HIRE Act Affects Foreign Trusts and Imposes Additional Requirements on U.S. Persons with Foreign Accounts

On March 18, President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847) (the "Act"), which includes several unrelated revenue raising provisions affecting foreign entities and individuals with certain foreign assets that were originally proposed as part of the Foreign Account Tax Compliance Act of 2009.

These provisions create significant changes in the rules governing foreign trusts and their trustees, resulting in a new category of deemed distributions of foreign trust property and a broader application of the rules that treat contributors to foreign trusts as the owner of the trust for income tax purposes. In addition, there are a number of provisions that increase withholding obligations on foreign banks, trusts and other entities and impose additional reporting requirements on US persons with certain foreign assets.

  1. Use of Foreign Trust Property. U.S. individuals who have been enjoying rent-free use of real estate owned by a foreign non-grantor trust may no longer be able to use such property free from rent without tax consequences. If the foreign non-grantor trust has current or accumulated income, the rent-free use of the property will be taxable to the U.S. person. Under this provision of the new law, which applies to uses of property after the date of enactment, such use by the U.S. grantor, U.S. beneficiary or any U.S. person related to such grantor or beneficiary after the enactment date of the Act is deemed to be a distribution of the fair market value of the use of the property to the U.S. person, unless the U.S. person using the property pays fair market rent for such use. This law also applies to the uncompensated use of artwork or other items of tangible personal property. Determining the value of the use of such tangible property will likely be problematic.

  2. Expanded Reporting Requirements in Addition to FBARs. Under existing law, every U.S. person who has a financial interest in, or signature authority over, bank, securities or financial accounts in a foreign country must file an FBAR for each calendar year in which the aggregate value of the accounts exceeds $10,000. For taxable years after 2010, in addition to the existing FBAR reporting requirements, U.S. individuals must now also disclose "an interest in a 'specified foreign financial asset'" by attaching a disclosure statement to their individual income tax returns reporting any interest in the following assets if the aggregate value of such...

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