Article Categories: Expatriation, Trusts

Published on: September 25, 2025

Annotated Checklist for Noncovered Expatriates with Foreign Retirement Plans

Phil Hodgen

Attorney, Principal

Today, you get an annotated checklist from me: how to document your reporting position to the file when you have a noncovered expatriate who has a foreign retirement plan classified as a foreign grantor trust for U.S. income tax purposes. Example: a U.S. person in Australia with a self-managed super fund.

Banish Gunk

I was inspired by a discussion of gunk and gardening in a group I belong to.

Gunk is when these things happen in your life:

Waiting.
Errors.
- First degree.
- Second degree.
- Third degree.
Muddiness.
Wasted Effort.
Wasted Talent.
Noise.
Missed/Lost Opportunity.

When you perform a task according to a framework (like the one below), you are reducing “wasted effort” gunk in your life. The ongoing process of eliminating gunk from your life is “gardening.”

Here’s the annotated checklist. I hope it is useful in itself, and I hope it inspires you to eliminate gunk from your life.

☐ Client is a noncovered expatriate

Confirm client does not meet the covered expatriate criteria under IRC § 877A(g)(1). A covered expatriate is someone who:

Has average annual net income tax liability exceeding the threshold amount ($206,000 for 2025 expatriations), OR
Has a net worth of $2 million or more, OR
Fails to certify tax compliance for the 5 years preceding expatriation

Authority: IRC § 877A(g)(1):

☐ Client has a foreign retirement plan

Document the existence and terms of the foreign retirement plan. Obtain plan documents, trust agreements, or other governing instruments.

Note: check for prior U.S. income tax reporting for the foreign retirement plan. Prior year amendments may be advisable.

☐ The foreign retirement plan is a trust

Verify the foreign retirement plan meets the definition of a trust under applicable law. Most foreign pension plans with individual accounts are structured as trusts.

Authority: Treas. Reg. § 301.7701-4(a):

☐ The foreign retirement plan is a foreign trust

Confirm the trust is "foreign" under the control and court tests.

It is almost certain that the foreign retirement plan is created under foreign law, so a foreign court would be the correct jurisdiction for lawsuits about the administration of the foreign retirement plan. This would make the foreign retirement plan a “foreign trust” under the court test.
It is almost certain that foreign law requires that the foreign retirement plan have a trustee/administrator in that country. Therefore, substantial decisions are controlled by a foreign person, making the foreign retirement plan a “foreign trust” under the control test.

Authority: IRC § 7701(a)(31)(B):

A domestic trust under § 7701(a)(30) requires both: (1) a U.S. court able to exercise primary supervision, and (2) U.S. persons controlling all substantial decisions. See Reg. §301.7701-7 for the specifics of the court test and the control test.

☐ Client is a grantor of the foreign retirement plan by creating it

Establish that client created or established the retirement account arrangement. This typically occurs when opening the account or enrolling in the plan. Look for the client’s signature on a document opening the foreign retirement plan.

Authority: Reg. §1.671-2(e)(1):

☐ Client is grantor of the foreign retirement plan (by funding)

Document that client made contributions or transfers to the retirement account without receiving adequate consideration. Employment contributions and voluntary contributions both qualify.

Authority: Reg. §1.671-2(e)(1):

☐ Client is owner of the foreign retirement plan

Determine ownership under the specific grantor trust provisions:

☐ IRC § 677 - Income for grantor's benefit

The right kind of grantor.

Is the client a grantor because of funding the foreign retirement plan as determined above? (Grantor status purely because of creating the foreign retirement plan is not enough).

The right kind of distribution authority.

Can the client receive distributions from the foreign retirement plan during his or her lifetime? (The answer is always yes; that’s the whole point of a retirement plan).
Are distribution decisions made by the client only, by an independent trustee only, or by the client with the consent of an independent trustee?

If all three bullet points are true, then the client is the “owner” of the foreign retirement plan by IRC §677(a). The whole point of a foreign retirement plan is to make distributions to the “right” person, and that will satisfy IRC §677(a). The distribution decisions are not controlled by someone with an adverse interest in the trust. An adverse interest is an economic interest in the trust, and in the retirement plan context, no one has the right to receive money from the retirement plan except the individual employee. Only after the death of the employee do the distribution rules change, and we are not concerned with after-death distribution rules.

Authority: IRC § 677(a):

☐ IRC § 676 – the client has power to revest assets in his/her own name

This is almost never required, because the right to receive distributions (IRC §677(a)) will be the key to grantor trust status and the client will be the owner of the foreign retirement plan under the grantor trust rules.

