for unwary US beneficiaries of foreign trusts
By now most of the offshore financial industry has become painfully aware of the new onerous reporting and withholding tax requirements implemented by the Foreign Account Tax Compliance Act.
Another important tax change adopted at the same time as FACTA, however, has received much less publicity, although it may have a significant impact on trusts which either directly or indirectly hold personal assets such as homes, boats, automobiles, planes and works of art.
This new tax provision may require US persons who use such real and personal property owned by a foreign trust without paying fair market value rent to report and possibly pay tax, for such use.
If a foreign trust permits the US grantor, a US beneficiary, or any US person related to the US grantor or US beneficiary to use trust property on a rent-free (or below-market rent) basis, whether such property is owned directly or indirectly by the foreign trust, the US person will be treated as having received a distribution from the trust in an amount equal to the fair market value of the use of the property (less any amount actually paid for such use).
This rule applies regardless of where the property may be located or the governing jurisdiction of any underlying holding company which may have been formed by the foreign trust.
The tax consequences of such a deemed trust distribution will depend on many factors including whether the trust is a grantor trust or a nongrantor trust. If the trust is treated as a nongrantor trust, the US person may potentially be subject to onerous tax and reporting consequences.
Any US person who uses property owned directly or indirectly by a foreign trust should ensure that fair rental value is paid for such use within a reasonable period of time. This new rule became effective for use of trust property after 18 March, 2010.
If a foreign trust involves a US grantor, US beneficiary or other US person who may benefit from trust property, US tax counsel should be consulted in order to determine the US tax consequences of rent-free use of trust property as well as the myriad planning opportunities available to reduce or eliminate such consequences.
With the increased mobility of people and property there is an increased likelihood that this law may pose a trap for the unwary.