Estate Planning for Non-US Residents Owning US Assets

Non-US citizens who do not live in the US are nonetheless subject to US gift and estate taxes on US assets, which include not only US property, but also stock in US companies. Unlike the $5.25 million estate tax exemption applicable to US residents, non-US residents are only entitled to an exemption of $60,000, which can present a trap for unwary investors in US companies and owners of US real estate. There are many ways for non-US residents to reduce their exposure to US estate taxes with certain planning strategies.  If you own U.S. assets, be sure to consult a US tax attorney to help minimize your tax bill.

Financial Reporting Obligations under FATCA

The Foreign Account Tax Compliance Act (FATCA) imposes reporting obligations on US citizens and residents who hold assets abroad, as well as on certain foreign institutions that hold US assets. Under FATCA, US citizens, residents, trusts, and business entities must file a Report of Foreign Bank and Financial Accounts (Form TD F 90.22.1) with the IRS for any year in which the total value of their financial assets abroad exceeds $10,000. Those US persons or entities with financial assets abroad exceeding $50,000 must also file Statement of Foreign Financial Assets (Form 8938). FATCA additionally imposes certain reporting obligations on foreign investment vehicles. Severe penalties can be imposed for failure to make the proper filings, so it is important to consult with a tax lawyer if you are not in full compliance.

Report of Foreign Bank Accounts (FBAR) Compliance

If you have an interest in or signature authority over a financial account outside the U.S., you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR) form with the U.S. Treasury Department. This form must be filed even if the account produces no income, and, unlike income tax returns, extensions are not available for untimely filings.  The deadline for filing the FBAR form is June 30.  Disclosure requirements for foreign accounts were originally imposed by the Bank Secrecy Act decades ago; however, enforcement has become far stricter in recent years.

Who Must File

All U.S. persons (including U.S. citizens, legal permanent residents, and U.S. corporations, partnerships, and trusts and estates) that have an ownership interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 must file IRS Form TD F 90-22.1. Foreign financial accounts include foreign bank accounts, brokerage accounts, mutual fund shares, insurance policies with a cash value, and annuities with a cash value. In general, you have an ownership interest in an account if you are the owner of record or if you have a greater than 50% interest in a partnership, corporation, trust, or other entity holding such account.  Even if you haves something like a virtual account or an account that uses mobile banking that is headquartered in another country, you may need to file.

How To File

You must submit a completed Form TD F 90-22.1 online. The e-filing form can be found HERE.  No paper forms will be accepted after 2013.

Penalties for Non-Compliance

Penalties for failure to file an FBAR form can be harsh, with up to $10,000 in civil penalties for each violation, and the greater of $100,000 or 50% of the value of the account for a willful violation.

If you have not complied with the FBAR filing requirements in previous years, you may want to enroll in the IRS Offshore Voluntary Disclosure Program (OVDP), implemented to bring taxpayers with unreported offshore accounts into compliance.  While the penalty for disclosure through OVDP can be as high as 27½% of the amount of funds in the undisclosed account, failure to disclose can result in penalties of 50% of the account balance, plus criminal prosecution.  In certain cases, where, for example, there was no unreported income from the account, the IRS may reduce the penalty or waive it entirely.

If you have outstanding FBAR reports from previous years, the best option is to come forward to the IRS as soon as possible.  The IRS is aggressively collecting information from foreign banks and other financial institutions on unreported U.S. accounts through the recently-enacted Foreign Accounts Tax Compliance Act (FATCA).  If the IRS obtains information about your account before you enter the OVDP program, you will be ineligible for reduced penalties and may risk criminal prosecution.  If you have an undisclosed foreign account, contact a tax attorney as soon as possible to discuss your options.