U.S. citizen living abroad as a trustee of a domestic trust

You’re right, but why are you right?

A lot of the things you just “know” are right. But you don’t know why you’re right.

This little blog post tells you why a U.S. citizen living abroad can be a trustee of a domestic trust and the trust will still be classified as a domestic trust.

Does a U.S. citizen living abroad make a trust “foreign” by acting as a trustee?

This is for U.S. citizens living abroad who are serving as trustees of a trust that is organized under U.S. law.

Perhaps you are named as a successor trustee and are wondering whether to accept the appointment. You think that maybe the fact that you are living abroad will create tax complexities for the trust.

The Continental Divide for the tax treatment of trusts is whether the trust is a foreign trust or a domestic trust. The presence of a foreign trustee is frequently enough to convert a domestic trust into a foreign trust.

Will the fact that you, a U.S. citizen, live abroad be enough to classify you as a “foreign” trustee and therefore make the trust be at risk of being classified as a “foreign” trust?

The answer is no. You (and the trust) are safe. The trust will be a domestic trust.

What makes a trust “domestic” or “foreign”?

Let’s say you have a U.S. trust created under U.S. law, with a U.S. citizen living outside the United States as trustee.

That’s a “domestic trust” under the traditional rules because it satisfies

• the “court test” (a U.S. court has primary jurisdiction if trust administration goes off the rails and you need a judge to referee the ensuing hilarity); and
• the “control test” (because all of the important activities of the trust are controlled by a U.S. person).

For your reading pleasure, here is the definition of a domestic trust from Internal Revenue Code Section 7701(a)(30)(E):

The term “United States person” means:

* * *

(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.

The first item, at (i), is the court test. (Remember, we are ignoring this, so pretend that this criterion is satisfied). The second item, at (ii), is the control test.

The control test is what we are talking about here:

Is a United States citizen who is resident outside the United States a “United States person” for purposes of determining the residence (domestic or foreign) of a trust?

What is a “United States person”?

What is a “United States person” for purposes of the control test as defined in IRC §7701(a)(30)(E)(ii)? The Regulations helpfully provide a definition, at Reg. §301.7701-7(d)(1)(i):

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.

The Regulations point us at IRC §7701(a)(30), and (happy happy) the Regulations do not contain any exceptions or special rules that modify the basic rules at IRC §7701(a)(30).

A United States citizen is a United States person

A United States citizen, regardless of country of residence, is a United States person. IRC §7701(a)(30)(A) says:

The term “United States person” means—

(A) a citizen or resident of the United States[.]

A United State citizen is a “United States person.”

Alternatively, a “resident” of the United States is a United States resident. It’s an either/or arrangement.

Therefore, a United States citizen will be a “United States person” no matter where he or she lives.

United States citizen anywhere = "United States person" for the control test

Back to the definition of a domestic trust. We can now see that a United States citizen living inside or outside the United States will be a “United States person” for the control test requirement at IRC §7701(a)(30)(E)(ii):

(ii) one or more United States persons have the authority to control all substantial decisions of the trust.

That means the control test can be satisfied by having a United States citizen living anywhere in the world.

Certain terms and conditions apply

Well, you’re not quite done yet. You also will have to look at the trust documents to see if there are other people who hold powers to make “substantial decisions” as that phrase is defined in Reg. §301.7701-7(d)(1)(ii) and then determine whether these people are United States persons or not.

And now you know

And now you know why a United States citizen, regardless of location or country of residence, is a “United States person” for purposes of trust taxation and classification: a human becomes a United States person via a disjunctive either/or test given to you in IRC §7701(a)(30)(A).

A United States citizen living in the United States satisfies both prongs of that test. A United States citizen living outside the United States satisfies one prong of that test. One is enough.

The answer always comes back to the Code. If you can’t trace your thinking back to the Code, you ain’t done thinking yet.