Transfers to Foreign Trusts

By Joseph Lipari and Quincy Cotton

In Brief

A Broad Regulatory Net Controls Planning

The IRC limitations on the use of foreign trusts by U.S. citizens and residents have been around for years. But in August 2000, the Treasury Department proposed new regulations that affect any creation of or transfer of assets to a foreign trust by a U.S. entity. The proposed regulations are effective for transfers occurring after August 7, 2000.

The proposed regulations cast an extremely broad net and raise many complicated planning issues for multigenerational families whose members reside in different countries. The authors’ best advice is to read the regulations thoroughly, paying particular attention to the examples and the exceptions provided in many areas.

Foreign trusts, as a means of deferring income from U.S. taxation, have advantages over controlled foreign corporations and passive foreign investment companies. Many nonresidents have also found foreign trusts to be a preferred vehicle for structuring U.S. real estate investments subject to the Foreign Investment in Real Property Tax Act (FIRPTA), because foreign trusts are taxable as individuals and consequently eligible for lower capital gains rates.

The IRC has long placed limitations on the use of foreign trusts by U.S. citizens and residents. In August 2000, the Treasury Department proposed regulations under IRC sections 679 and 684 that affect any creation of or transfer of assets to a foreign trust by a U.S. resident. The regulations would be effective generally for transfers after August 7, 2000. They are extensive, cast an extremely broad net, and raise interesting logistical issues for families whose members may take up and later relinquish residence in different countries at different times. A U.S. resident in the senior generation of such a family who wants to undertake gift and estate tax planning by making transfers in trust may find that his U.S. income tax liability with respect to the trust turns on the residence of his descendants (the beneficiaries), over which the trust settlor may have little information and even less control.

Taxation of Grantor Trusts and Foreign Trusts

Grantor trust rules. Under IRC sections 671–678, a person who transfers property to a trust (a grantor) and retains an interest in or certain powers over the trust is treated, for income tax purposes, as the owner of such portion of the trust. A grantor who is a U.S. citizen or resident is subject to U.S. income tax on the worldwide income of the trust (or the portion deemed owned by the grantor). If the trust is not a grantor trust but is a U.S. trust, its worldwide income is subject to U.S. income tax under the rules governing the income taxation of trusts and their beneficiaries. If the trust is not a grantor trust but is a foreign nongrantor trust, the potential exists for some or all of the trust’s income to escape U.S. taxation. This loophole exists because a foreign trust, like a nonresident alien, is subject to U.S. income tax only on its U.S. source income (excluding non–real estate capital gains) and any income effectively connected with a U.S. trade or business (or treated as such). It is not subject to U.S. income tax on its foreign source income or on U.S. source income that is neither effectively connected income nor fixed or determinable annual or periodical (FDAP) income.

Congress has long been concerned with the potential for the assets of a foreign nongrantor trust to accumulate income on a tax-deferred basis. IRC section 679 is one of the primary provisions intended to prevent this deferral. For example, a foreign trust (FT) invests in U.S. assets that generate income not subject to U.S. tax (e.g., non–real estate capital gains and portfolio interest) and invests in non-U.S. assets in countries that do not tax interest or dividends. If FT is formed and administered in a country that does not impose tax on such income, FT pays no income tax anywhere. Even though FT’s ultimate distribution to its U.S. beneficiaries may be taxable, FT’s income can accumulate completely tax-free until that time. IRC section 679 prevents this tax-free accumulation where there is a transfer of assets to FT by a U.S. person and where FT has one or more U.S. beneficiaries. In such a case, the trust is treated as a grantor trust and the U.S. transferor will be taxable on income attributable to the transferred assets, even if she retains no interest in and receives no distributions from the trust.

Transfers to foreign trusts. IRC sections 1491–1494, which were repealed in 1997, had subjected all asset transfers by a U.S. person to a foreign trust to a 35% excise tax, whether or not the transfer had been made with donative intent or at fair market value. The foreign trust could not increase its basis in the assets received from the U.S. transferor by the amount of excise tax paid on the transfer.

Under IRC section 684(a), a transfer to a foreign trust is treated as a taxable disposition (i.e., a sale of the assets at fair market value), except to the extent provided in the regulations. Thus, the general rule is that gain (but not loss) is recognized to the extent that the fair market value of the asset exceeds the transferor’s basis at the time of the transfer. The trust’s basis in the asset is equal to the deemed purchase price, i.e., fair market value.

