Rent-Free Use of Trust Property: A Trap for Unwary U.S. Beneficiaries of Foreign Trusts
By Steven L. Cantor and Arthur J. Dichter, Cantor & Webb P.A
By now many people have become aware of the new onerous reporting and withholding tax requirements implemented by the Foreign Account Tax Compliance Act ("FACTA"). 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 the real estate industry. This new tax provision impacts U.S. persons who use property owned by a foreign trust without paying fair market value rent for such use.
If a foreign trust permits the U.S. grantor, a U.S. beneficiary, or any U.S. person related to the U.S. grantor or U.S. beneficiary to use trust property on a rent-free basis, whether the real estate is owned directly or indirectly by the foreign trust, the U.S. 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 real property may be located. In addition to real estate, this rule would also apply to the use of other trust property, such as aircraft, boats, cars, artwork, etc. if it is owned directly or indirectly by a 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 U.S. person may potentially be subject to onerous tax and reporting consequences. Any U.S. 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 March 18, 2010.
If a foreign trust involves a U.S. grantor, U.S. beneficiary, or other U.S. person who may benefit from trust property, U.S. tax counsel should be consulted in order to determine the U.S. 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.
Steven L. Cantor
Arthur J. Dichter
Cantor & Webb P.A. is considered one of the leading boutique law firms in the field of international tax and estate planning for high net worth international private clients and their families. Servicing predominantly Latin American, Caribbean and European clientele. We have established a legal concierge oriented practice which caters to the unique needs of our international private clients. We take great pride in establishing long-lasting relationships with our clients and in going above and beyond the usual scope of work to ensure their needs are met.