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Control test

The IRS regulation defines the control test as part of the rules for classifying trusts as domestic or foreign. It describes whose authority over a trust's substantial decisions counts under those rules.

Definition and role

The IRS regulation on domestic and foreign trusts defines the control test as whether one or more U.S. persons can control every substantial decision of a trust, without another person's veto.[3]

The classification rule requires both the control test and the court test. A trust is a U.S. person on any day it meets both; the regulation calls such a trust domestic, and calls other trusts foreign.[3]

The trust instrument and applicable law supply the terms used to determine whether both tests are met. The control test concerns decision-making authority, while the court test concerns a U.S. court's primary supervision over trust administration.[3]

Decisions included

Substantial decisions are powers assigned by the trust terms or applicable law that are not merely ministerial. Examples include deciding whether and when to distribute income or principal, selecting beneficiaries, and changing trustees.[3]

The list also includes investment decisions, claims, and whether to end the trust. Routine bookkeeping, rent collection, and carrying out investment decisions are examples of ministerial tasks, which the regulation distinguishes from substantial decisions.[3]

A U.S. person who hires a trust investment adviser is treated as controlling the adviser's investment decisions when that U.S. person can end the adviser's decision-making authority at will.[3]

Authority and exceptions

Control means power, by vote or otherwise, to make all substantial decisions, with no other person able to veto any of them. The assessment includes everyone authorized to make a substantial decision, not only trustees or other fiduciaries.[3]

For example, if trustees must act unanimously and a non-U.S. fiduciary's agreement is needed for substantial decisions, U.S. persons do not control all those decisions. The regulation therefore says the control test is not met in that example.[3]

The regulation also provides a safe harbor for specified employee benefit and investment trusts. For the listed categories, it deems the test satisfied if U.S. trustees control all substantial decisions made by the trustees, subject to additional conditions for some categories.[3]

Connection to U.S. reporting

The IRS describes a U.S. person as including a U.S. citizen. Its foreign trust reporting guidance says Form 3520 can apply when a U.S. person is treated as an owner under grantor trust rules, while Form 3520-A applies to a foreign trust with a U.S. owner.[7]

The control test classifies the trust; it does not by itself determine whether a person owns trust assets under the grantor trust rules. The IRS instructions describe Form 3520 reporting for a U.S. person considered an owner of foreign trust assets under sections 671 through 679.[1]

Questions and answers

What does the control test measure?

It measures whether U.S. persons have authority to make every substantial trust decision, without another person's veto. The terms of the trust and applicable law guide that determination.[3]

Does the control test alone make a trust domestic?

No. The regulation requires both the control test and the court test. A trust qualifies as a U.S. person on days when both are met.[3]

Do trustees alone determine control?

No. The regulation says to include all persons who have authority to make substantial decisions. That can include people other than trust fiduciaries.[3]

Are investment decisions always substantial?

The regulation includes investment decisions among substantial decisions. When a U.S. person hires an adviser and can end the adviser's authority at will, the adviser's investment decisions count as controlled by that U.S. person.[3]

How is the control test different from grantor ownership?

The control test is one part of the trust's domestic or foreign classification. The Form 3520 instructions separately address a U.S. person's ownership of foreign trust assets under grantor trust rules.[1]

  • Substantial decisions: Substantial decisions under a trust include nonministerial choices about distributions, beneficiaries, income, principal, trustee changes, and investments.
  • Foreign trust classification: A trust is foreign when it fails either domestic trust test. The tests ask about U.S. court supervision and control of substantial decisions.
  • Domestic trust: The IRS defines a domestic trust through its court test and control test, and the term appears in U.S. foreign trust reporting rules for U.S. citizens.
  • Court test: The IRS court test asks whether a U.S. court can supervise trust administration. It works with the control test to determine whether a trust is domestic.

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Sources and data notes
  1. Internal Revenue Service, Instructions for Form 3520. https://www.irs.gov/instructions/i3520. Retrieved .
  2. Internal Revenue Service, Instructions for Form 3520-A. https://www.irs.gov/instructions/i3520a. Retrieved .
  3. Internal Revenue Service, 26 CFR 301.7701-7 Trusts, domestic and foreign. https://ecfr.io/Title-26/Section-301.7701-7. Retrieved .
  4. Internal Revenue Service, 26 CFR 301.7701-4 Trusts. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 679. https://uscode.house.gov/us/usc/119-118/t26/s679/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 6048. https://uscode.house.gov/us/usc/119-118/t26/s6048/. Retrieved .
  7. Internal Revenue Service, Foreign trust reporting requirements and tax consequences. https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences. Retrieved .

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