IRC section 684(b) provides that gain is not recognized under section 684(a) to the extent the U.S. transferor is considered to be the owner of the trust under the grantor trust rules, including section 679. Section 684(c) provides that if a U.S. trust becomes a foreign trust (e.g., if the U.S. trustee is replaced with a foreign trustee), the trust assets are considered to be transferred to a foreign trust and gain must be recognized.

Estate and Gift Taxation

U.S. citizens and U.S. residents domiciled in the United States are subject to the same estate and gift tax rules. Under the Treasury regulations, a person acquires a U.S. domicile for this purpose by living in the United States for even a brief period of time with no definite intention of leaving. All worldwide assets of U.S. citizens or domiciliaries are included in their estates and subject to full U.S. estate and gift taxes. The basis of such assets to the decedent is determined under IRC section 1014.

Individuals that are not U.S. citizens or domiciliaries (nonresidents) are subject to a different set of rules. Under IRC sections 2101 and 2106, estate tax is imposed only on the portion of an alien nondomiciliary’s gross estate that consists of U.S. property. This generally includes real and tangible personal property located in the United States as well as shares of domestic corporations and debt obligations of U.S. persons. Under section 2501(a)(2), the gift tax applies even more narrowly to alien nondomiciliaries, because it does not apply to the transfer of intangible property.

Resident and nonresident defined. The definition of U.S. resident for estate and gift tax purposes, by including only U.S. citizens and domiciliaries, is narrower than the definition of U.S. resident for income tax purposes. The income tax definition, which is incorporated into IRC sections 679 and 684, is also contained in section 7701(a)(30) and includes resident aliens under section 7701(b). Resident aliens include lawful permanent residents (green card holders) and other non–U.S. citizens who are U.S. residents based on the number of days present in the United States in a given year under the substantial presence test. Thus, many non–U.S. domiciliaries, not generally subject to U.S. estate and gift tax, are nevertheless U.S. residents for income tax purposes and therefore subject to the provisions of IRC sections 679 and 684.

IRC Section 679 Regulations

Section 679 applies when a U.S. transferor transfers property to a foreign trust that has one or more U.S. beneficiaries.

Indirect transfers. Proposed Treasury Regulations section 1.679-3(c) provides that when a transfer by a U.S. person to a foreign person (an intermediary) is followed by a transfer by the intermediary to a foreign trust, the transfer will be considered an indirect transfer by the U.S. person to the foreign trust “if such transfer is made pursuant to a plan, one of the principal purposes of which is the avoidance of U.S. tax.” The proposed regulation generally applies if the U.S. person is related (brothers and sisters, ancestors, lineal descendants, and the spouses thereof; also corporations and partnerships in which the U.S. transferor or one or more family members owns at least 10%, and other trusts of which the U.S. transferor is the settlor) to a beneficiary of the foreign trust, unless the U.S. person can demonstrate that the intermediary—

• has a relationship with a beneficiary of the foreign trust that establishes a reasonable basis for concluding that the intermediary would make a transfer to the foreign trust;
• acted independently of the U.S. person;
• is not an agent of the U.S. person under generally applicable U.S. agency principles; and
• complied in a timely fashion with the reporting requirements of section 6048, if applicable.

Otherwise, the intermediary will be treated as the agent of the U.S. transferor and the property in question will be treated as an indirect transfer for the purposes of section 679.

The proposed regulations provide two examples of this indirect transfer rule, but they are not very instructive—they provide few facts and it is not clear under what circumstances it could be established that an intermediary acted independently.

The indirect transfer rules of the proposed regulations are taken almost verbatim from Treasury Regulations section 1.643(h)-1, which provides that, under certain circumstances, a distribution from a foreign trust to a foreign person followed by a gratuitous transfer to a U.S. person will be recharacterized as a transfer by the foreign trust to the U.S. person. This distribution will be taxable to the extent it is made from the current or accumulated income of the trust. The indirect transfer rules under the two sets of regulations are essentially the same.

Any difference in the application of the indirect transfer rules can be important, because the provisions of sections 643(h) and 679 apply in similar situations; the form of the transaction largely governs which rules apply. An indirect transfer within the scope of section 679 may also arise in the form of a loan to a foreign trust from a bank that also holds deposits on behalf of the U.S. transferor.

