by Todd Rosenberg and Scott Snyder
For years, U.S. tax practitioners who focus in the area of international taxation have helped multi-jurisdictional families establish foreign grantor trusts, particularly in situations in which the client is a parent who is a non-U.S. person for all U.S. tax purposes1 and the next generation is comprised of U.S. persons.2 Such planning typically involves the non-U.S. person parent establishing a revocable trust in which the primary asset is a non-U.S. corporation (also referred to as a “foreign corporation” or “FC”) that is an eligible entity for U.S. tax purposes,3 with the FC having title to an investment portfolio.4 Generally, this is considered one of the better U.S. tax-planning structures for families with a non-U.S. person parent and U.S. person children and grandchildren. The structure avoids the imposition of the U.S. estate tax upon the non-U.S. person parent’s death and maintains certain U.S. income tax benefits afforded to a non-U.S. person investor while the trust is a grantor trust. In the post-mortem planning context, it was common prior to the enactment of H.R. 1, Tax Cuts and Jobs Acts, for the FC to be liquidated for U.S. tax purposes after the death of the non-U.S. person grantor. An FC that is an eligible entity can file Form 8832 (Entity Classification Election) to be treated as a partnership if it has two or more members or disregarded as an entity separate from its owner if it has a single owner (commonly referred to as a “disregarded entity”).5 An FC making such an election (commonly referred to as a “check-the-box election”) is deemed to liquidate for U.S. tax purposes at the end of the day immediately before the effective date utilized on the Form 8832.6 The common planning technique was to cause the deemed liquidation to occur less than 29 days after the date of the grantor’s death to prevent the harsh tax consequences of the U.S. anti-deferral regime associated with a “controlled foreign corporation” (CFC).7 The act contains many modifications to the Internal Revenue Code, but one modification in particular will leave both U.S. tax practitioners and their clients reevaluating the traditional trust planning set forth above.
In a trust where the non-U.S. person grantor contains a power to revest title in the property contributed (e.g., a revocation power), the grantor is viewed as the “owner” of the trust’s assets for U.S. income tax purposes; therefore, all tax attributes (i.e., income, deductions, credits, etc.) are attributable to said grantor.8 Such a non-U.S. person grantor would be responsible for any U.S. income tax consequences associated with the revocable trust during his or her lifetime. As a non-U.S. person, the grantor should only be subject to limited U.S. income taxation on 1) nonexempt “passive” U.S.-source income;9 and 2) income effectively connected with the conduct of a U.S. trade or business (ECI).10 In the trust structure outlined above, the only asset directly held by the trust is an FC during the grantor’s lifetime. Accordingly, the grantor would not have been liable for any U.S. income tax with respect to any income received from the trust as any such income would have been non-U.S.-source (e.g., a dividend from an FC).11 Any U.S. income tax liability would have been borne by the FC under rules similar to those discussed above in relation to a non-U.S. person.12 A U.S. person beneficiary of the trust would generally not include any of the income of the grantor trust in gross income being only a “future” beneficiary.
