MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES.

SEC. 1903. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES. (a) Treatment of Trust Obligations, Etc.— (1) Paragraph (2) of section 679(a) is amended by striking subparagraph (B) and inserting the following: “(B) Transfers at fair market value.— To any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value.”. (2) Subsection (a) of section 679 (relating to foreign trusts having one or more United States beneficiaries) is amended by adding at the end the following new paragraph: “(3) Certain obligations not taken into account under fair market value exception.— “(A) In general.— In determining whether paragraph (2)(B) applies to any transfer by a person described in clause (ii) or (iii) of subparagraph (C), there shall not be taken into account— “(i) except as provided in regulations, any obligation of a person described in subparagraph (C), and “(ii) to the extent provided in regulations, any obligation which is guaranteed by a person described in subparagraph (C). “(B) Treatment of principal payments on obligation.— Principal payments by the trust on any obligation referred to in subparagraph (A) shall be taken into account on and after the date of the payment in determining the portion of the trust attributable to the property transferred. “(C) Persons described.— The persons described in this subparagraph are— “(i) the trust, “(ii) any grantor or beneficiary of the trust, and “(iii) any person who is related (within the meaning of section 643(i)(2)(B)) to any grantor or beneficiary of the trust.”. (b) Exemption of Transfers to Charitable Trusts.— Subsection (a) of section 679 is amended by striking “section 404(a)(4) or 404A” and inserting “section 6048(a)(3)(B)(ii)”. (c) Other Modifications.— Subsection (a) of section 679 is amended by adding at the end the following new paragraphs: 110 STAT. 1910 “(4) Special rules applicable to foreign grantor who later becomes a united states person.— “(A) In general.— If a nonresident alien individual has a residency starting date within 5 years after directly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual transferred to such trust on the residency starting date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer. “(B) Treatment of undistributed income.— For purposes of this section, undistributed net income for periods before such individual’s residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into account. “(C) Residency starting date.— For purposes of this paragraph, an individual’s residency starting date is the residency starting date determined under section 7701(b)(2)(A). “(5) Outbound trust migrations.— If— “(A) an individual who is a citizen or resident of the United States transferred property to a trust which was not a foreign trust, and “(B) such trust becomes a foreign trust while such individual is alive, then this section and section 6048 shall be applied as if such individual transferred to such trust on the date such trust becomes a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to such trust. A rule similar to the rule of paragraph (4)(B) shall apply for purposes of this paragraph.”. (d) Modifications Relating to Whether Trust Has United States Beneficiaries.— Subsection (c) of section 679 is amended by adding at the end the following new paragraph: “(3) Certain united states beneficiaries disregarded.— A beneficiary shall not be treated as a United States person in applying this section with respect to any transfer of property to foreign trust if such beneficiary first became a United States person more than 5 years after the date of such transfer.”. (e) Technical Amendment.— Subparagraph (A) of section 679(c)(2) is amended to read as follows: “(A) in the case of a foreign corporation, such corporation is a controlled foreign corporation (as defined in section 957(a)),”. (f) Regulations.— Section 679 is amended by adding at the end the following new subsection: “(d) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.”. (g) Effective Date.— The amendments made by this section shall apply to transfers of property after February 6, 1995.