Domestic trust
The IRS regulation defines a domestic trust through court supervision in the United States and control of substantial decisions by U.S. persons.
Definition and classification
The IRS regulation defines a domestic trust as a trust that is a U.S. person under its court and control tests.[3]
A trust is a U.S. person on a day when it meets both tests. A foreign trust is any trust that does not meet the domestic trust definition. The trust instrument and applicable law supply the terms used to determine whether each test is met.[3]
Under the court test, a U.S. court must be able to exercise primary supervision over trust administration. The regulation defines primary supervision as authority over substantially all issues concerning administration of the entire trust. For this purpose, the United States means the states and the District of Columbia, so a court in a U.S. territory or possession does not count as a U.S. court.[3]
A court test safe harbor applies when the trust document does not direct administration outside the United States, administration in fact occurs exclusively in the United States, and no specified automatic migration provision applies. Other listed circumstances include certain court registrations, qualifying testamentary trusts, and court steps that bring an inter vivos trust under primary supervision. If a U.S. court and a foreign court both have primary supervision, the court test is met. The regulation also specifies an exception for a narrow migration provision tied only to foreign invasion or widespread confiscation or nationalization of U.S. property.[3]
The control test requires one or more U.S. persons to have authority over every substantial decision, without another person's veto power. Substantial decisions can include distributions, beneficiary selection, termination, trustee changes, and investment decisions. Ministerial matters such as bookkeeping and collecting rents do not count as substantial decisions. The analysis includes everyone with authority to make a substantial decision, not only trustees.[3]
Where the term appears
The Form 3520 instructions include a domestic trust in the definition of a U.S. person. That definition also lists U.S. citizens and residents, domestic partnerships, domestic corporations, and certain estates. The term therefore links the regulation's trust classification to the form instructions' U.S.-person category.[1]
The Form 3520 instructions describe reporting for certain transactions with foreign trusts, ownership of foreign trusts under grantor trust rules, and receipt of certain foreign gifts or bequests. They state that a separate Form 3520 is filed for transactions with each foreign trust. In the exceptions section, they exclude certain deemed transfers when a domestic trust becomes a foreign trust to the extent it is treated as owned by a foreign person after applying section 672(f).[1]
The neighboring term ordinary trust addresses a separate classification question. The regulation generally describes an ordinary trust as an arrangement in which trustees hold property to conserve it for beneficiaries. An arrangement called a trust may instead be treated as a business entity when its real character fits that category. Domestic or foreign status under the court and control tests comes after identifying an arrangement as a trust for federal tax purposes.[4]
Another neighboring term is U.S. beneficiary, which appears in the foreign trust rules. Section 679 addresses circumstances in which a U.S. person who transfers property to a foreign trust is treated as owner of the portion attributable to that property when a U.S. beneficiary exists, subject to statutory exceptions. That rule concerns foreign trusts and ownership attribution, while domestic trust classification turns on the court and control tests.[5]
Data table for this infographic
| Group | Question or label | Description or rule | Result or source |
|---|---|---|---|
| Reference diagram · Trust classification | Domestic or foreign trust, then who is treated as owner | Two separate U.S. tax questions, followed by local statutory labels for trusts created for a purpose. | |
| Step 1 · Domestic or foreign trust | Court test | Is a court within the United States able to exercise primary supervision over the administration of the trust? | |
| Step 1 · Domestic or foreign trust | Control test | Do one or more U.S. persons have the authority to control all substantial decisions of the trust? | |
| Step 1 · Domestic or foreign trust | Both questions answered yes | Domestic trust | |
| Step 1 · Domestic or foreign trust | Otherwise | Foreign trust, any trust other than a domestic trust | |
| Control, as defined in Treas. Reg. s. 301.7701-7(d)(1)(iii) | Control | "the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions." The test considers all persons who have authority to make a substantial decision, not only the trust fiduciaries. | Treas. Reg. s. 301.7701-7(d)(1)(iii) |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Grantor trust rules | Sections 671 through 679 (subpart E). The Form 3520 instructions count as a grantor any person treated as the owner of any part of a foreign trust's assets under these sections. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 679 | Section 679 generally treats a U.S. person who directly or indirectly transfers property to a foreign trust as owner of the portion attributable to that property for a taxable year in which income or corpus may be paid to or accumulated for the benefit of a U.S. person, including if the trust were terminated that year. Exceptions include transfers by reason of death and transfers for at least fair market value. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 672(f)(1) | The grantor trust rules apply only to the extent they result in an amount being "currently taken into account" in computing the income of a U.S. citizen or resident or a domestic corporation. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion treated as owned under subpart E | Grantor trust, as to that portion | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion not treated as owned by another person under the grantor trust rules | Nongrantor trust, as to that portion | |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Bahamas | Purpose Trusts Act: "authorised purpose trust", a trust declared for a non-charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | British Virgin Islands | "trust for any purpose", defined by exclusion as a trust other than listed kinds, including a trust for the benefit of particular persons | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Jersey | Article 12, "Trusts for non-charitable purposes", with enforcers under Article 13 | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Mauritius | "non-charitable purpose trust", a trust having a purpose other than a charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Seychelles | "purpose trust", created for non-charitable purposes, whether or not it has any beneficiaries | statute |
| Notes | Commentary and statute | The domestic-or-foreign question concerns the trust; ownership treatment under the grantor trust rules can apply to a trust or to a portion. Local statutes use their own terms, which are not U.S. classifications. | commentary |
| Sources | U.S. sources | IRS Instructions for Form 3520 (domestic and foreign trust; grantor) · Treas. Reg. s. 301.7701-7(d)(1)(iii) (control) · Treasury proposed regulations on foreign trust reporting (nongrantor trust definition; s. 679 discussion) · Cassra Minai commentary on section 679 · 26 CFR s. 1.672(f)-1 | |
| Sources | Local statute sources | Bahamas Purpose Trusts Act s. 3 · BVI Trustee Act s. 84 (purpose trusts) · Jersey Trusts Law Arts. 12 and 13 · Mauritius Trusts Act s. 2 · Seychelles Trusts Act s. 2 | |
Questions and answers
What makes a trust domestic under the IRS regulation?
It must meet both the court test and the control test. A U.S. court must be able to exercise primary supervision, and one or more U.S. persons must control all substantial decisions.[3]
Does administration under U.S. law alone meet the court test?
The regulation looks to whether a U.S. court can exercise primary supervision over administration. The trust instrument and applicable law are applied to determine whether the test is met.[3]
Which U.S. courts count for the court test?
The regulation includes federal, state, and local courts in its definition of court. Geographically, the United States for this test includes only the states and the District of Columbia.[3]
Are bookkeeping decisions substantial decisions?
No. The regulation treats bookkeeping and rent collection as ministerial examples. Substantial decisions include decisions about distributions, beneficiaries, trustee changes, or investments.[3]
How does the term connect to Form 3520?
The instructions include a domestic trust within the definition of a U.S. person. Form 3520 covers specified transactions and ownership involving foreign trusts, and the instructions identify an exception for certain deemed transfers when a domestic trust becomes foreign.[1]
Related terms
- Court test: The IRS court test asks whether a U.S. court can supervise trust administration. It works with the control test to determine whether a trust is domestic.
- Foreign trust classification: A trust is foreign under Form 3520 when it fails either domestic trust test. The tests ask about U.S. court supervision and control of substantial decisions.
- Control test: The control test is part of the IRS rules for classifying trusts as domestic or foreign. It describes whose authority over substantial decisions counts.
- Substantial decisions: Substantial decisions under a trust include nonministerial choices about distributions, beneficiaries, income, principal, trustee changes, and investments.
Related guides and articles
- The court and control tests for foreign trusts: The court test and the control test classify a trust as domestic or foreign, and foreign trust status connects to U.S. reporting rules for U.S. citizens.
- How the IRS classifies trusts for U.S. tax purposes: U.S. trust classification for tax purposes: ordinary and investment trusts, U.S. person status, and the environmental remediation trust rule in the regulations.
- Tax planning and compliance for foreign trusts: U.S. rules classify trusts and assign tax and reporting duties to U.S. citizens connected with foreign trusts, including forms, filing calendars and records.
Related pages
Sources and data notes
- Internal Revenue Service, Instructions for Form 3520. https://www.irs.gov/instructions/i3520. Retrieved .
- Internal Revenue Service, Instructions for Form 3520-A. https://www.irs.gov/instructions/i3520a. Retrieved .
- Internal Revenue Service, 26 CFR 301.7701-7 Trusts, domestic and foreign. https://ecfr.io/Title-26/Section-301.7701-7. Retrieved .
- Internal Revenue Service, 26 CFR 301.7701-4 Trusts. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
- Internal Revenue Service, 26 U.S.C. 679. https://uscode.house.gov/us/usc/119-118/t26/s679/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 6048. https://uscode.house.gov/us/usc/119-118/t26/s6048/. Retrieved .
- Internal Revenue Service, Foreign trust reporting requirements and tax consequences. https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences. Retrieved .
Dates in this block record when each source was read for this page.