A foreign grantor trust for a non-U.S. settlor is a lifetime arrangement. Section 672(f) allows grantor status in narrow cases, typically a power to revoke that the grantor alone can exercise, or a trust that can distribute only to the grantor or the grantor's spouse while the grantor is alive. Those conditions are about the grantor's life. When the grantor dies, the power dies with the person, or the "during the grantor's lifetime" limit closes. If the trust remains foreign under section 7701 and no other person is an owner under sections 671 through 679, the trust becomes a foreign non-grantor trust. The family often hears that sentence for the first time from a bank that has frozen the account.
The classification while the grantor was alive is in FGT vs. FNGT for International Families. This note is what changes at death. It is not tax advice. The year-of-death computations belong to the tax adviser. In Spanish, the same moment is described in cuando fallece el settlor de un FGT. The practice page is Foreign Trusts.
Income tax: the trust becomes a separate taxpayer
During a true FGT, income is attributed to the grantor. It is not, in the ordinary case, distributable net income of a non-grantor trust, and it does not sit in the trust as undistributed net income waiting for a later throwback. When grantor status ends, the trust is its own taxpayer. Income received after death that is not distributed can become UNI under section 665. A later distribution of that UNI to a U.S. beneficiary is an accumulation distribution, taxed under the throwback rules in sections 665 through 668, with an interest charge. Current-year distributions can carry out current DNI without that charge. The trustee who cannot produce a beneficiary statement leaves the U.S. beneficiary in the default that treats the distribution as an accumulation distribution.
We are not restating the throwback computation. It is in The Throwback Rule, and the beneficiary's side of the file is in U.S. Beneficiaries of Foreign Trusts. The planning point at death is narrower. Decide, with the trustee and the tax adviser, whether post-death income will be distributed currently to someone, accumulated, or left untouched until the records exist. Accumulating by silence is still accumulating.
Reporting changes in the year of death
While the grantor was alive, a distribution to a U.S. child was often a gift from the foreign grantor, reported on Form 3520 under section 6039F if it crossed $100,000, not as a trust distribution under section 6048(c). After death, the same wire is a distribution from an FNGT. The part of the form changes. A bequest from the foreign estate can still be a section 6039F item if it crosses the threshold. The trust's own post-death distributions are not that bequest merely because they happen in the same year. Someone has to separate the estate from the trust on paper. Form 3520-A does not start merely because there are U.S. beneficiaries. It starts if a U.S. person is an owner. See Forms 3520 and 3520-A.
Estate tax is a different statute
Income-tax classification does not decide the gross estate. A non-resident alien's U.S. estate tax is imposed on U.S.-situs property under sections 2101 through 2105, with a credit under section 2102(b) that shelters $60,000. Stock of a domestic corporation and U.S. real property are U.S.-situs. The powers that made the trust an FGT — a retained right to revoke, or a retained life interest — are often the same powers that pull U.S.-situs assets back into the gross estate under sections 2036 and 2038, as those inclusion rules apply to a non-resident alien's U.S. property. An FGT that was efficient for lifetime gifts to U.S. children can be the structure that leaves the Miami condominium and the U.S. brokerage stock exposed at death.
Assets that were never U.S.-situs, and assets that were transferred completely with no retained string, are a different analysis. Foreign-situs property is generally outside the non-resident alien's U.S. gross estate under section 2103. Basis follows inclusion: U.S.-situs property included in the U.S. gross estate may take a basis under section 1014. Property that stays outside that estate does not receive a U.S. basis adjustment merely because the grantor died. The tax adviser runs those numbers. The legal inventory is which assets are U.S.-situs and which powers survived until death. See U.S.-Situs Assets Inside a Foreign Trust and Irrevocable Trusts and the $60,000 Exemption.
The week the bank calls
The practical work in the year of death is succession, not a new theory of trusts. Who becomes trustee. Whether a protector must approve. Whether distributions are suspended until a personal representative exists. Whether the account title and the KYC file still name the deceased settlor as the person who must instruct. Counsel reads those clauses before the first post-death Form 3520 is drafted, and before anyone tells a U.S. beneficiary that "nothing changes because it was always a family trust." Something changes. The trust is no longer the grantor's.