Constructive Transfers

Under the proposed regulations, a constructive transfer includes any assumption or satisfaction of a foreign trust’s obligation to a third party. For example, a U.S. person’s payment or assumption of a foreign trust’s debt arising from services rendered by a third party constitutes a constructive transfer by the U.S. person to the trust.

If a foreign trust borrows money or other property from an unrelated lender and a U.S. person related to the trust guarantees that debt, the U.S. guarantor is treated for purposes of section 679 as a U.S. transferor who has made a transfer to the trust and is therefore deemed to own the applicable portion of the trust. In such a case, a special rule applies: “Payments of principal to the lender by the foreign trust are taken into account on and after the date of the payment in determining the portion of the trust attributable to the property deemed transferred by the U.S. guarantor.” It may require elaborate accounting to track the portion of the trust subject to section 679 (and the income attributable to that portion, which must be reported by the U.S. guarantor).

Who Is a U.S. Beneficiary?

A trust is treated as having a U.S. beneficiary for a taxable year unless, under the terms of the trust instrument, no part of the income or corpus of the trust may be paid to or accumulated for the benefit of a U.S. person during the year or in the case that the trust is terminated during the year. Under certain attribution rules, amounts paid to or accumulated for the benefit of a controlled foreign corporation, a foreign partnership with a U.S. partner, or a foreign trust or estate that has a U.S. beneficiary are treated as paid to or accumulated for the benefit of a U.S. person. The determination of whether a trust has a U.S. beneficiary is made on a year-by-year basis.

Possibility of a distribution. The regulations take an expansive view regarding trust income or assets being distributed to or accumulated for the benefit of a U.S. person. This determination is made without regard to whether trust income or principal is actually distributed and without regard to whether an interest in the trust is contingent on a future event. Thus, whenever the possibility exists for the distribution of a trust’s current income, accumulated income, or principal to a U.S. resident, all assets of the trust attributable to property from a U.S. transferor will be treated as owned by such U.S. transferor—notwithstanding the likelihood that all or most of the trust’s income or principal will be distributed to non–U.S. resident beneficiaries.

Under this expansive scope, application of IRC section 679 cannot be avoided merely because the trust instrument provides that distributions will not be made to any U.S. person. See the example in proposed Treasury regulations section 1.679-2(a)(2)(iii).

Changes in Status of a Beneficiary

The regulations provide special rules that address changes in the status of a beneficiary from a non-U.S. person to a U.S. person. The possibility that a non-U.S. person could become a U.S. person is not taken into account for purposes of section 679 until the year in which the beneficiary in fact becomes a U.S. person. However, if a beneficiary is a non-U.S. person at the time the U.S. settlor transfers assets to the trust, but becomes a U.S. person within five years thereafter, the grantor will have an additional income inclusion in the year the beneficiary becomes a U.S. person. The amount of additional income is equal to the undistributed net income of the trust (distributable net income minus amounts distributed to beneficiaries; the proposed regulations provide details) and the grantor is also subject to an interest charge. These rules do not apply in the event a non-U.S. beneficiary becomes a U.S. resident more than five years after the U.S. transferor’s transfer to the trust. However, the proposed regulations apply the five-year exception extremely narrowly. Changes in beneficiary status from U.S. resident to non-U.S. resident may take the trust outside the scope of section 679, but with potential adverse tax consequences under section 684.

Remote contingencies. The proposed regulations consider some contingencies so unlikely to occur that they are not counted for purposes of determining whether a trust has a U.S. beneficiary. A person not named as a beneficiary or member of a class of beneficiaries under the trust instrument is not taken into account if the U.S. transferor is able to demonstrate that the possibility of a U.S. person becoming a beneficiary is “so remote as to be negligible.” Based on the provided examples of negligible contingencies, it is likely that a U.S. resident parent with both resident and nonresident children could not avoid section 679 by establishing a separate foreign trust for nonresident children if the trust provides that upon their death, the trust assets may be distributed to the remaining children.

Preimmigration trusts. A frequently used planning technique for non-U.S. residents contemplating immigration has been to transfer assets to a foreign trust before moving to the United States. In 1995, section 679 was amended to apply to non-U.S. residents with a residency starting date less than five years after the transfer of property to a foreign trust. Proposed Treasury Regulations section 1.679-5 expands the reach of the statute to include non-U.S. residents that create a revocable foreign trust more than five years prior but amend the trust to make it irrevocable within five years of the change of residency. The property deemed transferred to the foreign trust on the residency starting date includes the undistributed net income attributable to the transferred property.

