FBAR s: 2011 Final (BSA) Regulations and How they apply to Protectors, Directors and other Powerholders

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1 FBAR s: 2011 Final (BSA) Regulations and How they apply to Protectors, Directors and other Powerholders STEP Miami Branch One Day Conference Friday, June 10, 2011 Conrad Hotel, Miami, FL Stewart L. Kasner (Miami)

2 Original Prop. Reg. Principal Intentions 1. Define scope of persons required to file FBAR s 2. Delineate types of reportable accounts 3. Exempt certain persons and accounts from reporting req ts

3 Summary of Changes Clarification on whether an account is foreign ; Treatment of global custody or omnibus accounts; Revision of the definition of signature or other authority; Clarification of what constitutes a financial interest in the trust context; and Clarification regarding record keeping requirements for officers or employees who have signature or other authority over foreign financial accounts of their employers. 3

4 Who is Required to File an FBAR Each U.S. person who: has a financial interest in, or signature or other authority over, any bank, securities or other foreign financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. Signature or other authority means the authority to control the disposition of money, funds or other assets held in a financial account. Shadow FBAR attached to Form 1040 will also be required for 2011 tax year filing. 4

5 New Definition of U.S. Person a U.S. citizen or U.S. resident Residency is determined without regard to any election to be treated as US resident Must be LPR or meet substantial presence test Trust status determined without regard to control test Look to governing law. Trustee may report. an entity formed under the laws of any U.S. state, territory or possession, or the District of Columbia Does not include NRA s doing business in the US Not clear whether residents who meet substantial presence test but take treaty position must file Conservatively they should, consider opposing rule disregarding elections of NRA s to be treated as residents. Very clear that LPR s who take treaty position must file FBAR Does include US LLC s, even if disregarded and owned by a foreign person. 5

6 Definition of Foreign Account Clarification of when an account is foreign : When a U.S. person can directly access their foreign holdings maintained at a foreign institution. Not a foreign account if a U.S. person has foreign holdings maintained with a financial institution located in the U.S. Example: Omnibus Account U.S. bank acts as a global custodian and holds client s foreign holdings outside the U.S. in the bank s own name and U.S. client cannot directly access funds. Not a foreign account. If U.S. client can access funds abroad, then account must be disclosed. FBAR rules generally look to the services provided by the financial institution 6

7 What is an Other Financial Account Foreign life insurance and annuity policies Must have cash value. Policyholder has reporting obligation, not the beneficiary. Policies issued by 953(d) companies not excepted Insurer themselves not treated as US person for FBAR purposes Foreign mutual funds or similar pooled funds Reporting obligation limited to funds that: are publically available have regular net asset value determinations and have regular redemptions Interests in private equity funds or hedge funds for these reasons are therefore generally not reportable. Regulations reserved, could be included in the future 7

8 Definition of Signature or Other Authority, for Individuals The authority of an individual (alone or in conjunction with another) to control the disposition of assets held in an account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. Signature or other authority exists if the foreign financial institution will act on direct communication from the person regarding the disposition of the assets in the account. Typically Protectors and other Powerholders do not give instructions directly to the financial institution and therefore are not required to file FBAR. Proposed trust protector rules eliminated in final regulations. 8

9 Definition of Signature or Other Authority, for Individuals Change from prior definition: Now includes direction in conjunction with another Previously, signature or other authority existed only if person could direct alone. Indirect communication eliminated 9

10 Financial Interests in Trusts FBAR reporting obligation for Grantors of all grantor trusts. Not clear if includes grantors under 678 if not transferor of assets to the trust and present beneficial interest < 50% Beneficiaries with a present beneficial interest or recipient of current income. No reporting requirement for discretionary beneficiaries or beneficiaries with remainder interests. Beneficiaries relieved of requirement to file if reporting obligations are satisfied by the trustee, trust, or agent of the trust. Differences from Title 26 No attribution No separate shares 10

11 Retirement Accounts Retirement Plans and IRAs Participants and beneficiaries are not required to file an FBAR for or on behalf of retirement plans or IRAs. Employee benefit trusts are required to be reported 11

12 Anti-avoidance Provisions If a U.S. person causes an entity (e.g., a corporation, partnership, or trust) to be created for the purpose of evading the FBAR reporting requirement such person has a financial interest in any foreign financial account for which the entity is the owner of record or holder of legal title. Evading does not apply to persons who make a good faith effort to comply. Example: U.S. person creates/funds foreign corp. owned 50/50 with foreign shareholder, but is not appointed as director or officer or given signature authority over foreign accounts. 12

13 Truncated Filing Large number of accounts (i.e., > 25): Need to provide: Number of financial accounts Personal identifying information Identification of beneficial owner (if different) Still responsible for providing detailed information concerning each account if requested. Truncated filing procedures recently expanded to include accounts over which U.S. person only has signature authority, and no financial interest Form not yet modified but procedures included in instructions and regs. 13

14 Recordkeeping Officers or employees with signature or other authority over foreign financial accounts of employer are not required to personally maintain those records. 14

15 Exception for certain employees and officers with signature authority but no financial interest Regulated US banks SEC registered financial institutions SEC registered investment companies Exception does not apply to SEC registered investment advisers (or their officers or employees) when they are providing advisory services to clients other than registered investment companies. US exchange publicly traded entities (domestic or foreign), or U.S. subsidiaries (of U.S. parents) included in consolidated FBAR reporting ADR s included as publicly traded Entities registered under sec. 12(g) of Securities Exchange Act (relates to company size). Modified reporting for US employees and officers employed abroad, identifying themselves and employer 15

16 Applicability Date Applies to FBARs required to be filed by June 30, 2011 and all subsequent years. Those who deferred filing pursuant to IRS Notices and have the option to apply the final regs. with respect to foreign financial accounts maintained in calendar years beginning before Notices relate to late filing of accounts over which U.S. person had signature authority, but no financial interest. Best result if U.S. person had signature authority over 25 or more foreign financial accounts, can truncate filing now. 16

17 Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter. 17

18 Questions Later On Contact: Stewart L. Kasner Baker & McKenzie LLP 1111 Brickell Ave., Ste Miami, FL Phone