Beneficial Interest or Ownership Interest in a Foreign Trust & FBAR
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FBAR for Beneficial Interest or Ownership of Foreign Trust
Beneficial Interest or Ownership Interest in a Foreign Trust & FBAR: When a U.S. person has a beneficial interest or ownership interest in a foreign trust, they may be required to file an FBAR regarding the trust’s foreign accounts. Specifically, when a U.S. person is the grantor and has an ownership in and/or has beneficial interest in a trust, and that beneficial ownership exceeds 50%, the FBAR reporting may kick-in. While it doesn’t sound fair (and it definitely isn’t fair), neither is offshore tax compliance in general. Therefore, U.S. person grantors of foreign trusts in which they have an ownership interest or foreign trust participants with a +50% beneficial interest should be aware of potential FBAR reporting traps.
FBAR for Foreign Trust Beneficial Interest or Ownership in Foreign Account
When a person has a financial interest in the account, the reporting kicks-in.
A U.S. person who has ownership, co-ownership or signature authority over foreign accounts may have an FBAR filing requirement when they meet the FBAR threshold for reporting.
The FBAR requires the annual reporting of foreign bank and financial accounts.
What is a Financial Interest in a Foreign Account?
As provided by FinCEN, a Financial Interest:
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“The owner of record or holder of legal title is one of the following:
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An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
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A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
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A partnership in which the United States person owns directly or indirectly: an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or an interest in more than 50 percent of the partnership capital;
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A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purpose See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust;
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A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or
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Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.”
(Limited) Exception for Trust Beneficiaries
Realizing just how unfair it can be to make a beneficiary file FBAR reporting, FinCEN carved out an limited (exception):
- “Trust Beneficiaries. A trust beneficiary with a financial interest described in section (2)(e) of the financial interest definition is not required to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person and (2) files an FBAR disclosing the trust’s foreign financial accounts.
In conclusion, when a U.S. Person is a grantor of a foreign trust and has an ownership interest in the trust or is not a grantor but has a +50% Beneficial Interest in a foreign trust, then they are considered to have a financial interest for financial account reporting.
By having a financial interest, the person may have an FBAR reporting requirement for foreign financial accounts.
International Tax Law Specialist Team: Golding & Golding
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A — as well as the FBAR.
Contact our firm today for assistance with getting compliant.