How to Determine Trust Residency: Federal and State Tests

To determine trust residency, you run two separate analyses. First, federal law asks whether the trust is domestic or foreign, using a court test and a control test. Second, each state with a connection to the trust applies its own rules, usually looking at some mix of the grantor’s domicile, the trustee’s location, where the trust is actually administered, and sometimes where beneficiaries live. Those state rules are not uniform, so one trust can be a resident of more than one state at the same time. Before either analysis is useful, though, you need to know whether the trust is a grantor trust or a non-grantor trust, because that answer changes everything downstream.

Grantor Trust or Non-Grantor Trust First

The most common estate planning vehicle, the revocable living trust, is a grantor trust. Under Section 671 of the Internal Revenue Code, all income from a grantor trust flows through to the grantor’s personal return as if the trust did not exist.¹

While the grantor is alive and treated as the owner, the trust’s own residency is essentially irrelevant for income tax. You pay tax in the state where you personally reside. Naming an out-of-state trustee or administering the trust from a no-income-tax state does not move the needle. An Oregon resident who funds a grantor trust with a Nevada trustee still owes Oregon income tax on the trust’s earnings. Several states, including Delaware, exclude grantor trusts from their fiduciary income tax entirely because the income is already being taxed on the grantor’s return.

Non-grantor trusts are where the residency question does real work. These include irrevocable trusts in which the grantor has given up all control, plus trusts that become irrevocable at the grantor’s death. The trust itself is the taxpayer, and where it is considered resident dictates which states can tax it. The rest of the analysis below is aimed at those trusts.

The Federal Test: Domestic or Foreign

Before any state gets to weigh in, federal law sorts every trust into one of two boxes. Under the Internal Revenue Code, a trust is domestic only if it passes both a court test and a control test. Fail either one, and the IRS treats the trust as foreign.²

The Court Test

The court test asks whether a court within the United States can exercise primary supervision over the trust’s administration. Primary supervision means a U.S. court has authority to resolve substantially all issues about how the trust is run, from investments to distributions to defending lawsuits. The trust instrument does not need to name a specific court. It just cannot direct that the trust be administered outside the United States, and it cannot include a clause that would automatically migrate the trust overseas if a U.S. court tried to assert jurisdiction.³

The Control Test

The control test asks whether one or more U.S. persons have authority to control all substantial decisions of the trust. Treasury regulations define substantial decisions broadly: whether and when to make distributions, how much to distribute, the selection of beneficiaries, investment choices, whether to terminate the trust, whether to pursue or settle legal claims, and whether to remove or replace a trustee. Routine bookkeeping and ministerial tasks do not count.³

If even one substantial decision rests with a non-U.S. person and no U.S. person can override it, the trust fails the control test. That single point of foreign control makes the entire trust foreign for federal tax purposes. Look closely at who holds which powers, particularly when family members or advisors abroad are named as trustees, protectors, or investment advisors.

What Foreign Classification Costs

A foreign trust is not illegal, but the paperwork is heavy and the penalties are steep. U.S. persons who create, transfer assets to, receive distributions from, or are treated as owners of a foreign trust must file Form 3520 each year. Penalties for a missing or incomplete Form 3520 start at $10,000 or a percentage of the assets involved, whichever is greater. A U.S. person who transfers property to a foreign trust without reporting it faces a penalty of 35% of the value transferred. A U.S. person who receives an unreported distribution faces the same 35% penalty on the distribution.⁴

A U.S. owner treated as holding a portion of a foreign trust’s assets faces a separate penalty of the greater of $10,000 or 5% of the trust assets they’re considered to own. Additional penalties accumulate if noncompliance continues more than 90 days after the IRS mails a notice.⁴

How States Assign Residency

Once a trust is domestic, each state with a connection to it runs its own residency analysis. There is no uniform rule. Two states looking at the same trust can reach different answers, and the trust can end up resident in both.

Grantor’s Domicile

This is the most widely used factor and the one that typically cannot be changed after the fact. For inter vivos trusts, states generally look at where the grantor lived when the trust was created or when it became irrevocable. For testamentary trusts, the connection is where the testator was domiciled at death. In some states, that single fact establishes permanent residency regardless of where the trustee or beneficiaries later end up.

Trustee’s Residence

A significant number of states treat the trustee’s residence as a primary factor. For an individual trustee, that means their personal residence. For a corporate trustee, it means where the principal office is or where the trust is actually managed, not the state of incorporation. When co-trustees live in different states, some states look to the residence of the majority, others to which trustee holds the most authority over key decisions. Two co-trustees split between states can give both states enough of a hook to claim the trust as resident.

