Election by Foreign Trust To Be Treated as a Domestic Trust

If you are a foreign trust that wants to relieve its U.S. recipients from liability under section 2801 for tax on distributions from the trust, you must make a valid election to be considered an electing foreign trust that is treated as a domestic trust solely for purposes of the section 2801 tax.

A valid election requires the electing foreign trust to pay the section 2801 tax on:

• All covered gifts and covered bequests received by the foreign trust during the first year of the election; and

6 Instructions for Form 708 (12-2025)

• The portion of the foreign trust attributable to covered gifts and covered bequests received by the trust before the first year of the election. This portion is computed by multiplying the section 2801 ratio by the fair market value of the trust on December 31st of the immediately preceding calendar year.

The effect of a valid election is to treat the trust as a domestic trust for purposes of section 2801, thus making you (the electing foreign trust) responsible for reporting and paying the section 2801 tax on covered gifts and covered bequests received by the trust, and thereby relieving U.S. recipients of trust distributions from any liability under section 2801 with regard to trust distributions (as long as the valid election is in place).

You make the election on a timely filed Form 708 for the calendar year for which the foreign trust seeks to be treated as a domestic trust for section 2801 purposes. You may make the election for a calendar year whether or not the foreign trust received a covered gift or covered bequest during that calendar year. The election is effective as of January 1 of the applicable calendar year for which the Form 708 making the election is filed. The election, once made, will apply for all subsequent calendar years unless and until the election is terminated as described in Termination of domestic trust election, below. Accordingly, for covered gifts and covered bequests received after the first year of the election, the electing foreign trust pays the section 2801 tax unless and until the election is terminated.

To make a valid election to be treated as a domestic trust for purposes of section 2801, you must do the following.

1. Check the “Yes” box on Part I, line 13b on a timely filed Form 708.

2. Complete Part IV, Section 1, if applicable, to report receipts of all covered gifts and covered bequests received in the applicable calendar year (excluding distributions received from any other non-electing foreign trust).

3. Complete Part IV, Section 2, if applicable, to report receipts of distributions from any other non-electing foreign trust received in the applicable calendar year.

4. Complete Part IV, Section 3, to report all covered gifts and covered bequests received in prior calendar years and to calculate the section 2801 ratio.

5. Designate a U.S. agent by filing a Form 2848, Power of Attorney and Declaration of Representative.

Note: By designating a U.S. agent, the trustee of the trust agrees to provide the agent with all information necessary for the agent to comply with any information request or summons that is relevant to the collection or determination of tax under section 2801. For more information on the requirements and impact of this designation for purposes of the domestic trust election, see Regulations section 28.2801-5(d)(3)(iv).

6. Complete Part VII to identify the trust’s U.S. agent and report all prior distributions attributable to covered gifts and covered bequests made to a U.S. recipient.

7. Provide a copy of the governing instrument of the trust as an attachment to Form 708.

8. Complete Part VII, Section 3 to provide the name and taxpayer identification number of each permissible distributee.

Note: As used here, the term “permissible distributee” generally refers to any U.S. citizen or resident (including domestic trusts and electing foreign trusts) who currently may or must receive distributions of income or principal from the trust, any U.S. citizen or resident who currently or in the future may withdraw income or principal from the trust, or any U.S. citizen or resident who would be entitled to receive such distributions or make such withdrawals upon an immediate termination of either the trust or certain interests in the trust. See Regulations section 28.2801-5(d)(3)(ii)(F) for more information.

9. Complete Part VIII to affirm under penalties of perjury that the trustee agrees to timely file a return to report each covered gift and covered bequest made to the trust and to affirm that each permissible distributee was notified that the trustee is making (or has made) the election to be treated as a domestic trust for section 2801 purposes.

Termination of domestic trust election. If an electing foreign trust’s election to be treated as a domestic trust for purposes of section 2801 is terminated, the trust will be treated as a non-electing foreign trust as of the effective date of the termination. Upon termination of the election, the trustee should promptly notify each permissible distributee of the foreign trust that the trust’s election was terminated (or terminated and converted to an imperfect election), the effective date of the termination, and that each U.S. recipient of a distribution made from the trust on and after such effective date is subject to the section 2801 tax on the portion of each such distribution that is attributable to covered gifts and covered bequests received by the foreign trust. If an electing foreign trust’s election to be treated as a domestic trust for purposes of section 2801 is terminated, the foreign trust is not prohibited from making another election in a future year.

Terminating the election by failing to timely file a required Form 708 or timely pay the section 2801 tax. If during any calendar year the foreign trust receives covered gifts or covered bequests and subsequently fails to timely file a required Form 708 or timely pay the section 2801 tax for that calendar year, the trust’s election to be treated as a domestic trust for purposes of section 2801 is terminated effective January 1 of that calendar year.

Terminating the election in the event of an imperfect election. If the IRS disputes or otherwise challenges the computation of the section 2801 tax for any calendar year and the foreign trust fails to enter into a closing agreement and to timely pay any additional amount of section 2801 tax the IRS determined to be due, as required by Regulations section 28.2801-5(d)(6)(i), then the trust’s election to be treated as a domestic trust for purposes of section 2801 is terminated and converted to an imperfect election effective January 1 of the calendar year for which the Form 708 is filed. See Regulations section 28.2801-5(d)(6)(iii) for more details.

Note: There is an interim period beginning on the effective date of the termination of the election and conversion to an imperfect election during which both the foreign trust and its U.S. recipients are likely to continue to comply with section 2801 as it applies to an electing foreign trust with a valid election in place. For more information on the applicable rules in this situation, see Regulations section 28.2801-5(d) (6)(iii) and Example 5 of Regulations section 28.2801-5(e).

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Terminating the election by revoking the election on a timely filed Form 708. If the foreign trust revokes the election on a timely filed Form 708 for a calendar year, the trust’s election to be treated as a domestic trust for purposes of section 2801 is terminated effective January of the calendar year for which the Form 708 is filed. See section 2801(e)(4)(B)(iii) and the specific instructions for Line 13e, later.