Reg. § 1.684-4 Outbound migrations of domestic trusts.
(a) In general If a U.S. person transfers property to a domestic trust, and such trust becomes a foreign trust, and neither trust is treated as owned by any person under subpart E of part I of subchapter J, chapter 1 of the Internal Revenue Code, the trust shall be treated for purposes of this section as having transferred all of its assets to a foreign trust and the trust is required to recognize gain on the transfer under . The trust must also comply with the rules of section .
(b) Date of transfer The transfer described in this section shall be deemed to occur immediately before, but on the same date that, the trust meets the definition of a foreign trust set forth in section .
(c) Inadvertent migrations In the event of an inadvertent migration, as defined in , a trust may avoid the application of this section by complying with the procedures set forth in .
(d) Examples The following examples illustrate the rules of this section. In all examples, A is a U.S. citizen, B is a U.S. citizen, C is a nonresident alien, and T is a trust. The examples are as follows:
Example 1. Migration of domestic trust with U.S. beneficiaries. A transfers property which has a fair market value of 1000X and an adjusted basis equal to 400X to T, a domestic trust, for the benefit of A's children who are also U.S. citizens. B is the trustee of T. On January 1, 2001, while A is still alive, B resigns as trustee and C becomes successor trustee under the terms of the trust. Pursuant to , T becomes a foreign trust. T has U.S. beneficiaries within the meaning of and A is, therefore, treated as owning FT under section . Pursuant to , neither A nor T is required to recognize gain at the time of the migration. provides rules that may require A to recognize gain upon a subsequent change in the status of the trust.
Example 2. Migration of domestic trust with no U.S. beneficiaries. A transfers property which has a fair market value of 1000X and an adjusted basis equal to 400X to T, a domestic trust for the benefit of A's mother who is not a citizen or resident of the United States. T is not treated as owned by another person. B is the trustee of T. On January 1, 2001, while A is still alive, B resigns as trustee and C becomes successor trustee under the terms of the trust. Pursuant to , T becomes a foreign trust, FT. FT has no U.S. beneficiaries within the meaning of and no person is treated as owning any portion of FT. T is required to recognize gain of 600X on January 1, 2001. of this section provides rules with respect to an inadvertent migration of a domestic trust.
[T.D. 8956, 66 FR 37899, July 20, 2001]