Administration of Foreign Trusts

Administration of Foreign Trusts

In this Analysis, Pamela Revak covers grantor and beneficiary reporting obligations under I.R.C. Code Section 679 with respect to foreign trusts with U.S. beneficiaries. She writes:

     Trusts are often created in foreign jurisdictions in an attempt to provide asset protection and/or tax savings. Regulations under 26 C.F.R. § 301 provide that a trust is treated as a "United States person if":

(1) A court within the United States is able to exercise primary supervision over the administration of the trust. This is referred to as the "court test."

(2) One or more United States' persons have the authority to control all substantial decisions of the trust. This is referred to as the "control test."

     Any trust that does not meet the court test or the control test is treated as a foreign trust. These tests are not as simple as they might appear. A trust that directs administration outside the United States or any domestic trust subject to an "automatic migration" of a provision would not meet the court test and would, consequently, be treated as a foreign trust. An automatic migration provision is one that would cause the trust to migrate from the United States if a U.S. court attempts to assert jurisdiction, directly or indirectly, except in the case of a foreign invasion, or widespread confiscation or nationalization of property in the United States.

(footnotes omitted)

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