(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 Sec. 1.684-1(a). The trust must also comply with the rules of section 6048.
(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 7701(a)(31)(B).
(c) Inadvertent migrations. In the event of an inadvertent migration, as defined in Sec. 301.7701-7(d)(2) of this chapter, a trust may avoid the application of this section by complying with the procedures set forth in Sec. 301.7701-7(d)(2) of this chapter.
(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 Sec. 301.7701-7(d) of this chapter, T becomes a foreign trust. T has U.S. beneficiaries within the meaning of Sec. 1.679-2 and A is, therefore, treated as owning FT under section 679. Pursuant to Sec. 1.684-3(a), neither A nor T is required to recognize gain at the time of the migration. Section 1.684-2(e) 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 Sec. 301.7701-7(d) of this chapter, T becomes a foreign trust, FT. FT has no U.S. beneficiaries within the meaning of Sec. 1.679-2 and no person is treated as owning any portion of FT. T is required to recognize gain of 600X on January 1, 2001. Paragraph (c) of this section provides rules with respect to an inadvertent migration of a domestic trust. [T.D. 8956, 66 FR 37899, July 20, 2001]