As long as the FC was properly formed, structured, and maintained, no assets of the trust should be subject to U.S. estate tax upon the passing of the non-U.S. person grantor because all assets would have been held through an FC.13 Upon the death of said grantor, the trust ceases to be a grantor trust (assuming no other power makes the trust a grantor trust toward another taxpayer), and unlike a grantor trust (which is ignored as a taxable entity separate from the grantor), a nongrantor trust is a taxable entity for U.S. tax purposes.14 A complete and detailed discussion of the income tax rules relating to nongrantor trusts and their beneficiaries is beyond the scope of this article.15 The focus herein relates to the tax consequences that devolve upon the domestic nongrantor trust or U.S. person beneficiaries of a foreign nongrantor trust owning a CFC.16
As a result of the transition from grantor to nongrantor trust status, consideration needs to be given to the cost basis the non-grantor trust has in the assets thereunder (in our example, the basis in the FC). Generally, the property’s cost basis in the hands of a person acquiring property from a decedent will be the property’s fair market value at the date of the decedent’s death.17 This adjustment in basis can be quite beneficial in the case of an asset with unrealized appreciation at the time of the decedent’s death. A “step up in basis” may be afforded without a corresponding income tax consequence.18 In addition, non-U.S.-situs property that is inherited by a U.S. person from a non-U.S. person’s estate should receive a basis adjustment at death (even if not includible in the decedent’s U.S. gross estate).19 The same is not necessarily true in relation to assets that pass via trust from a non-U.S. person. When dealing with a deceased non-U.S. person grantor, a revocable trust generally receives a basis adjustment of its assets upon the grantor’s death if the grantor retained the power to revoke the trust as well as the power to direct or order income distributions from the trust.20 For the purposes of this article assume that the grantor retained both powers allowing the trust to receive a step up in the basis of its assets.
During the lifetime of the grantor, the tax consequences associated with the underlying structure (including the FC) were attributable to the grantor.21 Upon the death of the grantor, that would no longer be the case, and the rules associated with the CFC regime need to be considered. An FC is a CFC if U.S. shareholders own more than 50 percent of the FC stock (by vote or value).22 A U.S. shareholder is a U.S. person who owns either directly or indirectly, through one or more foreign entities or through the application of certain constructive ownership rules, at least 10 percent of the total combined voting power of all classes of stock entitled to vote, or who owns 10 percent or more of the total value of shares of all classes of stock of an FC.23 In the case of a domestic nongrantor trust, the trust itself would be the U.S. shareholder.24 In the case of a foreign nongrantor trust, attribution rules may apply providing that a beneficiary will be deemed to own his or her proportionate share of any stock owned directly or indirectly by a trust.25 So as to avoid a lengthy discussion on CFC trust attribution, assume that any foreign nongrantor trust discussed herein only has U.S. person beneficiaries, the FC is a CFC, and that via attribution, the U.S. person beneficiaries are the U.S. shareholders.26
The general rule, prior to the enactment of the act, provided that if an FC was a CFC for an uninterrupted period of 30 days or more during the taxable year, then each U.S. shareholder (who owned or was deemed to own stock on the last day of the year) was to include in income the sum of said shareholder’s pro-rata share of subpart F income.27 Generally, and although much broader in concept, subpart F income includes passive investment income (e.g., interest, gains, and dividends) generated by an FC and known as foreign personal holding company income (FPHCI).28 The act eliminates the requirement for a holding period of “an uninterrupted period of 30 days or more” and replaces it with the phrase “at any time,” causing each impacted U.S. shareholder to include in income the sum of said shareholder’s pro rata share of subpart F income regardless of how long the U.S. shareholder owns or is deemed to own the CFC stock.29 As a result and as discussed below, a possible trap for the unwary may lurk.
