Understanding the Practical Implications of FATCA on Trusts

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1 Understanding the Practical Implications of FATCA on Trusts January 23, 2014

2 Trusts under FATCA Trusts as Financial Institutions? Trusts as Entities The legislative history The Regulations Trusts under IGAs Trusts under the IGAs Why the differences The Implementing Legislation Make things more complicated Trusts under the OECD AEOI Likely to result in similar treatment And more complexity

3 Trusts at a High Level

4 Requirements for Trusts All trusts must be classified as U.S. or Foreign A trust will be U.S. If the trust is controlled by a U.S. person and is subject to the jurisdiction of a U.S. court A U.S. trust is a specified U.S. person and is reportable All Foreign trusts must be classified as FFIs or NFFEs Most Foreign trusts will generally be Type B Investment FFIs under the Regulations There are exceptions for trusts which have no underlying companies and derive most of their income from nonfinancial assets and for private trusts with an individual trustee and an individual investment manager Similar treatment likely applies under the IGAs Model IGA determination is based on whether there is a professional manager and the source of income and nature of assets is irrelevant The UK Implementing guidance looks more like the definition in the Regulations *See the last two slides in this section for definitions of the trust types.

5 Impact on Trusts What are the implications if the trust is an FFI To become compliant, it will be necessary for the trust to enter into an FFI agreement with the IRS or meet the owner documented deemed compliant exception. The trust, as an FFI, will need to report to the IRS on all US accounts. A US account is defined as any financial account maintained by an FFI that is held by one or more specified US persons. Guidance is provided within the regulations on the definition of a financial account in the context of trusts, which includes the following An interest held by a person treated as the owner of all or a portion of the trust under the grantor trust rules A specified US person who has the right to receive a mandatory distribution or may receive a discretionary distribution. What are the implications if the trust is an NFFE A trust that is a NFFE is required to identify and report substantial U.S. owners or U.S. Controlling persons under an IGA In addition an NFFE with a substantial U.S. owner is a U.S. owned foreign entity which is a reportable U.S. account itself 4 Title

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