Common Fact Patterns

The proposed IRC section 679 regulations will have serious consequences on a common fact pattern found in families with U.S. residents in the senior generation and both U.S. and non-U.S. residents in the younger generation. If a settlor (senior-generation U.S. resident) establishes a foreign trust, FT, for his descendants at a time when all of them are non-U.S. residents, section 679 will not apply; however, section 684 may apply, causing a gain recognition event (see below). If one of FT’s non-U.S. resident beneficiaries becomes a U.S. resident within five years of its creation, section 679 will apply from the year in which the beneficiary becomes a U.S. resident. An amount equal to the trust’s undistributed net income will be taxable to the settlor in that year (and an interest charge will be imposed on such amount), and the entire income of the trust will thereafter be taxable to the settlor under section 679.

A resident alien parent with resident and nonresident children might consider setting up different sets of trusts for each. As seen above, however, if such an arrangement allowed a non-U.S. resident to become the beneficiary of a childless resident, the trust would not satisfy the remote contingency exception described above. In such an event, providing for disposition to the settlor’s heirs at law may satisfy the remote contingency rule, although this result may depend on the age of the nonresident child and whether there are descendants.

The proposed regulations make it advisable to set up a separate trust for each child or even for each grandchild. Under the proposed regulations, if a foreign trust is settled exclusively for nonresident beneficiaries and within five years thereafter one of the beneficiaries becomes U.S. resident, the U.S. transferor is taxable in that year on the trust’s undistributed net income and subject to an interest charge. The likelihood of such an event greatly increases with the number of potential beneficiaries and the amount of potential income. Separate trusts protect the settlor from the decision of any one descendant and can be established under a single trust instrument. Care must be taken, however, to maintain separate records for each trust, particularly if some will not file U.S. tax returns. In addition, all section 6048 filings must be clear that there are multiple trusts.

In addition to establishing separate trusts for separate beneficiaries, another step may be advisable: providing for separate subtrusts to be created each time the U.S. transferor makes a transfer to the trust. Because the five-year rule applies on a transfer-by-transfer basis, transfers made within five years of residency should not taint earlier transfers. Separate trusts (or subtrusts) for each transfer may be preferable, however, because they avoid the complicated task of tracking within a single trust the assets attributable to multiple transfers and minimize the risk that failing to account for such assets correctly may cause an otherwise exempt portion of a trust to become subject to IRC section 679.30

The proposed regulations make multigenerational planning more difficult because including grandchildren as potential beneficiaries subjects the trust to the risk of their change of residence. The proposed regulations can be read to conclude that, even where separate trusts are established, the mere possibility of distributions to the U.S. residents is sufficient to trigger IRC section 679. The preferable strategy may be simply to name nonresident children as beneficiaries and have them set up separate trusts for their own children. Depending upon the age and health of the nonresident beneficiaries, it may be possible simply to provide that, upon the death of the named nonresident beneficiaries, all trust assets will be contributed to charity.

Fair Market Value Exception

Under an exception for certain transfers for fair market value, transfers to a foreign trust do not qualify for IRC section 679 treatment to the extent of the value of property received in exchange. Similarly, a distribution by an entity, such as a partnership or a corporation, to a trust with respect to an interest in the entity held by the trust is characterized as a transfer at fair market value.

Congress was concerned that taxpayers could use the fair market value exception to avoid the application of section 679 by transferring property to a foreign trust in exchange for the trust’s note, which the parties would not intend to be repaid. Thus, one of the 1996 amendments to section 679 provided that obligations issued by the trust, any grantor or beneficiary, or any person related to a grantor or beneficiary are not taken into account in applying the fair market value exception, except as provided in regulations. Transfers to unrelated foreign trusts are not subject to the qualified obligation rules.

The proposed regulations detail the following specific rules: An obligation issued by a foreign trust that is a related person to the U.S. transferor is not taken into account for purposes of the fair market value exception unless it meets certain criteria as a qualified obligation. In addition, the U.S. transferor must agree to extend the period for assessment of any income or gift or estate tax attributable to the transfer and any consequential income tax changes for each year that the trust’s note is outstanding to a date that is at least three years beyond the note’s maturity date. The U.S. transferor must also report the status of the loan for each year the note is outstanding.

