. Once grantor status ends — by the terms of the instrument, by the settlor's death, or because Section 672(f) no longer applies — the trust is a non-grantor trust.
An FNGT is a separate taxpayer. Non-U.S.-source income can accumulate without current U.S. income tax. The cost appears when a U.S. beneficiary receives a distribution that carries out UNI. That distribution is an accumulation distribution, taxed under the throwback rules at historical rates plus an interest charge. If the trustee does not provide a Foreign Non-Grantor Trust Beneficiary Statement, the default characterization can treat the entire distribution as an accumulation distribution. We covered the mechanics in The Throwback Rule and the beneficiary-side reporting in U.S. Beneficiaries of Foreign Trusts.
FNGT planning that works in practice usually does one of three things: distribute current DNI each year so UNI does not build; keep U.S. beneficiaries out of the accumulation pool until the structure is ready; or migrate the trust to domestic status before large distributions. None of those is a template. Each requires the instrument, the trustee, and the tax reporting to match.
Forms 3520 and 3520-A — High-Level Reporting
U.S. persons who create, transfer property to, or receive distributions from a foreign trust generally file Form 3520. The form also applies to certain large foreign gifts. Penalties are computed as a percentage of the reportable amount and can apply even when no additional income tax is due.
Form 3520-A is the foreign trust's annual information return. A U.S. owner of a foreign grantor trust is responsible for seeing that it is filed. The trust (or the U.S. owner) reports income, assets, and distributions and issues the beneficiary statements that U.S. distributees need in order to avoid default throwback treatment. Failure to file Form 3520-A is penalized as a percentage of the trust's year-end gross assets.
Reporting is not optional because the family thinks of the arrangement as a "family trust" or because the trustee is offshore. If a U.S. person is an owner or a beneficiary, the forms are part of the structure. Counsel and the tax adviser should assign responsibility for 3520, 3520-A, and the beneficiary statements before the first transfer or distribution — not in April of the following year.
Pre-Immigration Timing: Creating the Trust Before vs. After U.S. Residency
The day the settlor becomes a U.S. tax resident — green card, substantial presence, or, for estate tax, domicile — the same instrument can change character. Section 679 treats a U.S. person who transfers property to a foreign trust with a U.S. beneficiary as the owner of that trust, with limited exceptions. A trust that was a clean FGT for a non-U.S. settlor can become a U.S.-owned foreign trust, with current inclusion of income and a different reporting stack. An FNGT that accumulated income while the family lived abroad can produce throwback tax when a newly resident beneficiary takes a distribution.
Creating and funding the trust before residency is usually simpler than unwinding it afterward. After residency, transfers can implicate gift tax, gain recognition, and outbound-trust rules. Families who are considering a visa or a move should treat trust classification as part of the pre-immigration work, not as a document to "clean up later." See Pre-Immigration Planning for LATAM Families.
How to Choose — and What to Review on an Existing Trust
Start with facts, not with a preferred acronym. Who is the settlor, and will that person remain non-U.S.? Who may receive distributions, and is any beneficiary already a U.S. person? Which assets are U.S.-situs for estate tax? Does the instrument actually confer a 672(f)-qualifying power, or does it only look like a grantor trust? Can the trustee produce the statements a U.S. beneficiary needs?
If the family already has a trust, the review is the same: read the deed against the court test, the control test, and the grantor rules; inventory UNI; confirm 3520 and 3520-A filings; and decide whether the structure should remain foreign, migrate, or be replaced before the next distribution or the next change in residence. Classification is not a one-time election. It is a continuing legal fact that changes when the people or the powers change.