Auditing US involved foreign trusts: A must for foreign trustees

Read our article in the Cayman Financial Review Magazine, eversion 

Many financial institutions and trust companies in the Cayman Islands serve as the trustee of trusts in which at least one settlor or a current or future beneficiary is a United States person. It is now more important than ever that these trustees fully understand all past, current and future United States federal and state tax payment and reporting obligations related in any way whatsoever to such trusts.

Recent Internal Revenue Service regulatory and
Congressional legislative efforts to better enforce compliance with the tax and
reporting requirements of United States taxpayers with interests in foreign
trusts and other entities, such as the Foreign Account Tax Compliance Act1 and The Offshore Voluntary Disclosure
Initiative2 have highlighted the difficult position in
which a foreign trust company can be placed without proper professional
guidance from a qualified United States tax attorney. 

For any trust that
has a United States person, who is the settlor or current or future
beneficiary, and also for any trust that directly or indirectly owns assets
located within the United States, the trustees should take the steps necessary
to determine the following:  

  • The current and past places of residence, domicile and citizenship for
    each settlor and beneficiary, and whether any changes to the current status are
    anticipated. 
  • Whether any settlor or beneficiary ever renounced their United States
    citizenship or relinquished their United States green card. 
  • Whether the trust is considered to be a foreign trust for federal tax
    purposes and under what circumstances that may change. 
  • The extent to which the trust is (and has been) a grantor trust and/or a
    non-grantor trust for United States federal income tax purposes. 
  • Who (if anyone) is current or in the past has been treated as a grantor
    of the trust and who (if anyone) is currently or in the past has been treated
    as the owner of the assets of the trust and under what circumstances that may
    change. 
  • The United States federal income, estate and gift tax consequences to
    the settlor and each beneficiary who is a United States person, whether due to
    (a) direct or indirect transfers of property to the trust, (b) powers or rights
    in connection with the trust or the entities owned by the trust and/or (c) the
    right to potentially benefit from the trust or the direct or indirect actual or
    deemed receipt of distributions or loans from the trust. 
  • The United States federal and state reporting requirements, if any, of
    the trustees, the settlor(s) and the beneficiaries of the trust (ie, Internal
    Revenue Service Forms 3520, 3520-A, 8621, 5471, 1040, 1041, 8858, 926, 706 and
    709, Treasury Department Form TD F 90-22.1 and compliance under FATCA). 
  • Whether and to what extent the trustee could be held liable for United
    States federal withholding tax or federal and state transfer tax (such as
    estate tax and gift tax). 
  • What important changes should be made to the trust deed, letter of
    wishes and/or the entities owned by the trust to ensure the trust is structured
    in a tax-efficient manner (ie, to ensure there is a “step-up in basis” upon the
    death of the settlor, to prevent a United States person from having a “general
    power of appointment” for United States federal tax purposes, etc). 
  • How to administer the entities owned by the trust in a tax efficient
    manner (ie, whether and when to make a “check-the-box election” and how to deal
    with appreciated assets and retained earnings). 
  • What type and situs of investment structures should not be held directly
    by the trust or indirectly through an entity. 
  • What procedures should be followed for making any additions to the trust
    so as to avoid adverse tax and reporting requirements. 

Trustees
are well advised to conduct proper advance planning and employ institutional
procedures for a systematic review of their trust inventory on a regular basis.
By doing so, the trust company can avoid serious problems before they present
themselves and minimise reputational risks. The benefits of maintaining an
ongoing trust audit policy within the trust company far outweigh the costs
involved.

Merely relying upon a representation by a settlor or beneficiary as
to his or her compliance with United States federal and state tax payments and
reporting obligations should not be viewed as sufficient for the comfort of the
trustee. Similarly, the failure of the settlor or beneficiary to comply with
United States law should not be tolerated by the trustee.

Our experience has been that financial institutions and trust companies
have found a systematic trust audit to be a very useful tool to assure
themselves and their clients that their trust inventory has been properly
reviewed and that important United States tax and reporting issues have been
properly addressed. 

 

Endnotes 

  1. See http://www.irs.gov/businesses/corporations/article/0,,id=236667,00.html
  2. See http://www.irs.gov/newsroom/article/0,,id=235695,00.html

 

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Steven L. Cantor

Steven is managing partner of Cantor & Webb P.A., a Miami based law firm focused on the representation of high net worth private international clients and handles a variety of complex foreign trusts with US assets and/or beneficiaries, tax and estate planning for multinational families, pre-residency matters and structuring on foreign investment in the US.

Steven L. Cantor
Managing Partner
Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 1001
Miami, FL 33131, USA

T: +1 (305) 374 3886
E:
steve@cantorwebb.com
W:
www.cantorwebb.com  

Hal J. Webb

Hal focuses on the representation of high net worth international private clients and international businesses in the areas of tax, estate planning, tax compliance, real estate and probate matters with an emphasis on foreign trusts with United States beneficiaries, and inbound tax and estate planning and voluntary disclosures.

Hal J. Webb
Partner
Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112
Miami, Florida 33131
USA

T: +1 (305) 374 3886
E: hal@cantorwebb.com
W: www.cantorwebb.com 

Cantor & Webb P.A.

Cantor & Webb P.A. is focused exclusively on the representation of high-net worth international private clients and their families in tax and estate planning, tax compliance, wealth preservation, probate and property matters.

The firm is considered one of the leading boutique international tax and estate planning law firms servicing predominantly Latin American, Caribbean and European clientele. With seven attorneys specializing in the representation of high net worth international families and a multi-lingual staff that totals an additional sixteen people, the law firm rivals in size the private international client practice groups of many larger law firms.

Clients are often referred by major international financial institutions and law firms which understand that the personalized service and advice which Cantor & Webb P.A. provides to its clients brings great value in the resolution of many difficult and complex projects, including tax and estate planning for multinational families, tax compliance, pre-immigration matters, foreign investment in the United States, foreign trusts with United States assets and/or beneficiaries and foreign companies doing business within the United States.

Often used as the legal and tax component of the family office by some of its top international private clients, the firm has established a concierge oriented practice which caters to its clients' unique needs while taking great pride in going above and beyond the usual scope of work.

The firm philosophy remains providing a personalized service much more like the doctor who treats the patient rather than the doctor who merely treats the symptoms of the disease. 

Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112,
Miami, FL 33131


T: +1 (305) 374 3886
E:
steve@cantorwebb.com
W:
www.cantorwebb.com