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.

What domestic and foreign trust mean

A trust is domestic under the Form 3520 instructions when it meets both the court test and the control test. The instructions classify other trusts as foreign. These definitions establish the classification used in the instructions before the separate rules for reporting transactions and ownership are applied.^[2]

Section 7701 includes U.S. citizens within its definition of a United States person. That definition also includes domestic partnerships, domestic corporations, and estates other than foreign estates. For trusts, the statute sets out the two conditions concerning U.S. supervision and control by United States persons.^[1]

What the court test requires

The court test requires a court within the United States to have the ability to exercise primary supervision over trust administration.

Meeting this condition supplies one part of the domestic trust definition. Section 7701 joins the supervision requirement to a separate requirement about who has authority over substantial decisions. A trust that meets the supervision condition still needs to meet the control condition to fall within that definition.^[1]

What the control test requires

The control test requires one or more U.S. persons to hold authority over every substantial trust decision. Authority covering only some substantial decisions does not satisfy the control test.^[1]

The statutory category of United States persons extends beyond individual citizens. Domestic partnerships and corporations also appear in that definition.

How the two tests fit together

Both conditions are necessary under the domestic trust definition reproduced in the Form 3520 instructions.

Classification under the two conditions
Court test	Control test	Classification
Met	Met	Domestic trust^[2]
Met	Not met	Foreign trust^[2]
Not met	Met	Foreign trust^[2]
Not met	Not met	Foreign trust^[2]

What grantor and owner mean

A grantor includes someone who establishes a trust or makes a gratuitous transfer to it, directly or indirectly. The instructions also include certain persons treated as owners under sections 671 through 679, while excluding section 678 from that part of the grantor definition.^[2]

Grantor trust treatment applies to the extent that someone other than the trust is treated as owning its assets. That treatment can cover only part of a trust. The court and control conditions determine domestic trust classification, while the grantor trust rules address ownership treatment.^[2]

How foreign status connects to Form 3520

Form 3520 reports specified foreign trust transactions and ownership under sections 671 through 679. For U.S. citizens within those rules, the instructions distinguish reporting a transfer, reporting ownership, and reporting a distribution. Transactions involving separate foreign trusts require separate Forms 3520.^[2]

Part I covers relevant reporting by the responsible party, including reportable events such as a U.S. person's creation of a foreign trust or transfer of money or property to one.^[2]
Part II applies to a U.S. person treated as owning foreign trust assets under sections 671 through 679, including periods with no trust transactions.^[2]
Part III reports distributions received by a U.S. person from a foreign trust, subject to the instructions' applicable rules.^[2]

How Form 3520-A connects to ownership

A U.S. person treated as a foreign trust owner under the grantor trust rules has responsibility for ensuring the trust files a complete and accurate Form 3520-A on time. The IRS also requires annual statements for the trust's U.S. owners and U.S. beneficiaries.^[3]

If the trust does not file Form 3520-A, the Form 3520 instructions call for the owner to attach a substitute. Separately, the IRS explains that a U.S. person treated as an owner under the grantor trust rules is generally taxed on the trust's income.^[2]^[3]

Reporting exceptions and other forms

The instructions provide exceptions to foreign trust information reporting for specified arrangements and transactions. These include covered Canadian retirement plans and certain eligible individuals' dealings with qualifying foreign retirement or nonretirement savings trusts. The latter exception depends on the requirements described in Rev. Proc. 2020-17.^[2]

Those reporting exemptions leave other reporting obligations intact. The IRS identifies Form 8938 reporting where specified foreign financial assets exceed applicable thresholds, and Schedule B reporting for a foreign trust grantor, transferor, or distribution recipient.^[2]^[3]

Questions and answers

Am I a U.S. person because I am a U.S. citizen?

U.S. citizenship places an individual within section 7701's United States person definition.

Does meeting just the court test make a trust domestic?

The domestic trust definition requires the supervision and control conditions together. Meeting only the court condition leaves the control requirement unsatisfied.^[2]

Can more than one U.S. person hold the required control?

Section 7701 permits multiple United States persons to hold the required authority. Their authority needs to cover every substantial trust decision.^[1]

Does a year without transactions remove ownership reporting?

The instructions require Part II for a U.S. person treated as owning foreign trust assets under sections 671 through 679. They expressly retain that requirement when the trust has had no transactions during the tax year.^[2]

Related glossary terms

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.
U.S. owner of a foreign trust: The Form 3520 instructions define a U.S. owner as a person treated as owning trust assets under grantor trust rules. Ownership can apply to part of a trust.
Foreign grantor trust: A foreign grantor trust is a foreign trust treated as owned by a grantor, often a U.S. person. Ownership brings Form 3520 and Form 3520-A reporting duties.