I am going to talk about this unique situation and what the possible consequences are; they are not that great if you take a conservative approach. These tax issues are not for regular people so you should seek professional tax advice when doing compliance because if you do things wrong it can cost you a lot of heartache in trouble.

First let us start with what is the definition of a domestic trust. In the IRS code 7701 [a] we define offshore and we define domestic trust.

(30)The term ‘United States person’means
any trust if –
1. A court within the United States is able to exercise primary supervision over the administration of the trust, and
2. One or more United States persons have the authority to control all substantial decisions of the trust.

(31) Foreign estate or trust…
(B) foreign trust
the term ‘foreign trust’ means any trust other than the trust described in subparagraph E of paragraph 30.

Basically if you structure a trust so that a court in United States is able to exercise primary supervision over the administration of the trust and one or more persons have control all substantial decisions of the trust, it is reasonable for your tax preparer to take a position that it is domestic.

This is usually a comfortable position if the assets are in the United States and the trustee is domestic, which is very common. If you have a domestic trustee and you submitted to the jurisdiction of one of the 50 states, and the assets are in the United States, you can comfortably take the position that it is domestic. This is a year-by-year decision and is not a one-time decision.