Continuing with the ongoing example, prior to the act, it was a common planning technique to cause a deemed liquidation of the FC by filing Form 8832 (wherein the FC would make a check-the-box election to be treated as a disregarded entity). Said deemed liquidation would occur less than 29 days after the date of death of the non-U.S. person grantor. In the example provided, the trust receives a cost-basis adjustment in the FC shares equivalent to the fair market value of said FC as of the grantor’s date of death.30 As a result, the deemed liquidation of the FC immediately thereafter would result in nominal gain at the trust level as the value of the portfolio (which would be the fair market value of the FC) upon liquidation should be close to, if not the same as, the fair market value of the trust’s basis in the FC upon the grantor’s death.31 Said gain, if any, would likely be taxable to a domestic nongrantor trust (unless part of the distributable net income paid out to any given beneficiary) and included in the distributable net income of a foreign nongrantor trust.32 Although the deemed liquidation of the FC addresses the recognition of gain in relation to the trust’s outside cost basis in the shares of the FC, it does not address the FC’s passive earnings from the grantor’s death and does not address the unrealized appreciation the FC has in the investment portfolio assets. Upon the FC’s deemed liquidation, the FC is also seen as selling all of its assets.33 The trust would then have a new basis in each asset formerly held by the FC at a value equal to the fair market value on the date of the deemed liquidation.34 The gain earned by the CFC, assuming there is a gain, would be passive and would generally be considered FPHCI.35 As a result, the gain would be treated as subpart F income taxable to each U.S. shareholder.36 As such, prior to the act, if the FC was liquidated less than 29 days after the date of the non-U.S. person grantor’s death, the FC would not be a CFC for an uninterrupted period of 30 days or more. Therefore, each U.S. shareholder would not have been required to include in income the sum of said shareholder’s pro rata share of subpart F income.37 Prior to the act, upon the death of the grantor in the exemplified scenario, there would have been a tax-free basis adjustment not only in the shares of the FC, but also in the underlying investment portfolio held in the name of the FC upon the deemed liquidation, and, as a result, little to no income or gain would be generated, and the trust structure would have a new basis in all of its investment portfolio assets.38
With the elimination of the reference to “an uninterrupted period of 30 days or more,” each U.S. shareholder who holds or is deemed to hold stock would be required to include in income the sum of said shareholder’s pro rata share of subpart F income regardless of how long the U.S. shareholder holds stock in the CFC.39 Although the trust would still receive an adjustment in basis in the shares of the FC upon the death of the non-U.S. person grantor, if the same liquidating event were to take place as was the case prior to the act, the FC’s unrealized appreciation in the investment portfolio would now, in part or whole, be subject to tax in the United States as subpart F income (even if the FC was deemed liquidated one day after the grantor’s death).40 Prior to the act, tax on the subpart F income was avoided because the liquidating event would occur before the occurrence of an uninterrupted period of 30 days or more.
As a result of the act, the traditional plan of action as being exemplified in this article could be problematic. The question then arises whether there are any planning alternatives that can be utilized in order to achieve the beneficial planning results which traditionally were planned for prior to the enactment of the act. U.S. tax practitioners should consider some alternatives.
For starters, it may be advisable to guide clients to use a separate FC for non-U.S.-situs assets. In relation to the non-U.S.-situs assets, it is important to note that non-U.S. situs assets are not included in the U.S. gross estate of a non-U.S. person (e.g., the FC in the ongoing example).41 To avoid any added complication of the CFC regime, and as to the FC holding the non-U.S.-situs assets, a retroactive check-the-box election could be made effective on the date of the grantor’s death.42 There would be no U.S. income tax liability to the non-U.S. person grantor, because the deemed sale of the foreign assets (from the deemed liquidation) would not produce any U.S. source income.43 The tax consequences of the liquidation are solely attributable to the non-U.S. person grantor (as the trust would still be a grantor trust prior to death).44 The result would be as if the trust was holding the non-U.S.-situs investment portfolio directly at a new basis equivalent to the fair market value as of the date prior to the effective date on Form 8832. Moreover, upon the grantor’s death, there would be no exposure to the U.S. estate tax, because the investment portfolio would be entirely non-U.S.-situs assets.45 It appears traditional planning will still work, although somewhat modified, in relation to a non-U.S.-situs investment portfolio held in the name of an FC.
The problem appears to be with the U.S.-situs investments. If one were to cause a deemed liquidation of an FC holding a U.S.-situs investment portfolio prior to the grantor’s date of death, then upon the grantor’s date of death, the non-U.S. person grantor would likely be seen as owning the U.S.-situs investment portfolio. Thus, the U.S.-situs investment portfolio would likely be included in the non-U.S. person grantor’s U.S. gross estate and subject to the U.S. estate tax.46 It appears the use of the FC is still necessary to shield such assets from the U.S. estate tax.47 With that said, the traditional planning used prior the act can no longer be used without risking some form of U.S. income taxation to U.S. shareholders (as “cleansing” before the occurrence of an uninterrupted period of 30 days or more is no longer allowed under the CFC regime and subpart F income rules).
