Question about non US citizen being Trustee of a US Trust

[justalayman]

From the 1996 Small Business Act (apparently the controlling law)

A trust will be considered domestic if (i) a U.S. court can exercise primary supervision over trust administration (the "court test"), and (ii) U.S. persons control all substantial trust decisions (the "control test"). All other trusts are foreign.


It goes on to state this as means to determine the court test:


(i) the trust deed does not direct that the trust be administered outside the United States;

(ii) the trust is, in fact, administered exclusively in the United States; and

(iii) the trust is not subject to an automatic "flee clause" pursuant to which the trust migrates from the United States in the event that a U.S. court attempts to assert jurisdiction over the trust's administration.


So under (ii) would a US citizen living in a foreign country cause the trust to fail the test or not? Would it being administered from a foreign country even though it is a US citizen be considered being administered within the US?

Realgardinv the control test; if U.S. persons control all substantial decisions affecting the trust and no foreign person acting in any capacity can overcome the decisions of the controlling U.S. persons

That would mean if a beneficiary who is a foreigner would have a right to replace the trustee, it would be a foreign trust.

 

[HRZ]

I repeat my caution to pay attention to CA law which seems to require at least one trustee resident in CA and subject to CA jurisdiction. A more demanding state law governs.

( One of my friends who practices both estate and tax law sometimes refers to such laws as make work for the local bar ..and that was in response to a CA estate matter where some prior "expert" bungled understanding of CA rules ...big bill.. )

Your attorney may be doing you a big favor by saying where not to go...and you cure it ...others might be a bit more proactive to protect thier client ..and client gets a whopper bill for great service.

 

[Taxing Matters]

From the 1996 Small Business Act (apparently the controlling law)

The definition of domestic trust from that Act is found in Internal Revenue Code (IRC) section 7701(a)(30)(E), which provides as follows:

(E) any trust if--

(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust.​

A foreign trust is any trust not domestic. IRC § 7701(a)(31)(B).

It goes on to state this as means to determine the court test:


(i) the trust deed does not direct that the trust be administered outside the United States;

(ii) the trust is, in fact, administered exclusively in the United States; and

(iii) the trust is not subject to an automatic "flee clause" pursuant to which the trust migrates from the United States in the event that a U.S. court attempts to assert jurisdiction over the trust's administration.

That is NOT part of the statute. That comes from Treasury Regulation § 301.7701-7(c). The thing to understand about this provision is that it is a safe harbor. In the language of tax law, a safe harbor rule is a rule where if the conditions are met the IRS will not challenge it, but it does not foreclose the possibilty that the taxpayer may still satisfy the requirements even though the safe harbor is not met. Here, I would argue that a U.S. court may have jurisdiction over the administration of the trust since the trust was originally established and domiciled in California and, importantly, the sole asset of the trust is real estate located in California. Real estate is an asset that cannot be moved and states always have jurisdiction at least in rem over real estate located within its borders. That may be enough to bring the trust within the jursidiction of the California and federal courts. If not, there are ways for the trustee to ensure that it does come under the jurisdiction of a U.S. court. Note that it is not where the trustee is located that determines this. Indeed, even in the safe harbor the regulation states “A court may have primary supervision under this paragraph (c)(3)(iv) notwithstanding the fact that another court has jurisdiction over a trustee, a beneficiary, or trust property.” It is for all these reasons that I said earlier that the mere fact that the trustee lives outside the U.S. would not itself cause the trust to fail to be regarded as a domestic trust.

And again, I think in this particular instance having the trust remain (as it apparently is now) a foreign trust is not someting that will result in owing more tax than would be owed if the trust were domestic. That’s because the property of the trust is U.S. real estate. My answer might change if the assets were something else.

 

[HRZ]

I may have some Ca points backwards..and Ca has a bit of a different rule ...IF it has a CA trustee then it first looks to that ...and from their on you need a chart and a lot of coffee And for types of income it makes sense not to have anyone in Ca if you are not looking to pay Ca income taxes on retained income ..and then set out what is ca source income....hey op ..what's the purpose of holding this trust ? can it be desolved and assets liquidated ?

 

[justalayman]

The definition of domestic trust from that Act is found in Internal Revenue Code (IRC) section 7701(a)(30)(E), which provides as follows:

(E) any trust if--

(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust.​

A foreign trust is any trust not domestic. IRC § 7701(a)(31)(B).




That is NOT part of the statute. That comes from Treasury Regulation § 301.7701-7(c). The thing to understand about this provision is that it is a safe harbor. In the language of tax law, a safe harbor rule is a rule where if the conditions are met the IRS will not challenge it, but it does not foreclose the possibilty that the taxpayer may still satisfy the requirements even though the safe harbor is not met. Here, I would argue that a U.S. court may have jurisdiction over the administration of the trust since the trust was originally established and domiciled in California and, importantly, the sole asset of the trust is real estate located in California. Real estate is an asset that cannot be moved and states always have jurisdiction at least in rem over real estate located within its borders. That may be enough to bring the trust within the jursidiction of the California and federal courts. If not, there are ways for the trustee to ensure that it does come under the jurisdiction of a U.S. court. Note that it is not where the trustee is located that determines this. Indeed, even in the safe harbor the regulation states “A court may have primary supervision under this paragraph (c)(3)(iv) notwithstanding the fact that another court has jurisdiction over a trustee, a beneficiary, or trust property.” It is for all these reasons that I said earlier that the mere fact that the trustee lives outside the U.S. would not itself cause the trust to fail to be regarded as a domestic trust.

And again, I think in this particular instance having the trust remain (as it apparently is now) a foreign trust is not someting that will result in owing more tax than would be owed if the trust were domestic. That’s because the property of the trust is U.S. real estate. My answer might change if the assets were something else.

https://www.law.cornell.edu/cfr/text/26/301.7701-7


https://www.law.cornell.edu/uscode/text/26/7701




1)Definitions -

(i)United States person. The term United States person means a United States person within the meaning of section 7701(a)(30). For example, a domestic corporation is a United States person, regardless of whether its shareholders are United States persons.

(9) United States
The term “United States” when used in a geographical sense includes only the States and the District of Columbia


As I read through those sections I believe it does state a that the trustee must be within the US lest they not be a US person since it is defined as being based on the geographical location


And depending on the rules of the trust, it may not be possible to make it be a domestic trust. If the beneficiary has any substantial control over the trust, it appears it would demand it be considered a foreign trust.

 

[Taxing Matters]

As I read through those sections I believe it does state a that the trustee must be within the US lest they not be a US person since it is defined as being based on the geographical location

No. A U.S. citizen is always a U.S. person under the tax code. You did not read the regulation you quoted carefully. Treas. Reg. § 301.7701-7(d)(1)(i) says a U.S. person for the purpose of the regulation is a U.S. person within the meaning of IRC § 7701(a)(30). Turning to that section, what you find you find this:

(30) United States person.--The term “United States person” means--

(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E) any trust if--

(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust.​

26 U.S.C.A. § 7701(a)(30). That statute is what defines what a U.S. person is. So if the trustee is a U.S. citizen then he or she is a U.S. person regardless of where in the entire universe he or she happens to reside. BTW, I know the rules for what defines a U.S. person extremely well as I am one of the people that authored part of the regulations on the subject while an attorney at IRS chief counsel.

And depending on the rules of the trust, it may not be possible to make it be a domestic trust. If the beneficiary has any substantial control over the trust, it appears it would demand it be considered a foreign trust.

That is a different issue and would depend, of course, on the terms of the particular trust. The typical revocable living trust used in estate planning would not give the beneficiary that control, but of course this trust might be different.