Is it possible that a trust established under the laws of a US State such as California, with a US agent serving as its trustee could be forced to file taxes as a foreign trust? Yes, Under the Foreign Account Tax Compliance Act or FATCA rules and federal law if primary “substantial” decisions can be made on behalf of the trust by non-US citizens, in the role of a financial adviser to the trust or even as a grantor, the “US trust” could be labeled as a “foreign trust” under US tax law. Further, if it has an account or a relationship with a financial institution, whether those accounts are here in the US or offshore, the trust is required to file appropriate certification of status under FATCA requirements.
FATCA regulations also require all financial institutions to document and certify all account holder’s withholding status and FATCA status. When the account is associated with a trust, the trustee must be informed if the trust is a “grantor trust” or a “non-grantor trust.” If the person who established the trust, known legally as the “grantor” is still living and actively involved in decision making the trust is almost always classified as a grantor trust when it comes to income tax liability. The trustee must provide the appropriate form W-9 for a US taxpayer and accompany it with a Form W-81MY if the trust is considered a foreign trust. Additional reporting requirements apply if the US trust has a non-US taxapayer as the grantor including the Form W-8BEN for the non-US grantor which tells the financial institution that income tax must be withheld on specific US source income.
Why is the FATCA status important? Because many foreign nationals are moving their money into the US, and are utilizing US trusts as a vehicle to manage those assets and income. A foreign citizen can form a foreign (grantor) trust here in the US, as long as there is a financial partner who agrees to serve as a FATCA sponsoring entity, and that all reporting requirements are fulfilled to ensure that the trust remains certified as compliant for FATCA purposes. The foreign national can establish a US (grantor) trust as a foreign trust knowing that those assets are secure and will remain secure, even after death.
These are obviously sophisticated and complex tax matters. These are sophisticated and complex times. Recent FATCA developments have destroyed tax havens used to shelter US assets and income for decades. The recent disclosure of the “Panama Papers” continues to expose the nature of the shell games used to hide income and assets, as well as the extent of the investment flowing into the United States. FBAR compliance is a reality, and the IRS has developed sophisticated information sharing and reporting systems that make it much more challenging to hide offshore assets and income. We advise our clients based upon their unique needs, goals, financial realities and taxable exposure(s). Allen Barron is uniquely positioned to advise and serve these sophisticated clients. Our legal, accounting, business and tax skills provide a single-source perspective and accountability. We invite you to contact us for a complimentary and substantive consultation at 866-631-3470.