Final regs. for trust status as foreign or domestic.

• Author: Jaffa, Thomas
• Position: IRS regulations

The IRS issued Regs. Sec. 301.7701-7, implementing the definitions of domestic trust and foreign trust enacted in 1996. The final regulations create a bias for treating trusts as foreign trusts.

Action Required

Trusts intended to be domestic trusts should be carefully reviewed to determine whether they are to be treated as foreign trusts under the final regulations. Under Regs. Sec. 301.7701-7, if a domestic trust inadvertently becomes a foreign trust (e.g., due to a change in the trusteeship), the trust has 12 months to correct the disqualifying event. In addition, certain trusts treated as domestic trusts under pre-Aug. 20, 1996 law could have elected to continue to be treated as domestic trusts. Although the deadline for filing such election was Oct. 15, 1999, trustees may request an extension from the Service to elect to be treated as a domestic trust.

Summary of Final Regulations

A trust is considered domestic if a U.S. court can exercise primary supervision over its administration and one or more U.S. persons have authority to control all substantial decisions (Regs. Sec. 301.7701-7(a)(27)). If both of these requirements are not met, the trust will be a foreign trust.

Court Test

Under Regs. Sec. 301.7701-7(c), a trust will satisfy the court test if:

* The trust instrument does not direct that the trust be administered outside the U.S.;

* The trust is in fact administered exclusively in the U.S.;

* The trust is not subject to an automatic migration provision that would cause it to migrate from the U.S. if a U.S. court attempts to assert jurisdiction or supervise trust administration. (An example is if a trust instrument provides that the trust will automatically migrate from the U.S. if a creditor sues the trustee in a U.S. court.)

Control Test

The control test is often the most difficult test to satisfy. As a result, many trusts that would have previously qualified as domestic will be considered foreign under Regs. Sec. 301.7701-7(d). U.S. persons must have the authority to control all substantial decisions of the trust. "Control" means that no non-U.S. person has veto power over any substantial decision. To determine whether U.S. persons have control, it is necessary to consider all persons who have the authority to make a substantial decision. The determination is not limited to trust fiduciaries and, therefore, includes non-U.S. grantors, protectors and beneficiaries. Powers that affect solely the portion of the trust over which...