Is it Mandatory for Trusts to File an Annual FBAR (FinCEN 114)

Is it Mandatory for Trusts to File an Annual FBAR (FinCEN 114)

Trusts have an FBAR Filing Requirement

For US Persons who have foreign bank and financial accounts, they may be required to file an annual FBAR – which is otherwise known as foreign bank and financial account report form a.k.a. FinCEN Form 114. Much of the confusion surrounding who has to file the FBAR lies in the fact that oftentimes people assume that it is only individuals who are required to file the FBAR — but that is not correct. Rather, the requirement is for US persons and not just individuals. So for example, a domestic corporation that has foreign financial accounts would also be required to report these accounts on the FBAR as well. The question then becomes — are trusts required to file an FBAR?  The answer is (typically) yes — but there are various factors to consider as well as other exceptions, exclusions, and limitations – with a key component being whether or not the trust owner/trustee properly filed the FBAR on behalf of the Trust.

US Trusts Must Also File FBAR

Sometimes, tax professionals try to take something that is relatively straightforward and make it unnecessarily confusing –– especially when it has anything to do with trusts. From a simple baseline perspective, a US trust is considered a US person, and therefore a US trust has to file an FBAR – and if the trust has not properly filed the FBAR, it may, unfortunately, become the responsibility of the Trust Beneficiary who must now bear the burden of filing the FBAAR.

Is the Trust a US Person – Step 1

As far as the US government is concerned, a US Trust is considered a US person and a trust qualifies as one of the types of US persons that are required to file the annual FBAR.

As provided by the FinCEN Form 114 instructions:

      • United States Person.

        • United States person means United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

        • The federal tax treatment of an entity does not determine whether the entity has an FBAR filing requirement. For example, an entity that is disregarded for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so. Similarly, a trust for which the trust income, deductions, or credits are taken into account by another person for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so.

Does the Trust Have a Financial Interest? – Step 2

Whether or not the trust has a financial interest in the account will go toward the extent of reporting required by the trust. For example, is it an account that the trust has an ownership or interest in – or is it a foreign account that the trustee merely has signature authority over, but no financial interest in —

      • 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 purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust;

      • 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.

Trust Beneficiary – (Alternatively) Step 3

If for one reason or another, the trust does not properly file the FBAR – then it may become the responsibility of the Beneficiary of the trust to file the form instead, which is completely unfair. But, pursuant to the FBAR instructions as published by FinCEN, if the trust beneficiary has a financial interest and the US person trust/trustee does not file the FBAR — then they can be required to file instead:

      • 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.

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.