When one looks to the computation of the U.S. shareholder’s pro rata share of subpart F income, the consequences, in most cases, may not be as daunting as one would initially think. In general, the pro rata share of subpart F income is the amount that would have been distributed with respect to the stock that such shareholder owns48 in such FC if on the last day, in its taxable year, on which the FC is a CFC it had distributed pro rata to its shareholders an amount 1) which bears the same ratio to its subpart F income for the taxable year, as 2) the part of such year during which the FC is a CFC bears to the entire year.49
Consider the scenario in which a U.S. shareholder owned 100 percent of the only class of a CFC throughout an entire calendar year. In that case, if the CFC derives $100 of subpart F income, has earnings and profits, and makes no distribution, the U.S. shareholder would include $100 in gross income for said calendar year.50 Using the same facts as above, now the U.S. shareholder, instead of holding 100 percent of the stock of the CFC for the entire year, sells 60 percent of such stock to a nonresident alien on May 26. In this scenario, the FC is a controlled foreign corporation for the period January 1 through May 26. Said U.S. shareholder must include $40 ($100 x 146/365) in gross income for the calendar year.51 This concept is of importance as it gives the U.S. shareholder a methodology to determine what his or her pro rata share of subpart F income would be upon the death of the non-U.S. person grantor. Assume in our ongoing example that the non-U.S. person grantor died on March 30 with the check-the-box election being made with an effective date of April 1 (thus causing the deemed liquidation to occur on March 31). In computing the pro rata share of subpart F income, the U.S. shareholder would include as subpart F income 1.111 percent of each dollar of income and gain (one day of being a CFC over 90 days of the FC’s existence in the calendar year up until liquidation). In this regard, if you had a $500,000 gain triggered by the deemed liquidation of the FC, then the U.S. shareholder would include $5,555.55 in income as the sum of his or her pro rata share of subpart F income ($500,000 x 1/90).
In a way, depending on when death occurs, U.S. tax practitioners and their clients may find the results palatable in relation to the CFC holding period before and after the act. For example, a death on January 10 would result in the U.S. person including 9.09 percent of the sum of his or her part of subpart F income, a death on June 30 would result in a 0.54 percent amount and death on December 30 would result in a 0.27 percent amount. All in all, it appears that a death earlier in the year poses a greater concern with one possible trap for the unwary that is not so palatable. Assuming the taxpayer was on a calendar year, if the non-U.S. person grantor’s death were to occur on December 31, the effective date of the check-the-box election would be January 2 of the following calendar year. Remember, if the check-the-box election were effective January 1, the deemed liquidation would occur on December 31 and potentially expose any U.S.-situs assets to U.S. estate tax. In this situation, the U.S. beneficiary will be subject to his or her pro rata share of subpart F income, and, the amount included for the purposes of subpart F income will be the one day of FPHCI earned (which amount includes the gain recognized on the unrealized appreciation in the U.S. investment portfolio as a result of the check-the-box election and resulting deemed liquidation). The entire gain would be included because the FC would have been a CFC for the entire year comprised of the one day.52 For a death occurring on January 1, a similar result occurs as the FC will be a CFC upon death up until liquidation.
