The Foreign Account Tax Compliance Act (FATCA) was enacted to prevent abuse of the US voluntary tax compliance system and to address the use of offshore accounts to facilitate tax evasion. The Internal Revenue Service hopes that FATCA will strengthen the integrity of the US voluntary tax compliance system by requiring foreign financial institutions, beginning in 2015, to identify and report information regarding their US account holders.
In order for the Internal Revenue Service (IRS) to gather information on the foreign financial assets of US persons, more than 145,000 financial institutions have registered through the IRS Foreign Account Tax Compliance Act (FATCA) registration system. FATCA requires these financial institutions to report information on their US account holders beginning in 2015 for reporting year 2014.
For a foreign trust with a foreign professional trust company as trustee, compliance with the Foreign Account Tax Compliance Act (FATCA) is relatively straightforward. However, a private trust company that is not in the business of providing trustee services for compensation should assess its options with regard to how it complies with FATCA.
When the United States and the offshore jurisdictions negotiated intergovernmental agreements in order to implement the Foreign Account Tax Compliance Act (FATCA), they added a category of deemed-compliant foreign financial institution that is not in the final FATCA regulations: the trustee-documented trust. Financial institutions have now begun asking trustees of trustee-documented trusts to provide a FATCA certificate for the trust.
Including: Gift tax; Estate tax; Generation-skipping transfer tax; Income tax; Income tax residency and transfer tax domicile; Anti-avoidance rules; US citizens and green card holders living abroad; Expatriation; Taxation of trusts; Increased reporting obligations; Foreign Account Tax Compliance Act.
As advisers review succession planning structures to determine each foreign entity's Foreign Account Tax Compliance Act classification, they should consider whether each entity has been maintained in a manner consistent with income and estate tax results. Non-US individuals should also prepare for their US bank account information to be reported to their home country's tax authorities.
Withholding is soon scheduled to begin on certain payments of US source income to non-US entities that are not compliant with the Foreign Account Tax Compliance Act (FATCA). International families and their trustee companies are advised to familiarise themselves with the revised compliance deadlines and review succession planning structures to determine where FATCA withholding could take place and then take the necessary steps to prevent it.
The Internal Revenue Service (IRS) recently posted to its website updated model intergovernmental agreements which it is using to implement the 2010 Foreign Account Tax Compliance Act. Changes to the model agreements highlight the IRS's current thinking as implementation moves forward.
It is time for advisers to international families to assess the classifications of the family office, trust company, trusts and holding companies within the family's succession planning structures under the Foreign Account Tax Compliance Act and any relevant intergovernmental agreements, regardless of whether such entities currently have US owners, beneficiaries or investments.
The American Taxpayer Relief Act 2012, which was signed into law by the president on January 2, provides some certainty for international families as they address their succession planning and begin to move wealth to the next generation. In addition, clarification of the Foreign Account Tax Compliance Act has been provided by new final regulations, but the full impact on foreign trusts and their offshore trustees is still to be determined.
Advisers to international families know that the US tax laws will change in the new year and that the implementation of expanded reporting obligations will continue. In this uncertain environment, advisers do their best to help with investment and succession-planning decisions involving complex questions of law, tax and business planning.
The Tax Relief, Unemployment Insurance Reauthorisation and Job Creation Act of 2010 created advantageous tax and wealth-planning opportunities that are scheduled to expire on December 31 2012. Advisers to international families should be aware of these opportunities as it may be advantageous for US family members to take advantage of them while they still exist.
Significant planning opportunities now exist for both US and non-US trusts using state decanting laws. State initiatives are responding to the need to provide flexibility in trust administration, while the tax authorities are studying the tax implications of trustee distributions of all or a portion of the principal of an irrevocable trust to another irrevocable trust.
The Internal Revenue Service has released Form 8938 – Statement of Specified Foreign Financial Assets. Certain individual US taxpayers must use the form to report information about specified foreign financial assets for the 2011 tax year. Advisers to international families should bring this filing requirement to the attention of US beneficiaries of foreign trusts, as certain interests in foreign trusts are considered specified foreign financial assets.
The Dodd-Frank Act removed an exemption from registration previously available for investment advisers with fewer than 15 clients to enable the Securities and Exchange Commission to regulate private fund advisers. A family office falling within the definition of 'investment adviser' has until March 30 2012 either to register or to qualify for the new single family office exemption.
After passing major tax legislation in 2010 and following up with some regulations and guidance notices, the US tax authorities have now released new forms and additional guidance on reporting foreign accounts and the use of foreign trust property. However, despite the new guidance, US tax compliance continues to be complicated and burdensome.
The Internal Revenue Service (IRS) has announced a 2011 Offshore Voluntary Disclosure Initiative, available until August 31 2011. Following the previous initiative, which closed on October 15 2009, the new initiative is again designed to enable taxpayers to bring offshore money into the US tax system and to help those taxpayers become compliant with their US tax and reporting obligations.
US persons with financial interests in, or signature over, foreign bank accounts are required to report such interests in a foreign bank account report (FBAR). On February 24 2011 FinCEN issued a comprehensive final rule amending the Bank Secrecy Act regulations regarding FBARs, requiring reports for accounts exceeding $10,000 and maintained in 2010 to be filed by June 30 2011.
Tax practitioners and family advisers had their work cut out in 2010, wrestling with various changes and new rules; the new year promises more of the same. The Tax Relief, Unemployment Insurance Reauthorisation and Job Creation Act 2010 has provided some certainty, but new forms and guidance are still awaited for earlier reporting and tax laws.
For more than 20 years advisers to US beneficiaries of foreign non-grantor trusts have struggled with the US passive foreign investment corporation rules, which attribute stock owned by a non-grantor trust to its beneficial owners. The American College of Trust and Estate Counsel recently made recommendations to the US Treasury on how regulations could be drafted to avoid tax on phantom income for US beneficiaries.