On March 18, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law, which includes several unrelated provisions intended to generate revenue. Consistent with the increased scrutiny on foreign investments that we saw in 2009, the HIRE Act includes a provision that shifts the burden of reporting foreign trusts from the foreign trustee to the domestic grantor.
First, the new law treats the rent-free use of foreign trust property as a distribution of the fair-market value of such use to the domestic user.
Second, the HIRE Act increases the likelihood that the U.S. individual will be treated as the grantor of the foreign trust and will thus be responsible for payment of income tax. The U.S. individual is treated as the grantor for property that he or she contributed to the trust if the beneficiary of such property is a U.S. beneficiary. The Act broadens the definition of a U.S. beneficiary to include a U.S. person who is a current, future or contingent beneficiary. Additionally, the trust must specifically state that no U.S. person may receive a distribution from such trust and the transferor of property must submit such verification to the IRS; otherwise the trust will be deemed to have a U.S. beneficiary.
The HIRE Act is effective for tax years beginning after March 18, 2010. Clearly, this is an extremely complex area of tax law and should only be approached with the direct counsel of an expert.