Trusts classified as foreign for US tax purposes, whether established under the law of a US state or of an offshore jurisdiction, must review whether they have any US tax or information reporting filings to make in 2019 with regard to income earned and distributions made in 2018. This article provides trust officers and family advisers with a summary checklist.
Keeping in mind US tax basis and estate tax issues while establishing and maintaining a succession planning structure can protect the estate of a non-US settlor from US estate tax and prove beneficial after the settlor's death where a branch of the family moves to the United States or a family member marries a US citizen. Recent changes to the US Tax Code have prompted some US tax advisers to suggest additional layers of entities to the structure, the additional cost and complexity of which may not result in substantial tax savings.
Trusts remain a flexible succession planning tool for families wishing to pass wealth to future generations in a responsible manner and can include philanthropic goals. The wealth-creating settlor wants to establish such a trust in a jurisdiction with well-established trust laws, a stable business environment, responsive and efficient trust officers and clearly stated comprehensive annual fees. When comparing jurisdictions, the United States should be included.
US citizens and US residents are subject to income, gift and estate taxes. Non-US persons are subject to tax on certain US income and property transfers. Advisers to international families must be able to recognise when a family member has come in contact with the US tax net and plan accordingly. This will often mean seeking advice from competent US tax counsel. Even if no tax is due, running the gauntlet of US reporting obligations requires specialised knowledge.
A limited liability company (LLC) created under the laws of a US state that is wholly owned by a single non-US person (a foreign-owned LLC) will be required to report transactions with its non-US owner and related parties to the Internal Revenue Service. Advisers to families with succession planning structures that use US foreign-owned LLCs should familiarise themselves with Form 5472 and determine whether the LLC has had any reportable transactions with its sole non-US owner or a related party.
The Internal Revenue Service (IRS) recently released an updated Form W-8BEN-E and Form W-8IMY. Non-US entities should use these new forms when requested to certify their status under the Foreign Account Tax Compliance Act. Among other things, the new forms clarify confusion over which global intermediary identification number should be reported for the trustee of a trustee-documented trust.
All over the world, financial institutions are collecting information on and reporting individuals associated with a family's succession planning trust structure. The family's interests are best served when the family office and professional advisers take a proactive approach to complying with the Foreign Account Tax Compliance Act and the Common Reporting Standard as they apply to each entity within the family trust structure.
Particularly since the US presidential election, some US citizens have moved abroad and others are considering such a move. Tax professionals and trust officers worldwide are fielding questions from these individuals, and how to advise them depends on the particular individual's objectives. Regardless of the length of time spent living outside the United States, the US citizen must be advised to continue all annual US tax reporting.
US citizens and US residents are subject to income, gift and estate taxes. Non-US persons are subject to tax on certain US income and property transfers. Advisers to international families must be able to recognise when a family member has come in contact with the US tax net and plan accordingly. This will often mean seeking advice from competent US tax counsel.
Limited liability companies (LLCs) established under the law of a US state are classified by default as disregarded entities if they have only one owner. As such, these LLCs have generally not been required to file a US tax return. Beginning with tax year 2017, US domestic LLCs that are wholly owned, directly or indirectly, by one foreign person, are now required to obtain a US tax identification number and file an annual return reporting transactions between the LLC and its foreign owner.
The leaked Panama Papers highlighted the ways in which offshore companies and structures can be used to cloak the identity of beneficial owners, some of whom have used such entities to avoid paying tax in their country of tax residence. The Internal Revenue Service and US financial institutions will now begin gathering information to identify beneficial owners of certain entities in response to the heightened awareness of abuse resulting from the papers' disclosure.
Even though a trust may be established under US state law and have a US trust company serving as trustee, this does not mean that it is a US domestic trust for income tax purposes. If non-US persons make substantial decisions for the trust, the US-based trust will be classified as a foreign trust under US tax law and, if it has accounts with financial institutions, it must provide certification of its status for Foreign Account Tax Compliance Act purposes.
The Foreign Account Tax Compliance Act (FATCA) is in full swing. Just as international families and their advisers are getting used to myriad requests for FATCA Form W-8 certification forms, more than 90 other countries have indicated that they wish to address tax evasion through a global exchange of financial information by implementing the Common Reporting Standard which, like FATCA, will affect non-US trusts and their trustees.
A certificate of loss of nationality addresses the immigration side of expatriation, but tax issues still remain. Certain 'covered' expatriates pay an exit tax on giving up their US citizenship. Although they themselves may have left the US tax net, there are lingering tax issues for any US family members. The Internal Revenue Service has now issued proposed regulations concerning the tax on certain gifts and bequests from covered expatriates.
The Foreign Account Tax Compliance Act requires non-US financial institutions, including investment entities, to report US account holders to the Internal Revenue Service. This reporting is causing US taxpayers living abroad to consider whether they have been adequately filing their annual income and information returns in the United States.
The Bureau of Economic Analysis has revised the form used to request an extension of time to file the BE-10 survey. The form no longer makes reference to the number of investments in foreign businesses to be reported by the US reporter. Thus, it is now more applicable to a small filer, such as a trust or limited liability company reporting only one foreign affiliate.
The Bureau of Economic Analysis, an agency of the US Department of Commerce, conducts a survey every five years of US investments abroad. Its stated purpose is to "secure current economic data on the operations of US parent companies and their foreign affiliates"; but the survey's reach is much broader than that. The response period for new filers closes on June 30 2015.
The Foreign Account Tax Compliance Act (FATCA) requires entity account holders to document their status for US withholding tax purposes and for FATCA due diligence purposes. In the case of a non-US entity account holder that has made a 'check-the-box election' to be disregarded for US income tax purposes, advisers should consider the instructions to the W-8 forms and provide documentation for the disregarded entity's beneficial owner.
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.