Under the fair market value exception, if a U.S. transferor gives property to a related foreign trust with a U.S. beneficiary in exchange for a note from the trust that complies with the qualified obligation rules, section 679 does not apply. However, special rules apply in the event an obligation that initially constitutes a qualified obligation ceases to qualify or is renegotiated. The transfer will become a sale transaction and any gain must be recognized by the transferor. In addition, accumulations inside the trust will be reduced by payments of interest on the note (which will be includible in the income of the U.S. transferor). If the trust’s assets are likely to outperform the applicable federal rate (AFR), however, such a sale for a qualified obligation may be a worthwhile planning technique.

If a trust issues a note to a related U.S. transferor and the note does not constitute a qualified obligation under the rules described above, the transfer will be subject to section 679. In such a case, principal repayments under the nonqualified note will decrease the portion of the trust treated as owned by the U.S. transferor. The proposed regulations provide that each principal payment is taken into account on and after the date of the payment when determining the portion of the trust attributable to the transferred property.

IRC Section 684 Regulations

IRC section 684 generally treats a transfer to a foreign trust as a taxable disposition of the transferred assets, unless the transferor is treated as its owner under the grantor trust rules. Section 684 is also triggered by the change in status from a U.S. trust to a foreign trust—when, for example, the beneficiary becomes a non-U.S. resident and, as a result, the trust ceases to be a grantor trust.

The definition of foreign trust is found in IRC section 7701(a)(31) and in related regulations adopted in 1999. The definition is expansive. A trust is treated as a foreign trust (for U.S. income tax purposes) unless a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions. For example, a trust with one U.S. trustee and one non-U.S. trustee who jointly make decisions on behalf of the trust would be treated as a foreign trust. The proposed section 684 regulations provide, however, that if a U.S. trust without any U.S. beneficiaries inadvertently becomes a foreign trust, the trust may redomesticate under Treasury Regulations section 301.7701-7(d)(2).

Indirect and Constructive Transfers

Proposed Treasury Regulations section 1.684-2 provides rules for determining whether an indirect or constructive transfer to a foreign trust has occurred. When a U.S. person transfers property to a foreign person who subsequently transfers the property to a foreign trust, the transferor must demonstrate that the foreign person acted independently of the U.S. person in making the subsequent transfer.

Under Proposed Regulations section 1.684-2(d), if a trust is treated as owned by any person under the grantor trust rules, a transfer by that trust is treated as a transfer by the deemed owner. The proposed regulations characterize any event that “de-grantorizes” a trust as a transfer subject to IRC section 684. Under Proposed Treasury Regulations section 1.684-2(e), if a foreign trust (or any portion thereof) is treated as owned by a U.S. person under the grantor trust rules (e.g., it has a U.S. beneficiary), and then ceases to be treated as owned by such U.S. person, such U.S. person is treated as having transferred the assets, immediately before it ceases to be a grantor trust, of such trust (or portion thereof) to a foreign trust. Accordingly, if a foreign trust that was a grantor trust because of a U.S. resident beneficiary ceases to be a grantor trust because the beneficiary becomes a non-U.S. resident (or dies), gain must be recognized on appreciated assets held by the trust at that time.

Multiple Assets Deemed Transferred

IRC section 684 treats a transfer of property by a U.S. person to a foreign trust as a taxable disposition of the property. Under proposed Treasury Regulations section 1.684-1(a)(2), gain but not loss will be recognized on such a transfer. If multiple assets are transferred, losses may not be used to offset gains. All gain on a transfer to a foreign trust must be recognized, even if the transferor might otherwise have been allowed to defer recognition of gain.

Except for transfers at death, the proposed regulations on gain recognition contain only a handful of rare exceptions, including a transfer for fair market value to an unrelated foreign trust, a transfer to a charitable trust that has received a determination letter, and a distribution by an entity to a trust with respect to an interest in the entity held by such trust.

Transfers upon Death

Proposed Regulations section 1.684-3(c) addresses transfers upon death. The effect is particularly significant when planning for the disposition of assets upon the death of a person who is a U.S. resident for income tax purposes but not estate tax purposes. As noted above, the estates of U.S. citizens and non-U.S. citizens who are U.S. residents for estate tax purposes (i.e., U.S. domiciliaries) include the decedents’ worldwide assets. The basis of such assets to the inheritor is stepped up under IRC section 1014. By contrast, the estate of a non-U.S. resident foreign decedent includes only the decedent’s U.S. assets.

