Generally, the IRS will not issue an advance ruling on whether or not a trust is foreign or domestic. Therefore, it is left up to the taxpayer and his or her advisor. A trust is domestic if it meets either the “court test” or the “control test.” A trust will meet the court test if a court within the United States is able to exercise primary supervision over the administration of the trust. Additionally, a trust will satisfy the safe harbor for court test if 1) the trust instrument does not direct that the trust be administered outside of the United States, 2) the trust in fact is administered exclusively in the United States, and 3) the trust is not subject to an automatic migration provision. In other words, a United States court’s attempt to assert jurisdiction or otherwise supervise the administration of the trust directly or indirectly will not cause the trust to migrate from the United States.
A trust will meet the control test if one or more United States persons have the authority to control all substantial decisions of the trust. For purposes of the control test “substantial decisions” has been interpreted to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” Some substantial decisions include whether and when to distribute income or corpus, allocations, selection of beneficiaries, etc. There is also a safe harbor provision for the control test. Trusts are allowed a 12-month grace period to meet the test in the event of a inadvertent change in any person that has the power to make a substantial decision of the trust that causes the residency of the trust to change. Under reasonable circumstances the 12-month period may be extended for failing to make the necessary changes within the grace period.