In the event any of these scenarios are concerning, as to the U.S.-situs investment portfolio assets, consideration should be given to using a combination of three FCs that are all eligible entities and able to make check-the-box elections.53 The foreign grantor trust would wholly own two FCs (upper-tier FCs).54 Each upper-tier FC would own 50 percent of the shares of the third FC (lower-tier FC). The lower-tier FC would own the U.S.-situs investment portfolio.55
Within 75 days after the death of the grantor, the lower-tier FC would make a check-the-box election to be classified as a partnership for U.S. tax purposes (with an effective date the same as the date of grantor’s death). The lower-tier FC should be treated as if it distributed all of its assets and liabilities to its two shareholders (i.e., the upper-tier FCs) in complete liquidation on the day before the effective date of the election.56 The upper-tier FCs deemed receipt of the lower-tier FC’s assets should be treated as amounts received in exchange for their stock in the lower-tier FC.57 As a result of the fact that this liquidation does not qualify as a nonrecognition event for U.S. tax purposes,58 the basis of the lower-tier FC’s former assets in the hands of its corporate shareholders (i.e., the upper-tier FCs) will be the fair market value of said assets on the day prior to the effective date of the check-the-box election.59 The gain, if any, on the disposition of the U.S. investment portfolio in this deemed liquidation would not be subject to U.S. income tax.60 As the above relates to pre-death events, the CFC rules would not yet be applicable.
The two upper-tier FCs would also make check-the-box elections, but in the case of the upper-tier FCs, each upper-tier FC would elect disregarded entity status and utilize an effective date on the Form 8832 two days after the non-U.S. person grantor’s death. By making these check-the-box elections two days after death, the deemed liquidation will occur a day after the non-U.S. person grantor’s death. As a result, on the date of death, the non-U.S. person grantor should be seen as holding the shares of the upper-tier FCs through the revocable trust. As noted above, non-U.S.-situs assets should not be subject to the U.S. estate tax. Additionally, if held through a properly drafted revocable trust, the trust’s cost basis in the upper-tier FCs should be the fair market value on the non-U.S. person grantor’s date of death. As a result, there should be nominal gain to the trust as a result of the deemed liquidation of the upper-tier FCs. As there is now a U.S. taxpayer (i.e., either the domestic nongrantor trust or U.S. person beneficiaries of a foreign nongrantor trust), the upper-tier FCs will become CFCs, and, thus, any unrealized appreciation in the investment portfolio (or any other FPHCI) would now be subject to tax in the United States as subpart F income. With that said, the deemed liquidations of the upper-tier FCs should produce nominal gain recognition on the deemed sale of assets held in the investment portfolio. If you recall, two days earlier, each asset held by the upper-tier FCs received a basis adjustment as a result of the deemed liquidation of the lower-tier FC. The basis in any such investment portfolio asset would be the fair market value of such asset as of the day prior to the effective date of the lower-tier FC’s check-the-box election (which was only a few days earlier). In this regard, although now exposed to the CFC regime, there should be nominal subpart F income as there would have been a tax-free basis adjustment not only in the shares of the upper-tier FCs but also in the underlying investment portfolio initially held in the name of the lower-tier FC.61
All in all, U.S. tax practitioners with foreign grantor trusts will need to reevaluate post-mortem planning techniques as a result of the aforementioned change to the CFC rules. Potential risk will need to be explored and different planning techniques may need to be considered to assist clients in obtaining post-act U.S. tax result similar to those obtained prior to the act.62
1 A non-U.S. person for all U.S. tax purposes would mean a non-U.S. citizen who is a U.S. income tax nonresident alien (NRA) as well as a nonresident alien domiciliary for U.S. transfer tax purposes (NRAD). U.S. transfer taxes include estate, gift, and generation-skipping transfer taxes. See I.R.C. §7701(b) for the definitions pertaining to a U.S. income tax resident alien (RA) and an NRA. Status as a resident alien domiciliary (RAD) or NRAD is a facts and circumstances determination generally based around the concept of domicile. See Treas. Reg. §20.0-1(b).
2 This article focuses on U.S. income tax issues associated with a trust beneficiary who is a U.S. person (i.e., a U.S. citizen or RA). The U.S. transfer tax status of such a beneficiary is not relevant for this discussion.
3 A business entity that is not classified as a corporation is an eligible entity that can elect its U.S. tax classification on Form 8832 (Entity Classification Election). See Treas. Regs. §§301.7701-2 and 301.7701-3.
