As a result of the Great Recession, many homeowners and would-be real estate investors found themselves facing foreclosure of “underwater” properties by banks and other lenders. After losing their property, many borrowers heard nothing more and thought their ordeal was over. They did not realize that, since the bank sold their property for less than the mortgage balance, they were also liable to the bank for the deficiency – the difference between the value of the underwater property and the full balance of the mortgage (including penalties, interest and legal fees).
We again remind readers that FinCEN Form 114 (formerly TD 90-22.1), the Report of Foreign Bank and Financial Accounts (the “FBAR”), for calendar year 2013, is due by June 30, 2014. The FBAR must be filed electronically.
As we wrote previously, in 2011, the U.S. Treasury Department changed the FBAR filing requirements to now apply to U.S. grantors of foreign trusts, and in some cases their U.S. beneficiaries.
The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year. If you are subject to the FBAR filing requirement, the 2013 FBAR is due by June 30, 2014.
U.S. grantors (also known as settlors) of foreign asset protection trusts are deemed to be the owners of all trust assets for tax purposes. Thus, the FBAR filing requirement applies to such grantors, whether or not they actually control trust assets and whether or not they receive distributions from the trust.
The 2011 revised regulations now extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, including foreign asset protection trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in the assets of a trust or if the U.S. person received more than fifty percent of the income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee (asset protection trusts created by this firm are purely discretionary trusts) does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.
Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Usually, beneficiaries of a foreign asset protection trust receive distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.
Please also note the following with respect to the FBAR requirement:
- Even if the trust account was closed during 2013, if the account existed at any point during 2013, an FBAR is required.
- The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Specified Foreign Financial Assets. Please contact us for a copy of our memorandum regarding new Form 8938.
- The June 30, 2014 deadline is the deadline for receipt of the FBAR by the Treasury Department.
- Even if you have an extension for filing your tax returns, the 2013 FBAR is still due by June 30, 2014. There are no extensions for the FBAR deadline.
- The FBAR is now required to be filed electronically.
Having established an offshore asset protection trust to safeguard your assets from attack by creditors and litigants, it is crucial to preserve the integrity of the trust and to be in compliance with all IRS requirements. Please contact us with any questions.
For the prior history of the court case United States v. Grant, please see our article here.
After beating the IRS, Arline Grant became careless and sloppy. In 2011, she ordered the foreign trustees to make periodic cash transfers to her totaling more than $500,000. These transfers were made to various accounts in her children’s names that she controlled, as well as to an account in her name in Bermuda. In addition, the trusts now provided for mandatory quarterly distributions to her. The IRS discovered the transfers and brought Ms. Grant before a new federal judge who held her in contempt for violation the repatriation order that was issued in 2008 and was still in effect. (Remember, in 2008 the federal court ordered Arline to repatriate trust funds and pay the proceeds to the IRS, but then refused to hold her in contempt for failing to do so because the court determined that she tried to comply but had no control over the trustees.)Continue Reading