If you have a financial interest in, or signature authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR). The Financial Crimes Enforcement Network (FinCEN) and the IRS have been stepping up enforcement of foreign account reporting requirements. Thus, it’s important to closely follow compliance rules to avoid penalty.
Foreign financial accounts defined
Financial accounts include bank accounts, securities and brokerage accounts, and other accounts maintained with a financial institution or “other person performing the services of a financial institution.” They also include mutual funds, insurance and annuity funds with cash values, commodity futures or options accounts, and certain retirement accounts.
Foreign accounts are those located outside the United States, regardless of the financial institution’s nationality. So, for example, an account maintained with a branch of a U.S. bank physically located outside the United States is a foreign financial account, while an account maintained with a branch of a foreign bank physically located in the United States isn’t.
The owner or legal titleholder of an account has a financial interest in it, regardless of whether he or she enjoys any benefits from it. And one who uses an agent, attorney or other representative to acquire an account has a financial interest even without legal title.
Suppose, for example, that Dennis, a U.S. citizen living abroad, agrees to hold $20,000 in his foreign bank account for his brother, John, also a U.S. citizen. The brothers each have a financial interest in the account and must file FBARs: Dennis as the legal owner, and John as the beneficial owner of the funds.
One can also hold a financial interest in a foreign account through a business entity or trust. Under the FBAR rules, a U.S. person who owns, directly or indirectly, more than 50% of a corporation’s voting power or total value is deemed to hold a financial interest in the corporation’s foreign financial accounts. Similar rules apply to owners of more-than-50% capital or profits interests in partnerships and to majority owners of other types of entities.
Financial interests in accounts held in trust are attributed to a U.S. person who 1) has an ownership interest in a grantor trust, 2) has a present beneficial interest in more than 50% of the trust assets or 3) receives more than 50% of the current trust income. Beneficiaries are relieved of their FBAR filing obligations, however, if the trust or its trustee has a separate FBAR filing obligation.
FBAR reporting obligations also extend to U.S. persons with signature authority over foreign financial accounts. These may include power of attorney holders, officers or employees of entities that hold foreign accounts, trustees of trusts that hold foreign accounts and executors of estates that hold foreign accounts.
FBAR reporting and your estate plan
In an estate planning context, foreign account reporting obligations can arise in a variety of ways. Anytime you designate another person to act on your behalf or transfer interests in your assets to other people or entities, you may trigger additional FBAR reporting obligations.
Avoid the penalties
Often misunderstood or overlooked, the FBAR can be a costly trap for the unwary. If you own or control foreign financial accounts, consult your estate planning advisor to discuss your FBAR and other reporting obligations and their potential impact on your estate plan.