4 Assume for this discussion that there are no U.S. real property interests held in the structure, as such holdings bring about other issues beyond the scope of this article. It is important to note that the FC needs to be relevant to ensure default classification as a corporation for U.S. tax purposes. See Treas. Reg. §301.7701-3(d). The FC would likely be relevant as a result of the Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Withholding and Reporting (Entities)) on file with the financial institution. See Treas. Reg. §301.7701-3(d).
5 See Treas. Reg. §301.7701-3. Generally, an election may specify an effective date up to 75 days prior to the date on which the election is filed. See Treas. Reg. §301.7701–3(c)-(1)(iii). Although formal liquidation in the FC’s jurisdiction would work as well, tax practitioners generally agree that the process is too lengthy for planning accuracy.
6 See Treas. Reg. §301.7701-3(g).
7 See I.R.C. §951, et seq. This article conservatively assumes that the CFC holding period of the U.S. person begins on the date of death. Unless otherwise noted, all citations to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended by the act.
8 See I.R.C. §§672(f) and 671. The power can be exercised either alone or with the consent of a related or subordinate party who is subservient to the grantor.
9 Nonexempt “passive” income from U.S. sources is commonly known as “FDAPI” (e.g., dividends from U.S. corporations, interest payments by certain U.S. persons, U.S. real estate rents, etc.). FDAPI is generally subject to tax at a flat 30 percent rate without the benefit of deductions. See I.R.C. §871(a).
10 See I.R.C. §871(b). ECI is generally subject to tax at graduated rates and entitled to deductions. ECI includes U.S. real estate gains and See I.R.C. §897.
11 See Treas. Reg. §1.861-3(a)(3).
12 See generally I.R.C. §§865, 881, and 882.
13 The value of the gross estate of every NRAD is that part of the gross estate which at the time of death is situated in the United States. Shares of an FC should be considered a non-U.S.-situs asset. See I.R.C. §§2103, 2104 and 2105.
14 Accord I.R.C. §641(b).
15 See I.R.C. §§641 through 668. The passive foreign investment company regime and the taxation thereon is beyond the scope of this article but should be considered. See I.R.C. §§1291, et seq.
16 A trust is domestic if 1) a court within the U.S. exercises primary supervision over the trust’s administration; and 2) one or more U.S. persons control all substantial decisions of the trust. See I.R.C. §7701(a)(30)(E). A trust is foreign if it fails to meet either or both of the foregoing. See I.R.C. §7701(a)(31)(B).
17 See I.R.C. §§1014(a)(1) and 1014(b).
18 Such an adjustment is only beneficial to the extent the asset has appreciated because the basis adjustment can also result in a “step down in basis” if the asset at hand has depreciated. Id.
19 See, e.g., Rev. Rul. 84-139 and I.R.C. §1014(b)(1). See also I.R.C. §1014(b)(9) and Treas. Reg. §1.1014-2(b)(2).
20 I.R.C. §1014(b)(2).
21 See I.R.C. §671.
22 I.R.C. §957(a).
23 I.R.C. §951(b).
24 See I.R.C. §§951(b) and 957(c).
25 I.R.C. §958(a)(2). See also Treas. Reg. §1.958-1(b).
26 In the case of beneficial trust interests that are discretionary in nature arguments can be made against attribution.
27 See I.R.C. §§951(a)(1)(A) and 958(a). Also included in the gross income of a U.S. shareholder were earnings generated by the CFC when invested in certain U.S. property. See also I.R.C. §§951(a)(1)(B) and 956.
28 See I.R.C. §952(a). See also §§954(a)(1) and 954(c). As this article focuses on investment portfolio assets, FPHCI is the primary form of subpart F income discussed herein.
29 I.R.C. §951(a)(1).
30 See I.R.C. §1014(b)(2).
31 Due to risks of causing U.S.-situs assets to be included in the gross estate of a non-U.S. person grantor, the timing of the effective date of the Form 8832 should be discussed with appropriate U.S. tax advisors.
