The check-the-box election (1) is an integral component of international tax and estate planning. A recurring and fundamental theme is that of a revocable foreign trust with a nonresident, nondomiciliary alien as grantor and with contingent U.S. beneficiaries who become vested on the grantor's demise.
A key consideration in this context is avoiding imposition of the U.S. estate tax. The typical approach has been the insertion of a foreign corporation as wholly owned by the trust to retain assets otherwise classified as U.S.-situs property for estate taxation. (2) The result is to transform the U.S.-situs into foreign-situs property such that exposure to the estate tax is avoided on the grantor's demise. (3)
Due to the Tax Cuts and Jobs Act, (4) this approach must now be assiduously refined, due to the repeal of the 30-day rule as previously set forth in the controlled foreign corporation provisions. (5) More specifically, if the foreign corporation is indeed extant on the grantor's demise, CFC classification will now automatically occur. (6) The result will be the imputation of Subpart F income consistent with the CFC provisions to the U.S. shareholders of the foreign corporation. (7)
By contrast, if the foreign corporation is eliminated prior to the date of the grantor's death, CFC considerations are avoided. Yet, adopting this approach must be balanced against and considered in light of the potential estate tax consequences. If the foreign corporation holds and is to continue to hold only foreign-situs property, elimination on or prior to the date of death is appropriate. This may be accomplished through exercise of the election. More specifically, on exercise of the election, the foreign corporation is deemed to have distributed all of its assets to the trust as its sole owner in liquidation. (8) Accordingly, the existence of the foreign corporation is treated as having been terminated through its deemed liquidation and dissolution under the check-the-box regulations. The result is essentially elimination of the impact of the CFC provisions.
This approach requires that the foreign corporation be appropriately formed as a foreign eligible entity. (9) This means that on formation the foreign corporation must not constitute a foreign entity, which is automatically classified as a corporation. (10) Otherwise, the check-the-box election will, in general, be unavailable.
Notably, the regulations authorize exercise of the election retroactively for a period of up to 75 days prior to its intended effective date. (11) In this context, the election should be exercised within such 75-day period but with an effective date on or preceding the date of the grantor's death.
Consistent with this approach, with exercise of the election, the foreign corporation will be deemed to have been liquidated and dissolved on the designated effective date with the foreign situs property treated as having been distributed to the trust in liquidation. (12) Resulting tax effects include the following:
1) The bases of the underlying assets as contained within the investment portfolio will have been adjusted to their fair market values as of the date of liquidation. (13)
2) The U.S. estate tax will be avoided on the subsequent death of the foreign grantor since only foreign, and not U.S.-situs property will have been held by the foreign corporation within the portfolio.
3) With the foreign corporation's being treated as having been eliminated prior to the death of the grantor, the CFC provisions will be inapplicable subsequent to the grantor's demise.
Even so, if the foreign corporation owns or is expected to own U.S.-situs property on the demise of the grantor, CFC considerations will then be present, and this approach is generally not viable. Instead, with repeal of the 30-day rule, alternative strategies should be considered. One of these is to retain the wholly owned foreign corporation-trust structure even where U.S.-situs assets are present, but to go an important step further. This...