Families ask where the trust was "formed." Section 7701 asks two different questions. A trust is a United States person only if it meets both the court test and the control test in section 7701(a)(30)(E). Section 7701(a)(31)(B) classifies every other trust as foreign. Fail either test and the trust is foreign, including a trust written by Miami counsel, governed by Florida or Delaware law, and funded only with U.S. accounts. Pass both, and a trust sitting in a file in Panama can be a domestic trust. The place named on the cover is evidence. It is not the test.
Foreign versus domestic is not the same question as grantor versus non-grantor. An FGT is foreign and has a grantor-owner. An FNGT is foreign and does not. Both still have to be foreign first. See FGT vs. FNGT for International Families and the practice page, Foreign Trusts. The same tests, in Spanish, are in court test y control test para el settlor.
The court test
The court test asks whether a court within the United States is able to exercise primary supervision over the administration of the trust. The regulations under section 7701 describe when that is true. In general terms, a trust that is in fact administered in the United States, whose instrument does not direct that it be administered outside the United States, and that is not subject to a clause sending it out of the United States if a U.S. court takes jurisdiction, is the pattern that satisfies the test. A flee clause — an automatic migration if a U.S. court asserts authority — is often written for asset-protection reasons and is also a way to fail the court test on purpose. Exclusive supervision reserved to a foreign court fails the test as well.
Governing law is not supervision. A Florida choice-of-law clause does not put primary supervision in a Florida court if the trustee administers the trust abroad and the deed tells the trustee to stay there. The inverse is also true: a Cayman governing-law clause does not, by itself, make the trust foreign if a U.S. court can in fact supervise administration and the control test is met. The file has to be read for what the trustee does, not for the stationery.
The control test
The control test asks whether one or more U.S. persons have authority to control all substantial decisions of the trust. "All" is the word that does the work. If a non-U.S. person must consent to a substantial decision, U.S. persons do not control all of them, and the trust is foreign. That result is sometimes exactly what the family wanted. It is sometimes an accident, discovered when a U.S. protector's resignation leaves a foreign protector with a veto, or when an investment committee offshore was given a consent right no one reread after a child moved to New York.
The regulations treat as substantial the decisions that actually run a trust: whether and when to distribute, and how much; who the beneficiary is, if the deed allows a selection; whether a receipt is income or principal; whether to terminate; whether to compromise or abandon a claim; whether to sue or defend; and whether to remove, add, or replace a trustee. Investment decisions are substantial unless the U.S. fiduciary can terminate a delegation to a foreign adviser. Bookkeeping, collecting rent, and signing documents the trustee has already decided to sign are ministerial. They do not flip the test, and they do not save it.
A power to replace a trustee can be carved so that it may not be used to change the trust's residence. Families rely on that carve-out without checking whether the protector's other powers — a veto on distributions, a veto on the sale of the Miami apartment — are still substantial decisions held by a non-U.S. person. Those other powers are the control test. Protectors are covered separately in Protectors and Reserved Powers.
Inadvertent changes, and why the test is not a one-time memo
People die, resign, and move. A trust that was domestic because two U.S. trustees controlled every substantial decision becomes foreign on the day a non-U.S. person succeeds to a veto, unless the change is cured. The regulations under section 7701 provide a limited cure period — generally twelve months — to restore U.S. control after an inadvertent change. If the trust is not cured, foreign status runs from the date of the change, not from the date someone notices. The outbound consequences of becoming foreign, including section 684 for a U.S. transferor to a foreign non-grantor trust and a reportable event under section 6048, are the tax adviser's to model. The legal fact is that the control test moved.
Migration in the other direction — making a foreign trust domestic — is the same two tests, run as a project rather than as an accident. Appoint a U.S. trustee, put primary supervision in a U.S. court, and move every substantial decision to U.S. persons. A decanting into a new U.S. trust is a different legal act and can be a distribution. Both are discussed in Domestication, migration, and decanting. Neither is complete because a banker changed the mailing address.
What we read
The instrument, the amendments, the identity and residence of every person who holds a substantial decision, and any letter of wishes the trustee has been treating as mandatory. Then a sentence: the trust is foreign, or it is domestic, as of a date, and here is the power that decides it. Classification under sections 671 through 679 comes after that sentence, not before. If the sentence cannot be written, the family does not yet have a U.S. view of the trust, whatever the preamble says.