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International Tax Blog - New and Interesting International Tax Issues

Uncompensated Use of Foreign Trust Property


As a result of 2010 changes to Code §643(i)(1), the use of foreign trust property by a U.S. grantor, a U.S. beneficiary, or a U.S. person related to the U.S. grantor or the U.S. beneficiary is treated as a distribution of the fair market value of the use of the property to the U.S. grantor or U.S. beneficiary.  The use of the property is not treated as a distribution to the extent that the trust is paid the fair market value for the use of the property within a reasonable period of time.

For example, say a U.S. individual is a beneficiary of a foreign trust that was created by a nonresident alien relative, and the foreign trust owns a family home located outside the U.S.  The family home is available for personal use by the U.S. individual and by other nonresident alien family members.  If the U.S. individual visits the home for a two week vacation, without paying rent for the two weeks, the U.S. individual will be treated as having received a distribution from the foreign trust in an amount equal to the fair market value of the use of the home for the two week period.

This deemed distribution would trigger a requirement to file Form 3520 for that year.  It is important to note that the penalty for failure to timely file Form 3520 is the greater of $10,000 or 35% of the deemed distribution, unless the failure can be shown to be due to reasonable cause and not to willful neglect.

An interesting question would be whether uncompensated use of the foreign home by a nonresident alien relative of the U.S. beneficiary, where the nonresident alien relative was also a beneficiary of the foreign trust, would trigger a deemed distribution and a Form 3520 filing requirement to the U.S. beneficiary.

Tags: 6048 Foreign Trusts, Form 3520 / 3520-A