Why is this Topic Important to Wealth Managers? Presents wealth managers with relevant law and analysis related to the HIRE Act and foreign trusts.  Also, discusses important reporting requirements regarding foreign trusts owned by U.S. persons. 

Use of Foreign Trust Property and Deemed Distributions

The new FATCA law expands 26 U.S.C. § 643(i) to provide that any use of trust property by a U.S. grantor or U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary, is treated as a distribution equal to the fair market value of the use of the property. [1] 

“Thus, the rent free use of real estate, yacht, art work or other personal property (wherever located including the United States) or an interest-free or below-market loan of cash or uncompensated use of marketable securities will trigger a distribution equal to the FMV for the use of such property to the extent of distributable net income”. [2]

However, if the trust is paid the fair market value, within a reasonable period of time, for the use of property or the market rate of interest on a loan by the trust, the new law does not create a deemed distribution. [3]

This provision is effective after March 18, 2010. 

When does a foreign trust have a U.S. beneficiary?

The new also law creates a rebuttable presumption that the trust has a U.S. beneficiary when a U.S. person directly or indirectly transfers property to a foreign trust. [4]

This presumption can be overcome by submitting information (as the Treasury may require) and by demonstrating to the satisfaction of the IRS that (i) under the terms of the trust no part of the income or corpus of the trust may be paid or accumulated during the tax year to or for the benefit of a U.S. person, and (ii) if the trust were terminated during the tax year, no part of the income or corpus could be paid to or for the benefit of a U.S. person. [5]

The presumption becomes effective after March 18, 2010.

Reporting requirement by U.S. owners of foreign trusts.

The new FATCA law also requires U.S. persons, “when treated as an owner of any portion of a foreign trust under the grantor trust rules, to provide information as may be required with respect to the trust, in addition to ensuring that the trust complies with its [traditional] reporting obligations.” [6]

“In other words, if a U.S. person is treated as the owner of a foreign trust under the grantor trust provisions, the U.S. person is responsible for ensuring that the trust files an information return for the year and that the trust provides other information to the IRS as the Treasury may require to each U.S. person who is treated as the owner of any portion of the trust or receives any distribution from the trust.” [7]

The provision is effective for tax years beginning in year 2011.

General reporting rules

If a U.S. person creates or transfers property to a foreign trust, the U.S. person generally must report this event and certain other information by the due date for the U.S. person’s tax return, including extensions, for the tax year in which the creation of the trust or the transfer occurs. [8]

If a U.S. person directly or indirectly receives a distribution from a foreign trust, the U.S. person generally must report the distribution by the due date for the U.S. person’s tax return, including extensions, for the tax year during which the distribution is received. [9]

If a U.S. person is the owner of any portion of a foreign grantor trust at any time during the year, the person is responsible for causing an information return to be filed for the trust, which must, among other things, give the name of a U.S. agent for the trust. [10]

Penalties

The new law increases penalties if the reporting requirements with respect to certain foreign trusts are not met. [11]

“Under the new law, an initial minimum penalty of $10,000 or 35 percent of the gross reportable amount may be imposed for failing to report where the Treasury has insufficient information to determine the gross reportable amount of the property transferred to a foreign trust under [26 U.S.C. § 6048].” [12]

This provision is effective to notices and returns required to be filed after December 31, 2009.

Tomorrow’s blogticle will conclude this week’s discussion of international tax compliance. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Section 531. HIRE Act. H.R. 2847. 2010.; See generally, TAXES – The Tax Magazine, FATCA: The Global Financial System Must Now Implement a New U.S. Reporting and Withholding System for Foreign Account Tax Compliance, Which Will Create Significant New Exposures—Managing This Risk (Part III). CCH. Sept. 1, 2010. ; See also Dean Marsan. FATCA: An Analysis.  21 JITAX 24, 63-64. 2010. 

[2] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.

[3] Id.       

[4] Section 532. H.R. 2847;TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; 21 JITAX 24, 63-64. 2010. 

[5] Id.

[6] 21 JITAX 24, 63.; See also, Section 534. H.R. 2847.

[7] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; See also, Section 534. H.R. 2847.

[8] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010. Citing, 26. U.S.C.§ 6048(a).

[9] Id. Citing, 26. U.S.C.§ 6048(c).

[10] Id. Citing, 26. U.S.C.§ 6048(b).

[11] Section 535. H.R. 2847.

[12] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; See generally, Section 535. H.R. 2847.