Reviewed trust met domestic court and control tests

Plain-English summary

Chief Counsel analyzed whether a trust was a United States person under the court and control tests. The trust instrument placed administration with a U.S. trustee and contained no automatic migration provision, so a U.S. court could exercise primary supervision over administration. After the foreign trustee ceased serving, only the U.S. trustee could make substantial decisions. Even earlier, the trust terms let the U.S. trustee govern and gave the U.S. settlor, acting as protector, veto power over trustee decisions. Chief Counsel concluded that U.S. persons controlled all substantial decisions and cautioned that the analysis depended on the reviewed documents and applicable law.

Ruling snapshot

• Question: Did the reviewed trust satisfy the court and control tests for treatment as a domestic trust?
• Outcome: Advice given, both tests were met
• Key authorities: IRC § 7701(a)(30) and (31)(B); Treas. Reg. § 301.7701-7

Full text (IRS public release)

ID: CCA-042874-14
Office: -----------------
UILC: 7701.04-00
Number: 201509035
Release Date: 2/27/2015
From: ---------------
Sent: Monday, April 28, 2014 7:40:45 AM
To: ----------------------
Cc: ------------------
Subject: RE: Domestication of Foreign Trust – ----------------------

In answer to your questions posed below, § 301.7701-7(a)(1) provides that a trust is a United States
person if: (i) a court within the United States is able to exercise primary supervision over the
administration of the trust (court test); and (ii) one or more United States persons have the authority
to control all substantial decisions of the trust (control test). In order to be a domestic trust, the trust
must meet the court test and the control test based on the terms of the trust itself and the applicable
law. See § 301.7701-7(b).

  When applying the court test, the term “is able to exercise” means that a court has or would

have the authority under applicable law to render orders or judgments resolving issues concerning
administration of the trust. § 301.7701-7(c)(3)(iii). Primary supervision means a court has the
authority to determine substantially all issues regarding the administration of the entire
trust. § 301.7701-7(c)(3)(iv). Administration of the trust means carrying out the duties imposed by
the terms of the trust instrument and applicable law, including maintaining the books and records of
the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from
suits by creditors, and determining the amount and timing of distributions. § 301.7701-7(c)(3)(v).

 The regulation also provides a safe harbor. A trust will satisfy the court test if: (i) the trust

instrument does not direct that the trust be administered outside of the United States; (ii) the trust is
administrated exclusively in the United States; and (iii) the trust is not subject to an automatic
migration provision. § 301.7701-7(c)(1).

   With respect to the --------------(which will be the only trust document described in this email, the

------------------------includes these same provisions), a court within the United States is able to exercise
primary supervision over the administration of the trust, thus the court test is met. -----------------------
------------------------ Trust Agreement explains that the intent of the Settlors is that the trust not
constitute a “foreign trust” as defined in § 7701(a)(31)(B). To that end, ---------------- provides that the
place of administration shall be the state of resident of the “First Trustee,” who is a United States
person living in ------------. Pursuant to this provision, the First Trustee administered the Trust in -------
-----------. The paragraph continues that if that person is no longer a Trustee, the place of
administration shall be the state of residence or domicile of the longest-serving Trustee who is a
resident in the same country as a majority of the Beneficiaries. In addition, there is no automatic
migration provision in the trust document, as defined by § 301.7701-7(c)(4)(ii). Because a United
States court is able to exercise primary supervision of the administration of the trust, the court test is
met.

 In order to meet the control test, one or more United States persons (within the meaning of

§ 7701(a)(30)) must have the authority to control all substantial decisions of the trust. The term
“substantial decisions” means 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. § 301.7701-
7(d)(1)(ii). Substantial decisions include, but are not limited to, decisions such as whether and when
to distribute income or corpus, the amount of any distribution, and whether to remove, add, or
replace a trustee. Id. Control means having 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. To determine whether U.S. persons have control, it is necessary to consider all
persons who have authority to make a substantial decision of the trust, not only the trust
fiduciaries. § 301.7701-7(d)(1)(iii).

 When created, the Trust had two trustees, a United States person trustee and a foreign

trustee. You informed us that the foreign trustee was effectively fired in ------ when the trustee fees
that were being paid to the foreign trustees were no longer paid. No other foreign trustee was
named as a replacement. The only trustee at that point forward was the United States person
trustee. As such, United States persons are the only persons who have the power to make the
substantial decisions of the trust from ------ forward.

Furthermore, even prior to ------, United States persons controlled all the substantial decisions of the
trust. There were only two trustees named, the United States person and the foreign trustee. ---------
-----------------------------Trust document provided that a majority of the trustees must agree to
decisions, but if there are only two acting, the joinder of both is required “unless at such time one (1)
of the Trustees is a resident of or domiciled in the same country as Settlor and the other of the
Trustees is not a resident of or domiciled in the same country as Settlor, in which case the
determination of the Trustee who is a resident of or domiciled in the same country as Settlor shall
govern.” Effectively, the United States person trustee could make decisions without the input of the
foreign trustee. In addition, --------------------------------------- Trust document provides the Protector
(who is the Settlor and a United States person) with a veto power over any decisions to be made by
the trustees. As such a United States person (the United States trustee) has the power to make all of
the substantial decisions of the trust and another United States person (the Settlor) has the power to
veto any of those substantial decisions. All powers of control over substantial decisions rest in United
States persons under § 301.7701-7(d)(1)(iii). See also § 301.7701-7(d)(i)(v) Example 4.

Disclaimer: This discussion only applies to the trust documents we reviewed and cannot be applied
to trust documents governing different trusts. The analysis under § 301.7701-7 depends on the
terms of the trust and the applicable law.