Rent-free use of Trust property: A trap

for unwary US beneficiaries of foreign trusts

Read our article in the Cayman Financial Review Magazine, eversion 

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.

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Steven L. Cantor

Steven is managing partner of Cantor & Webb P.A., a Miami based law firm focused on the representation of high net worth private international clients and handles a variety of complex foreign trusts with US assets and/or beneficiaries, tax and estate planning for multinational families, pre-residency matters and structuring on foreign investment in the US.

Steven L. Cantor
Managing Partner
Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 1001
Miami, FL 33131, USA

T: +1 (305) 374 3886
E:
steve@cantorwebb.com
W:
www.cantorwebb.com  

Arthur J Dichter

Mr. Dichter counsels U.S. individuals and companies with operations abroad as well as foreign individuals and companies with operations in the United States. He assists U.S. and foreign individuals and entities with the acquisition of U.S. and non-U.S. companies. This work includes consulting, structuring, and assisting with the implementation and compliance related to such acquisitions. He also structures expansion projects, including analysis of holding company structures.

Born and raised in southern New Jersey, Mr. Dichter was admitted to the New Jersey Bar in 1989, the District of Columbia Bar in 1990 and the Florida Bar in 2011. He is a member of the Taxation Section of the American Bar Association and is on the Steering Committee of the International Fiscal Association’s Miami Chapter. He is an Associate Member of the Florida Institute of Certified Public Accountants where he serves on the International Tax Committee.
 

Arthur J Dichter
Partner
Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112,
Miami, FL 33131
United States

T: +1 (305) 374-3886            
E: art@cantorwebb.com            
W: www.cantorwebb.com
 

 

Cantor & Webb P.A.

Cantor & Webb P.A. is focused exclusively on the representation of high-net worth international private clients and their families in tax and estate planning, tax compliance, wealth preservation, probate and property matters.

The firm is considered one of the leading boutique international tax and estate planning law firms servicing predominantly Latin American, Caribbean and European clientele. With seven attorneys specializing in the representation of high net worth international families and a multi-lingual staff that totals an additional sixteen people, the law firm rivals in size the private international client practice groups of many larger law firms.

Clients are often referred by major international financial institutions and law firms which understand that the personalized service and advice which Cantor & Webb P.A. provides to its clients brings great value in the resolution of many difficult and complex projects, including tax and estate planning for multinational families, tax compliance, pre-immigration matters, foreign investment in the United States, foreign trusts with United States assets and/or beneficiaries and foreign companies doing business within the United States.

Often used as the legal and tax component of the family office by some of its top international private clients, the firm has established a concierge oriented practice which caters to its clients' unique needs while taking great pride in going above and beyond the usual scope of work.

The firm philosophy remains providing a personalized service much more like the doctor who treats the patient rather than the doctor who merely treats the symptoms of the disease. 

Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112,
Miami, FL 33131


T: +1 (305) 374 3886
E:
steve@cantorwebb.com
W:
www.cantorwebb.com