Do US Trusts Report Foreign Accounts & Assets (Common Exmples)

Do U.S. Trusts Report Foreign Accounts or Assets?

Do U.S. Trusts Report Foreign Accounts?

When a U.S. person owns or has signature authority in foreign accounts, assets, and/or investments, they may have to report this information to the United States government on various international information reporting forms, such as the FBAR (FinCEN Form 114) and Form 8938 (FATCA). It is very important to note that the term ‘US person’ is not limited to individuals; a U.S. person can also include entities and trusts, for example. Therefore, when a US person, such as an entity or a trust, holds foreign accounts, assets, or investments, they may also be required to file certain international information reporting forms to disclose this information to the US government. Let’s look at some common examples involving US trusts.

For purposes of these examples, the trust is owned more than 50% by US persons, the beneficiaries are US persons, and the trustee is a US person.

Grantor Trust (In General)

• • • Adam is the owner of a grantor trust that contains various foreign accounts. Since the grantor trust is not generally considered separate from the grantor (Adam), Adam will report the accounts and assets on forms such as the FBAR and Form 8938.

Non-Grantor Trust (In General)

• • • Brian is a beneficiary of a non-grantor trust. He does not have any ownership of the trust itself and therefore does not have any ownership of the assets or foreign accounts that are listed within the trust. The general rule of thumb is that Brian will not have to file any international reporting forms, although depending on whether the trustee properly reported the accounts or not can impact whether beneficiaries will have any liability or requirement to do so.

Irrevocable Life Insurance Trust (ILIT)

• • • Charles is the trustee of an irrevocable life insurance trust, and within that trust, there are both domestic and foreign policies and assets. Charles will be required to report this foreign account information to the IRS and FinCEN.

Charitable Lead Trust (CLT)

• • • David is the trustee of a charitable lead trust in which both the US and foreign assets are being used to make payments to the charity for the duration of the period established in the trust. David will be required to report this foreign account information to the IRS and FinCEN.

Charitable Remainder Trust

• • • Eden is the trustee of a charitable remainder trust in which part of the assets that will ultimately be donated to the charity include income-generating securities located in a foreign account (held in a U.S. trust). Eden will be required to report this foreign account information to the IRS and FinCEN.

Qualified Terminal Interest Property QTIP

• • • Maggie is the trustee of a QTIP trust, which is funded by both US and domestic assets, providing a current income stream to the surviving spouse. Maggie will be required to report this foreign account information to the IRS and FinCEN. Once the assets are transferred to the children, the children may have their reporting requirements as well as the individual owners of the foreign assets.

Qualified Domestic Trust (QDOT)

• • • Frank is the trustee of a QDOT that is funded with both US and foreign assets. Even though the surviving spouse is a non-citizen, the trust is a US person and therefore Frank is still required to report this foreign account information to the IRS and FinCEN.

Domestic Asset Protection Trust (DAPT)

• • • Greg is a trustee of a domestic asset protection trust, which includes several US and foreign assets. Even though the trust is designed to protect assets from creditors and other scenarios, there are also foreign assets contained in the trust, so Greg is required to report this foreign account information to the IRS and FinCEN.

Dynasty Trust

• • • Harry is the trustee of a US dynasty trust designed to pass wealth from one generation to the next. Since the family is originally from a foreign country, they still have many assets overseas that are being held in the dynasty trust. Therefore, Harry is required to report this foreign account information to the IRS and FinCEN.

IRA Trust

• • • Jeffrey is the trustee of an IRA Trust. In general, an IRA is not required to file an FBAR, but the rules get blurred when it involves a self-directed IRA/IRA trust. Typically, if there are some foreign accounts or assets in an IRA trust, then it may be reportable for FBAR, FATCA, and other foreign compliance purposes.

Family Limited Partnership (FLP)

• • • Kevin, Keith, and Kimberly are the general partners of a family limited partnership designed to manage and protect the company. While technically there is no trustee in the FLP, the general partners are required to file forms such as the FBAR and FATCA if there are foreign accounts or assets held within the FLP.

Grantor Retained Annuity Trust (GRAT)

• • • Lance is the trustee of a Grantor Retained Annuity Trust in which both the US and foreign assets are held within the trust and are being used to generate the annuity. Lance will be required to report this foreign account information to the IRS and FinCEN

Grantor Retained Income Trust (GRIT)

• • • Mark is the trustee of a Grantor Retained Income Trust which in which both the US and foreign assets are held within the trust and are being used to generate income. Mark will be required to report this foreign account information to the IRS and FinCEN

Grantor Retained Unit Trust (GRUT)

• • • Nancy is the trustee of a Grantor Retained Income Trust in which both the US and foreign assets are held within the trust for transfer to the beneficiaries. Nancy will be required to report this foreign account information to the IRS and FinCEN

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.