32 See I.R.C. §643(a)(6).
33 See I.R.C. §331(a).
34 Id. See also §1012(a).
35 See I.R.C. §954(c).
36 See I.R.C. §§952(a)(2) and 954(a). See note 16 in relation to the passive foreign investment company regime.
37 See I.R.C. §951(a) prior to the act.
38 See I.R.C. §§1014 and 1012(a). See note 16 in relation to the passive foreign investment company regime.
39 I.R.C. §951(a).
40 Accord I.R.C. §951(a).
41 See I.R.C. §§2103, 2014, and 2015.
42 See notes 4, 6, and 32. An initial election as a disregarded entity is also possible.
43 See I.R.C. §§865. Realized gain on the shares of the FC and the appreciated investments would be foreign source.
44 See I.R.C. §671.
45 I.R.C. §2103. See also I.R.C. §§2014 and 2015.
46 See I.R.C. §§2101(a) and 2104(a).
47 But see Robert F. Hudson, Jr., The U.S. Tax Effects of Choice of Entities for Foreign Investment in U.S. Real Estate and Businesses and the Taxation of Dispositions of U.S. Partnership Interests (2005) (containing a discussion on partnership interests and the U.S. estate tax, and consider said discussion taking into account the act codifying support of Rev. Rul. 91-32).
48 “Ownership” for this purpose is defined by I.R.C. §958(a).
49 I.R.C. §951(a)(2)(A). Consider reductions in the pro rata share amount afforded by I.R.C. §951(a)(2)(B).
50 Example 1 in Treas. Reg. §1.951-1(b)(2).
51 Example 2 in Treas. Reg. §1.951-1(b)(2).
52 See Treas. Reg. 1.951-1(b).
53 See note 48. See also I.R.C. §754 in relation to certain partnership basis adjustments.
54 It is important to note that the upper-tier FCs need to be relevant. See note 5.
55 The lower-tier FC would likely be relevant as a result a Form W-8BEN-E. See note 5.
56 Treas. Reg. §301.7701-3(g)(1)(iii).
57 See I.R.C. §331(a).
58 See I.R.C. §332. A discussion of I.R.C. §332 and the requirements thereunder is beyond the scope of this article.
59 See I.R.C. §334(a).
60 See I.R.C. §865.
61 See I.R.C. §§332, 334, 1014(a), and 1012(a). But see I.R.C. §7701(o) for the economic substance doctrine, which could be argued to negate the structure if there is no business purpose for the upper-tier FCs. Consider using two separate trusts that each own one FC; such trusts should have different beneficiaries and purposes.
62 Other planning techniques are available. During foreign grantor trust status, consideration should be given to having an FC periodically sell its assets followed by an asset repurchase. Unrealized appreciation in the assets sold could be realized and “cleansed” with the FC having an updated cost basis in new assets. This allows the FC to have a “fresh” cost basis in assets that approximates, as nearly as possible, the value of such assets on the date of the grantor’s death.
Scott Snyder is a tax attorney at Packman, Neuwahl & Rosenberg, P.A., and focuses on international tax planning for high net-worth individuals, subpart F planning, treaty issues, partnership and corporate taxation. He obtained his law degree and LL.M. in taxation from the University of Miami School of Law.
Todd Rosenberg is a shareholder at Packman, Neuwahl & Rosenberg, P.A., and practices in the area of international tax, trust and estate planning for high net-worth clients. He obtained his law degree from Nova Southeastern University and his LL.M. in taxation from the University of Miami School of Law.
The authors thank Jose L. Nunez and Shawn P. Wolf for their input, thoughts, and discussion.
This column is submitted on behalf of the Tax Law Section, Joseph B. Schimmel, chair, and Christine Concepcion, Michael D. Miller, and Benjamin A. Jablow, editors.