Arthur Dichter and Steven Cantor, Cantor &
institution’s accounting department has just spent countless hours
producing financial statements for your American client who may
have a foreign (non-US) trust and possibly a foreign company. Now
your client’s US accountant tells you that these statements are
useless and they must be redone. What happened and how can this be
US income tax and financial
reporting rules are very complex and differ greatly from the
reporting rules used by financial institutions and fiduciaries
elsewhere in the world. The type of portfolio financial investments
in your client’s account affect the US tax and reporting
obligations, as does the characterisation of any trust structure
that may be involved.
From our experience, most of the
non-US financial statements provided to us by trustees and private
bankers have been prepared pursuant to fiduciary accounting rules
which are quite different from those required to prepare US income
The burden continues to be on the
financial institutions, trust administrators and the US tax
advisers to work together to provide the US taxpayers with the
information required to comply with US income tax laws.
In recent years, this relationship
has become more important and it will continue to do so in the
future because of the IRS offshore initiative and the enactment of
the Foreign Account Tax Compliance Act (FATCA).
Whether a trust is considered a grantor trust, and thus ignored
as not being separate from the settler, or a non-grantor trust,
which is treated like a separate person, adds to the
The fiscal period used for the
preparation of the financial statements may cause US individual
taxpayers – who prepare their US income taxes based on the 31
December calendar year end and not 5 April – additional
US individual taxpayers use a “cash
basis” of accounting, subjecting them to tax when items of income
are actually received or deemed to have been received. An
adjustment made to account for unrealised items at year-end must
not be included in income currently for US income tax purposes if
the financial statements are kept on a fair market value basis.
These adjustments include accrued interest, gain or loss on the
investment portfolio or foreign currency fluctuations.
When a foreign trust is involved,
certain income items such as dividends, capital gains, interest,
and transactions in foreign currency require special treatment in
order to provide the US taxpayer with the information needed to
complete their US income tax return accurately.
These issues are magnified where,
as a result of US tax planning, the trust owns a company and an
entity classification (“check the box”) election was made.
In that case, the trust and the
company are treated as one single person. This places a significant
burden on the trustee/management company either to properly
understand US income tax rules or retain US tax counsel to assist
A non-US mutual fund (unit trust)
will be considered a passive foreign investment company (PFIC)
which creates significant tax complications to US owners and US
beneficiaries. The potential rate of return from such funds must be
weighed against the potentially negative US income tax
Certain elections may be available
to mitigate the adverse consequences of PFIC ownership. Beginning
with the 2011 tax year, a US owner of an interest in a PFIC is
required to file an annual information statement disclosing their
interest in the PFIC.
The financial institution or trust
company that appreciates the complexity of the US tax and reporting
issues presented and takes the proper steps to better address them
will have achieved a great benefit for all involved.
Steven Cantor is managing partner and Arthur Dichter is a
partner at Cantor & Webb PA – a Miami-based international
private client law firm focusing exclusively on tax and estate
matters for high net worth clients and their family