Saturday, July 31, 2010
A widely distributed article recently published by some attorneys contains some dire warnings about the adverse income tax consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A because the IRS currently holds Fideicomisos to be foreign trusts). The conclusions in this article are most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to in the near future) issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts. What the regulations or further guidance may say is pure speculation. The general principles of trust taxation which are most likely to apply are stated in the next paragraph.
Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).
You must keep in mind that until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not "twist" its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.