You Say Prĭvacy and I Say Prīvacy: Tips to Take Away

This article was originally published on November 9, 2022

Increasing demand for transparency and tax rules focused on the ownership of foreign financial accounts and interests in foreign trusts and entities affect private wealth planning. There are steps you can take to comply with applicable disclosure and reporting requirements and also maintain a degree of privacy.

• Annual Inventory. Take an (at least) annual inventory of accounts, trusts, and entities that have foreign points of contact. Include foreign financial accounts you own or control, trusts with foreign trustees, beneficiaries or assets, and entities organized under foreign law or holding foreign assets. Note any changes from the prior year and work with your advisors to determine what disclosure requirements apply and whether there are any changes in taxation.

• Restatements Rather Than Amendments. Restatement of trust, partnership, and limited liability company agreements, rather than an amendment to such documents, may be advantageous in dealing with global transparency requirements. U.S. anti-money laundering and corporate transparency acts and their foreign, often more far-reaching, counterparts commonly require disclosure of the parties in a transaction and for the opening of financial accounts. Trusts, partnerships, and limited liability companies may be modified from time to time to alter the terms of the governing agreement or the beneficiaries, partners, or members. If a governing instrument is restated rather than amended, or schedules are used to identify the parties rather than naming the parties in the governing instrument, then the current document or schedule will be the only operative document or schedule to identify the parties and prior versions identifying former beneficiaries, partners, or members need not be included in any document review or delivery for disclosure purposes.

• Foreign Situs Wills. If you have foreign property, a foreign situs Will in addition to a worldwide Will and Revocable Trust may be advisable. Wills are public when filed at death. Trusts are private in the U.S. but are not entirely private in all foreign countries. Some countries do not recognize trusts, and some countries tax property held in trust at higher rates and more frequently than individually-owned property. For foreign property not held in trust, consider a foreign situs Will that only disposes of the foreign property to limit the scope of publicly available information in foreign courts.

• Limitation on Property Powers of Attorney. Be mindful of reporting requirements imposed on a U.S. Agent if the Principal has foreign financial accounts. A U.S. person who is an Agent under a Property Power of Attorney is required to report foreign accounts of the Principal on an annual Foreign Bank and Financial Account Report (FBAR) filed by the Agent (even if the Principal files a FBAR that reports the same accounts). Consider whether to limit the scope of a domestic Property Power of Attorney to domestic assets and to have a separate foreign Property Power of Attorney naming a foreign Agent for foreign assets.

• Use of Trusts. Trusts are generally subject to fewer registration requirements than corporations and other entities, and where registration is required, registries for trusts are often more private. The historic U.S. Corporate Transparency Act which requires most new and existing corporations and limited liability companies to disclose ownership information to the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN) does not apply to trusts themselves (although trusts which are beneficial owners will be disclosed). The registry is not public.

• Keep Trusts Domestic. Avoid accidentally creating foreign trusts and the accidental conversion of a domestic trust to a foreign trust which can trigger additional reporting requirements and taxes. For U.S. income tax purposes, a trust is deemed to be a foreign trust if a person who is not a citizen or resident of a state of the U.S. or the District of Columbia is a trustee, investment advisor, trust protector, or other person, including a beneficiary, who has control over decision-making related to the trust, including not only the management and distributions from the trust, but also the ability to name the trustee of the trust, unless limited to naming a U.S. Trustee. The change in the status of a trust from a domestic trust to a foreign trust can cause the unintended recognition of gain on appreciated assets.

• Designated Representative. Naming a designated representative in a trust allows for the delivery of account statements and other information to the representative rather than a beneficiary in many instances. State laws increasingly restrict the ability of a grantor to limit the beneficiaries to whom account statements and other information must be provided. However, Illinois and other states permit the grantor to name a designated representative to receive account statements and other information in the place of a beneficiary.

The Levenfeld Pearlstein Trusts and Estates Group is available to address the U.S. aspects of your wealth plan and coordinate with counsel in other countries to integrate U.S. and foreign planning.