FATCA Classification of Trusts and Estates as FFIs or NFFEs

The issue

Family trusts and decedents’ estates are seldom created with banking regulation in mind, yet FATCA treats each as an entity that must be classified. A Geneva bank opening a custody account for a Jersey trust, or a New York broker paying dividends to the estate of a Munich decedent, will ask for that status, and a missing or mistaken answer leads to 30 percent withholding or to unforeseen reports. No classification keeps the US persons behind a trust out of the reports; it settles which party reports them, what the banks learn about the family, and what the structure must certify.

Who the guide is for

The guide is written for trustees, private trust companies, family offices, executors of estates with accounts in the United States or abroad, and their attorneys and tax advisors. It covers Germany, France, the United Kingdom, Italy, Switzerland, the Netherlands, Belgium, Spain, Austria, Luxembourg, Ireland and Canada.

Residence before category

Only a foreign entity can be an FFI or an NFFE, so the first question is whether the trust or estate is a US person at all. For a trust the answer lies in the instrument: if a foreign protector can block distributions, the trust is foreign even where every trustee is American (Treas. Reg. § 301.7701-7). A domestic trust gives its payers a Form W-9, and its foreign banks then report its accounts. For estates the guide sets the facts-and-circumstances test beside the agreements’ rule treating the estate of a US citizen or resident as a US person.

When a trust becomes a financial institution

The management prong of the investment entity definition most often surprises families. Appointing a corporate trustee, or giving a bank discretion over the portfolio, can turn a family trust into a financial institution, whereas individual trustees who keep every investment decision leave it a nonfinancial entity. A trust owning real property directly fails the income test however it is managed. Once a trust is a financial institution, some party must carry its duties; the guide examines which routes each agreement recognizes.

Controlling persons and the documentation of trusts and estates

A passive trust names its settlor, trustees, protector and beneficiaries to each bank in an agreement jurisdiction that holds its accounts, unless it elects to report to the IRS directly. The certificate follows the trust’s character under chapter 3: a complex trust or an estate signs Form W-8BEN-E, a grantor or simple trust Form W-8IMY with the certificates of its owners or beneficiaries. An account held solely by an estate escapes the bank’s reporting once the bank holds a copy of the will or death certificate (Treas. Reg. § 1.1471-5(b)(2)(iii)), but withholding and the estate’s own certification continue.

Treaties, underlying companies and the Common Reporting Standard

For the firm’s clients the treaty rate is the rule, but chapter 4 withholding applies regardless of any treaty, so the rate is available at source only to a documented payee, and only for income taxed to a resident of the treaty country, whether to the trust itself or, under clauses such as Article 1(7) of the income tax treaty with Germany, to its beneficiaries. Each company beneath the trust, and a private trust company acting as trustee, needs its own classification. The Common Reporting Standard then repeats the analysis for every country in which family members live.

The questions the guide answers

• Does a corporate trustee, a discretionary mandate or a private trust company make a foreign trust a financial institution?
• When must a trust register for a GIIN and file Form 8966, and when can a trustee, sponsor or designated withholding agent act for it?
• In which jurisdictions is the trustee-documented trust available, and when does a family trust qualify as a sponsored, closely held investment vehicle?
• Who are the controlling persons of a passive trust or estate, and what does each bank report about them under each regime?
• Which certificate does each kind of trust or estate furnish, and how is a treaty claim made on it?

The firm classifies trusts, estates, private trust companies and holding companies under chapter 4 and the applicable agreement, prepares their certificates and treaty claims, and implements the registration or deemed-compliant route. For structures with accounts in several countries, the firm aligns the FATCA and Common Reporting Standard positions with the trustees, the banks and the family’s own advisors there, and prepares the family for the controlling-person disclosure.