Place of Administration

Several states focus on where the trust is actually managed day to day: where records are kept, where investment decisions are made, and where tax returns are prepared. The Uniform Trust Code, adopted in some form by roughly 35 states, lets the trust instrument designate a principal place of administration. That designation holds only as long as a trustee’s principal office or residence is in the named jurisdiction, or the trust is actually administered there at least in part. A state tax authority can look past a paper designation to where the substantive work really happens.

Beneficiary Residence

A smaller group of states considers where beneficiaries live. The U.S. Supreme Court has restricted how far this factor can be pushed, as described in the next section.

The Constitutional Ceiling: Kaestner

States cannot tax trusts without limit. The Due Process Clause of the Fourteenth Amendment requires a minimum connection between the state and the trust. In 2019, the Supreme Court drew a clear line in North Carolina Department of Revenue v. Kaestner 1992 Family Trust: a state cannot tax trust income based solely on the fact that a beneficiary lives there.⁵

The trust in Kaestner was created by a New York resident, managed by a Connecticut trustee, and administered in Connecticut. Its only tie to North Carolina was that some beneficiaries lived there. Those beneficiaries had received no distributions during the tax years at issue, had no right to demand distributions, and might never receive anything at all. The Court unanimously held that this was not enough to support the tax.⁵

The decision did not invalidate all beneficiary-based trust taxation. A state may still be able to tax a trust’s income when a resident beneficiary has actually received distributions or has a present right to demand them. But for discretionary trusts where the beneficiary holds only a contingent interest, beneficiary residence alone is off the table.

When More Than One State Claims the Trust

Because states use different factors, a single trust can qualify as resident in more than one state at the same time. A trust created by a grantor domiciled in one state, managed by a trustee in a second, with beneficiaries in a third can face tax claims from all three. This happens routinely with families spread across multiple states.

You might expect states to offer credits for taxes paid elsewhere, the way they do for individuals earning income in multiple states. For trusts, that expectation is often wrong. Many states define a resident trust’s income as in-state source income by definition and then limit their credit for taxes paid to other states to out-of-state source income only. Since the home state treats everything as in-state, there is nothing to credit. The result is genuine double taxation with no offset.

Levers You Can Actually Pull

Once the grantor’s domicile is fixed, the two factors most within your control are the trustee’s location and the place of administration. Trustee selection is the most flexible tool. Replacing a trustee can shift a trust’s residency, sometimes intentionally and sometimes by accident. Appointing a successor trustee in a new state may bring the trust under that state’s taxing authority for the first time. Moving an existing trustee across state lines can do the same. Most planning mistakes happen here: a family names a successor trustee based on personal trust or family dynamics, without checking whether the new trustee’s home state will impose income tax on the trust.

Transferring administration to a different state is possible but not casual. Under the Uniform Trust Code framework, the trustee must notify beneficiaries at least 60 days before initiating the transfer. The notice must explain the reasons for the move, provide contact information at the new location, and set a deadline for beneficiary objections. If a beneficiary objects before the deadline, the trustee’s authority to transfer administration terminates. Trustees cannot quietly shop for a friendlier tax jurisdiction.

Beyond taxes, residency also determines which state’s trust law governs everyday questions: what duties the trustee owes, what rights beneficiaries have to information, how the trust can be modified, and which court hears disputes. Those differences are real, and they follow whichever state’s residency rules end up applying.

Filing Obligations That Follow the Residency Call

Every domestic trust with gross income of $600 or more during the tax year must file Form 1041, regardless of whether any tax is owed after deductions.⁶ The $600 threshold is statutory and does not adjust for inflation. A trust with a nonresident alien beneficiary must file regardless of income level.⁷

State thresholds vary. Some states require a fiduciary return whenever the trust has any income; others set their own minimums. The triggers also differ: some states require a return whenever the trustee or a non-contingent beneficiary is a resident, even if the trust earned no income sourced to that state. Others look only at whether the trust earned income from in-state sources. Check every state with a potential connection to the trust, because a filing obligation can exist even when no tax is ultimately owed.

For trusts classified as foreign under the federal two-prong test, the reporting is heavier. Form 3520 filings apply to U.S. persons who create, fund, receive distributions from, or own portions of foreign trusts, and the foreign trust itself must file Form 3520-A each year.⁴

1
Internal Revenue Service. Revenue Ruling 2023-02 – Section 671, Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
2
Office of the Law Revision Counsel. 26 U.S. Code 7701 – Definitions
3
eCFR. 26 CFR 301.7701-7 – Trusts, Domestic and Foreign
4
Internal Revenue Service. Instructions for Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
5
Justia Law. North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust
6
Office of the Law Revision Counsel. 26 U.S. Code 6012 – Persons Required to Make Returns of Income
7
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1