Now that everyone is returning to work after the long summer break, we begin to hear the cogs of business clanking back into action. But all is not as it was.
It is now September and families with trusts offshore are looking to see what they can do to maintain the confidentiality of their trust assets and their own details as participators ahead of the arrival of the automatic exchange of financial information, which in some cases starts now.
For these trusts it is already too late – reporting entities across the globe have collated information and exchange is now due. For any trust which switches trustees now, careful planning needs to be done in order to evaluate whether or not they have missed the boat.
Numerous professional trustees have seen an exodus of business to S Dakota, Alaska or Nevada, some before 2017, but many more this year.
Jules was one of the people who came to see me earlier in the year. He has many well-known businesses around the world and years ago decided on the Bahamas as the jurisdiction for setting up his trust. Antonio, an adviser in Jules' home country of Argentina, had approached him with the idea of migrating his trust to Nevada. Antonio, according to Jules, was very persuasive.
Antonio knew the natural fear and paranoia which Jules has been experiencing over the last few years with respect to confidentiality. ‘The US is not a signatory of CRS, the Trustees will not need to report to the IRS, so your financial information is safe in the US!’ Antonio told him.
Jules was uncomfortable as he was not convinced it was as simple as Antonio was making it look. He had heard of me from a business colleague of his for who I did some structuring work so he approached GFOS for an independent opinion.
I pointed out to Jules that Argentina had entered into an ‘Agreement for the Exchange of Information relating to Taxes’, with the US, on the 23rd December 2016, for tax information arising as from 1st January 2018.
Under this agreement the exchange of information from the US to Argentina would be either, ‘Upon Request’, ‘Automatic’, and/or ‘Spontaneous’. Jules was shocked; if there was such a treaty in place, why was the US such a safe haven? Why are advisers taking their clients willingly into the US trap?
The difference between the US and a CRS country, I told him, was that CRS countries are obliged to collate and report on all financial information on accounts held by foreigners, whereas the IRS will only report on financial information which comes its way.
Crucial to this special status is that the trust has a FATCA-sponsoring entity, which means an entity which will divulge all information about the assets and participants of the trust on demand.
If the trust does not have a sponsoring entity, or it loses its sponsoring entity status, the trustee must register the trust as a foreign US-based trust with the IRS and the trust will be issued a ‘Global Intermediary Identification Number’ (GIIN). Such a trust has ‘Chapter 4 FATCA status of a participating FFI’, which is indicated on its W-81MY or W-8BEN-E - forms it is obliged to fill out. This information will then automatically be exchanged with Argentina.
The million-dollar question is therefore how likely is it that information will be requested of the sponsoring entity? The answer is, quite high. First information may have been exchanged from the previous trustee if, like Jules his trust is in a jurisdiction which is within the CRS regime, second it could arise from the amnesty demands - most residents in Argentina have declared trust and non-trust assets. Third, if a distribution is made to a beneficiary then the beneficiary must declare that as a distribution from a trust, and fourth, if any one of the beneficiaries opens an account in the US, has assets in the US or in any other way becomes known to the IRS, information will be automatically exchanged.
Before Jules makes a decision, however, he needs to be aware of the consequences of any leaked information which to put it lightly will be catastrophic.
Under US tax law the assets of a grantor trust are treated as the assets of the grantor. It is a small and simple step for the tax authorities of Argentina to declare that the assets of a grantor trust are to be treated for all tax and reporting requirements as belonging to the Grantor.
This is much simpler than arguing that the trust is a sham meaning they don't even need to bother with sham arguments or years of investigation. If the Argentine tax authorities, with the information in their possession, argue this point there is no plan B and almost no wriggle room – Jules would be a sitting duck to be shot at by the Argentinian tax authorities who would not waste a minute to make an example out of him.
Provided some modifications were put in place to his trust and assets in the Bahamas he could not only keep the trust assets and its participators confidential but of even more importance, should there be any leakage, the consequences need not be disastrous!
Jules didn't want to play Russian Roulette and provided we carried out a health- check on his structure, he will keep his trust in the Bahamas.
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Caroline's books 'When you are super rich who can you trust' and 'Winning Business from Private Clients' will be republished on 11th October at Waterstones Piccadilly.