In extreme cases you will need to look at the client’s power to revoke and revest the retirement plan’s assets into his or her own name. This requires significant research into foreign laws governing the retirement plan and careful review of the retirement plan documents.

Does the client have power to take an early distribution (prior to retirement age under local law) from the foreign retirement plan? The existence of a penalty for early distribution is irrelevant.

Does the retirement plan allow early distribution for purposes other than retirement? E.g., hardship, sickness, purchase of a home, take a loan from the retirement account? All of these constitute a power to revest assets in his/her own name.

If you think there is a theoretical possibility of any type for early withdrawal, do the necessary research under IRC §676(a), (b) to determine whether a power to revest exists.

Authority: IRC § 676(a):

☐ Client is owner of the foreign retirement plan after expatriation

Determine if grantor trust status continues after client becomes a foreign person. More specifically: after expatriation, is the client the “owner” of the foreign retirement plan under grantor trust principles?

The client will cease to be a United States person after expatriation. IRC §672(f)(1) prohibits a foreign person from being an owner of a trust (i.e., the trust is no longer a grantor trust). Therefore, if the foreign retirement plan was a grantor trust (and the client was the owner of the foreign retirement plan) we need to know whether the foreign retirement plan ceases to be a grantor trust (and the client cease to be the owner of the foreign retirement plan) after expatriation.

Authority: IRC § 672(f)(1):

☐ § 677(a) - sole beneficiary, therefore § 672(f)(2)(A)(ii)

If you determined above that the client is entitled to distributions from the foreign retirement plan during his/her lifetime (universally true) and is therefore the owner of the foreign retirement plan under IRC §677(a), make a further/deeper analysis: is the client the ONLY person entitled to receive distributions from the foreign retirement plan during his/her lifetime? Again, this is universally true—but check anyway.

The ban on a foreign person being the “owner” of a trust is bypassed if the foreign person is the sole beneficiary of the trust during his/her lifetime. (Ignore the possibility of distributions to the client’s spouse during lifetime—this as a practical matter is never found in retirement plan documents. The distribution is always to the employee for whom the plan has been established).

Authority: IRC § 672(f)(2)(A)(ii):

☐ § 676(a) - can revest assets, therefore § 672(f)(2)(A)(i)

This is a fall-back in extreme cases. It is never seen but is here, just in case.

If you decided above that the client has the power to revest assets at any time (i.e., has the power to revoke) and is therefore the “owner” of the foreign retirement plan, then this exception allows the client to continue remaining the “owner” of the retirement plan after expatriation.

Your analysis above to determine the client’s ability to withdraw funds from the retirement plan prior to retirement age is sufficient for application of this exception.

Authority: IRC § 672(f)(2)(A)(i):

Reporting Position Conclusions

Based on your analysis of the facts and law above, here are your reporting positions for the client (as a noncovered expatriate) for exposure to taxation under IRC §§877A, 684 with respect to the foreign retirement plan.

☐ Client not subject to § 877A exit tax on foreign retirement plan

Assets in a foreign grantor trust are subject to the mark-to-market taxation rules of IRC §877A(a) only if the expatriate is a covered expatriate. Notice 2009-85. The client is a noncovered expatriate. Therefore, the IRC §877A(a) mark-to-market rules do not apply.

Similarly, the tax rules for foreign retirement plans that are not foreign grantor trusts will apply only to covered expatriates. See IRC §877A(d), which defines such retirement accounts as “deferred compensation accounts.” This client is not a covered expatriate. Therefore, IRC §877(d) will not apply.

☐ Client not subject to § 684 tax on foreign retirement plan, triggered by expatriation

Transfer of property in a grantor trust owned by a U.S. person to a foreign trust will be treated as a deemed sale of the assets. IRC §684(a).

Authority: IRC § 684(a):

But it’s not a deemed sale if, after the transfer, the trust is still a grantor trust and someone—anyone—is the owner. IRC §684(b):

Your decided above that after expatriation the client will still be the owner of the foreign retirement plan because of IRC §677(a) and IRC §672(f)(2)(A)(ii). The client has the right to receive distributions without an adverse party’s consent (IRC §677(a)) and is the only person to receive distributions from the retirement plan during his/her lifetime (IRC §672(f)(2)(A)(ii)).

Therefore, you have defeated IRC §684’s deemed sale rule and there is no taxation of the foreign retirement plan when the noncovered expatriate terminates U.S. person status.