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Substantial decisions

The IRS regulations define substantial decisions for the control test used to classify a trust as domestic or foreign. The definition turns on who has authority over decisions under the trust instrument and applicable law.

Definition and examples

The IRS regulations define substantial decisions as decisions authorized or required by the trust instrument and applicable law that are not ministerial.[3]

Examples include decisions about distributions, beneficiary selection, allocating receipts between income and principal, and ending the trust. The list also covers claims, trustee changes, successor trustees, and investment decisions.[3]

Ministerial decisions concern administrative details such as bookkeeping, collecting rents, or carrying out investment decisions already made. The distinction is between authority to decide and execution of a decision.[3]

The term appears in the control test for determining whether a trust is a United States person, also called a domestic trust. The test requires both a U.S. court's ability to exercise primary supervision and authority in one or more U.S. persons to control all substantial decisions.[3]

The regulations direct that the trust instrument and applicable law determine whether the court and control tests are met.

The regulations illustrate how decision rules affect the test. If fiduciaries must act unanimously and a non-U.S. person must agree, U.S. persons do not control all decisions. If a majority vote governs and U.S. fiduciaries form the majority, the control test is met in the example.[3]

Investment decisions have a specific rule. When a U.S. person hires an investment adviser, the adviser's decisions count as controlled by that U.S. person if the U.S. person can end the adviser's decision-making authority at will.[3]

A power to appoint a successor trustee is generally substantial even without an unrestricted trustee removal power. The regulation states an exception when that appointment power is limited so it cannot change the trust's residency from foreign to domestic, or domestic to foreign.[3]

A safe harbor applies to listed employee benefit and investment trusts if U.S. trustees control all substantial decisions made by the trustees. The regulations list examples including qualified plans, individual retirement accounts, and Roth IRAs.[3]

A trust is domestic only when both tests are met; otherwise, the regulations define it as a foreign trust.

Questions and answers

What makes a decision substantial?

It is a decision authorized or required under the trust instrument and applicable law, and it is not ministerial. The regulations give examples such as distribution decisions and selecting beneficiaries.[3]

Are investment decisions substantial?

Yes. Investment decisions are included. If a U.S. person hires an investment adviser, the adviser's decisions count as controlled by that U.S. person when the person can terminate the adviser's authority at will.[3]

Do trustees alone determine who controls the trust?

No. The control assessment considers all persons authorized to make a substantial decision, not only trust fiduciaries. A veto held by another person also means U.S. persons lack control of all substantial decisions.[3]

How does the term relate to domestic trust status?

The control test requires one or more U.S. persons to control all substantial decisions. Domestic status also requires that a U.S. court be able to exercise primary supervision over administration of the trust.[3]

  • 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.
  • 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.
  • Domestic trust: The IRS defines a domestic trust through its court test and control test, and the term appears in U.S. foreign trust reporting rules for U.S. citizens.
  • 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.

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Sources and data notes
  1. Internal Revenue Service, Instructions for Form 3520. https://www.irs.gov/instructions/i3520. Retrieved .
  2. Internal Revenue Service, Instructions for Form 3520-A. https://www.irs.gov/instructions/i3520a. Retrieved .
  3. Internal Revenue Service, 26 CFR 301.7701-7 Trusts, domestic and foreign. https://ecfr.io/Title-26/Section-301.7701-7. Retrieved .
  4. Internal Revenue Service, 26 CFR 301.7701-4 Trusts. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 679. https://uscode.house.gov/us/usc/119-118/t26/s679/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 6048. https://uscode.house.gov/us/usc/119-118/t26/s6048/. Retrieved .
  7. 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 .

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