Although non-U.S. assets held by a non-U.S. citizen nonresident are exempt from U.S. estate tax, there remain issues concerning the basis of the property and the application of IRC section 684 to the transfer of these assets. Under a longstanding revenue ruling, all assets held by a non-U.S. resident at death receive a step-up in basis under IRC section 1014, including property not subject to U.S. estate tax. Under sections 1014(b)(1)–(4), the stepped-up basis applies to all assets owned by the nonresident directly, through a revocable trust, or through a trust in which the nonresident possessed a general power of appointment exercised by will. Nevertheless, as with decedents who are U.S. citizens and residents, the stepped-up basis does not apply to assets that were transferred, within the meaning of the estate tax rules, prior to the decedent’s death. For example, if property is transferred before death to an irrevocable trust in which the decedent does not possess a general power of appointment, the assets do not receive a step-up in basis at death.

Since IRC section 684 was enacted, significant questions have been raised as to whether it affects transfers upon the death of a person who is a U.S. resident for income tax purposes but not for estate tax purposes. Such questions concern transfers of property to the decedent’s estate, transfers to testamentary trusts created under the decedent’s will, and the deemed transfer that occurs upon the death of the deemed owner of assets held in a grantor trust. Resolution of these questions turns upon the interplay between section 684 and the step-up in basis rules of section 1014.

For income tax purposes, the termination of grantor trust status is treated as a transfer of the trust’s assets by the deemed owner. Under proposed Treasury Regulations section 1.684-2(e), the death of the U.S. transferor of a section 679 grantor trust results in a deemed transfer by the U.S. transferor (the decedent), immediately before death, to the nongrantor foreign trust that results from the termination of grantor trust status. An example in the proposed regulations shows that, as a general rule, the U.S. transferor recognizes gain at the time of the deemed transfer. Because the transfer is deemed to occur before death, section 1014 does not apply; the gain recognized is the fair market value immediately before death minus the trust’s basis in the assets without a step-up.

The example in proposed Treasury Regulations section 1.684-3(c) notes that an exception for certain transfers at death may prevent the gain recognition that otherwise would apply. The preamble to the proposed regulations explains that this exception is intended to apply with respect to trusts over which the decedent retained sufficient powers to require inclusion in the decedent’s gross estate for estate tax purposes. This would include a trust that was revocable by the decedent or a trust over which the decedent possessed a general power of appointment, but not a trust that was treated as a grantor trust under section 679 solely because of the presence of one or more U.S. beneficiaries.

The exception for transfers at death refers to the “U.S. transferor” and requires inclusion of trust assets in the U.S. transferor’s gross estate as well as a basis determined under IRC section 1014. Under these regulations, U.S. transferors include persons that are U.S. residents for income tax purposes but are not U.S. residents for estate tax purposes. The gross estate of the deemed owner of a trust who is a U.S. resident for income tax purposes but not for estate tax purposes will not include any non-U.S. assets held by the trust at his death. Thus, even though Revenue Ruling 84-139 accords the benefit of a step-up in basis to such assets under section 1014, gain will be recognized under section 684 if the assets deemed transferred are not included in the deemed transferor’s gross estate. Apparently, the drafters of the proposed regulations intended that either assets would be subject to estate tax or gain would be recognized for income tax purposes.

Broader implications. It is unclear, however, whether this rule applies to the wide variety of ways that assets may be transferred at death. Significantly, proposed Treasury Regulations section 1.684-1(a) provides for recognition of gain to any U.S. person (U.S. citizen or resident for income tax purposes) who transfers property to a foreign trust or “foreign estate.” The proposed regulation can be read as causing a non-U.S. citizen who is a U.S. resident for income tax purposes, but not a U.S. domiciliary, to recognize gain under section 684 on all appreciated non-U.S. assets held directly upon death, on the theory that all such assets are transferred to a foreign estate. The issue is further complicated because assets need not necessarily end up in an estate. In fact, many civil law countries do not recognize the concept of an estate. The heirs of a decedent are considered to receive the assets directly from the decedent upon her death. Even in countries such as the United States that provide for the creation of an estate upon death, the decedent can, by will, make a specific bequest of assets directly to a named beneficiary. As a result, applying section 684 to non-U.S. assets held directly by a non-U.S. citizen, non-U.S. domiciliary may differ depending on whether the assets are located in a civil law country and whether the decedent makes specific bequests in her will.