Technical article
United States: When a Trust Is a US Trust, and Why the Heirs' Nationality Does Not Decide It
The court test asks whether a US court can exercise primary supervision over the trust's administration.
Imagine a widower in Ohio who sets up a family trust. He has two daughters. One lives in Portugal and one in Chile. Neither holds a US passport, and neither plans to move to the United States. A US bank is the trustee. Does the trust still file a US tax return?
The sources say it can, and the heirs have little to do with the answer. The tests look at the trust's courts and at who makes its decisions.
The two tests
Federal law calls a trust a US person only if it passes both tests. A trust that fails either one is a foreign trust for US tax purposes.
The court test asks whether a US court can exercise primary supervision over the trust's administration. A federal, state or local court counts. The rules give a clear path: the trust document does not direct the trust to be run abroad, the trust is in fact run only in the United States, and it has no clause that moves it automatically if something changes.
The control test asks whether one or more US persons control all the substantial decisions, and nobody else holds a veto. The list of substantial decisions is specific:
- whether and when to pay out, and how much
- choosing a beneficiary
- ending the trust
- bringing a lawsuit for the trust
- removing or replacing a trustee
- investment decisions, with a separate rule for an investment adviser
Routine tasks such as keeping the books do not count. The test looks at everyone with authority, not only the trustee. A protector, an adviser or a family member with a veto counts as well.
Where the heirs fit
They do not appear in either test. The widower's daughters in Portugal and Chile are beneficiaries, and the tests ask about courts, trustees and people with power. If a US trust files as a domestic trust, it files Form 1041 and gives each beneficiary a Schedule K-1. A trust with a nonresident beneficiary files even when its income is small. That is the same return whether the daughters live in Ohio or Lisbon.
What changes if the control moves
| Event | Result |
|---|---|
| A US trustee keeps all substantial decisions | Domestic trust, files Form 1041 |
| A foreign person gains a substantial power or veto | Trust becomes foreign unless fixed |
| The change is fixed within 12 months | Trust keeps its earlier status |
| It is not fixed in 12 months | The change dates from the day of the event |
The 12-month window applies when a death, a resignation or a move of someone with a substantial power would change the trust's status. A move of a trustee to another country can start it. The tax office can allow more time for reasonable cause.
What it costs to become a foreign trust
The sources list what follows when a domestic trust turns foreign. The trust is treated as having transferred all its assets to a foreign trust just before the change. Forms 3520 and 3520-A apply. Penalties for missing reports start at the greater of US$10,000 or 35% of the amount, and the greater of US$10,000 or 5% of the trust assets treated as owned for a missing 3520-A. A later article in this series goes through those in full.
You could
You could list every person who holds any power over the trust and ask whether each one is a US person today. You could ask what happens if one of them dies, resigns or moves abroad.
Have you named someone abroad as a protector or adviser, or thought about it? Tell us how you decided. Someone with the same family spread across several countries may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Cornell LII 26 USC 7701 (A)
- Cornell LII 26 CFR 301.7701-7 including the 12-month rule (A)
- IRS Instructions for Form 1041 (A)
- IRS Instructions for Form 3520 (A)
- Cornell LII 26 USC 6677 and 684 (A)
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