The Impact of FATCA on Foreign Trusts and Estates

In 2010, congress passed the Foreign Account Tax Compliance Act (“FATCA”) after a series of high-profile tax evasion cases. The main purpose of FATCA is to force foreign financial institutions to comply with reporting requirements of the Internal Revenue Service and curb non-compliance. However, FATCA will have new reporting requirements for individuals, as well. Classically, any United States citizen with an interest in a foreign bank account was required to file an FBAR form disclosing their interest in any foreign bank account with their regular tax return. FATCA has broadened filing requirements “to all specified foreign financial assets” held by “specified individuals” with the implementation of section 6038D to the Internal Revenue Service. The new requirement seeks to ensure that the Internal Revenue Service has all potential information to prevent assets that could produce taxable income from being concealed in foreign jurisdictions. For section 6038D purposes, a specified individual is a United States citizen, a resident alien of the United States (as determined under section I.R.C. 7701(b) and ยงยง301.7701(b)-1 through I.R.C 301.7701(b)-9), or a nonresident alien who has elected under section 6013(g) or (h) to be taxed as a United States resident. Under FATCA, specified individuals with a specified financial interest must file an information form (form 8938) with the Internal Revenue Service. Section 6038D may also apply, at the discretion of the Treasury Department, to domestic entities formed for the purpose of holding a specified foreign financial asset under I.R.C. 6038D(f).

Specified foreign financial assets are defined as any financial account maintained by a foreign financial institution, any stock or security issued by a non-U.S. person, any financial interest or contract held for investment that has a non-U.S. issuer or counterparty, and any interest in a foreign entity. I.R.C. 6038D(b). Accordingly, beneficiaries of a foreign trust or estate are required to file if they know, or have reason to know by readily accessible information, that they have a beneficial interest in a foreign trust or estate. Also, there are certain thresholds specified individuals must meet before being required to file Form 8938. For unmarried taxpayers living in the United States, the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers filing a joint income tax return and living in the US, the total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. For married taxpayers filing separate income tax returns and living in the United States, the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. The potential penalty for failure to file a Form 8938, if required to do so, is an initial penalty of $ 10,000. Up to $50,000 of penalties may be levied for continued failure to file.

If you are in need of legal advice with regard to how FACTA applies to specific foreign trusts and estates, do not hesitate to contact the experienced attorneys at Chepenik Trushin LLP.