Your Pet’s Foreign Bank Account Report
By Orlando Gotay
I came across a very informative note by a colleague on what are called “pet trusts.” As of last week, all 50 United States and Washington DC have laws allowing trusts to provide for care of domestic animals. We are very fond of our pets, and it is logical that owners may want to provide for them, even when the owners are no longer around.
Last week at an IRS seminar on Foreign Bank Account Reports (FBARs), there was mention of a US person’s obligation to file FBARs if they owned or controlled a United States entity that had a foreign account. If a person is more than a 50 percent owner of a domestic entity that has a foreign financial account over US$10,000, both the entity and the owner have an FBAR filing obligation. An owner can be one who has an “indirect” interest in the financial account. This applies to corporations, partnerships, Limited Liability Companies/Partnerships, and—you guessed it—trusts.
Trusts generally have three types of persons involved: the creator, or settlor; the trustee, who administers the trust; and the beneficiary. In pet trusts, “Fido” is the obvious beneficiary. Fido is not a “US person” but both the trustee and the settlor can be. If Fido’s trust has a foreign bank account for his benefit, it must be taken into account by both the settlor and the trustee for FBAR purposes. The highest account balance during the year may put either of them over the US$10,000 threshold and thus may cause an FBAR filing obligation for four persons: the trust, the settlor, the trustee, and the beneficiary.
The settlor reports because of indirect ownership, while the trustee reports a signature authority over the foreign account. But… the beneficiary? I talked about Fido being the beneficiary: Fido does not report.
Under the typical pet trust statute (I use California as an example), when Fido is no longer around, the trust purpose terminates and the remaining trust assets must be distributed. If the pet trust has human contingent beneficiaries (those who will receive what’s left after Fido is no longer living), any one of them with more than 50 percent interest in trust assets may also have to file an FBAR the year they become actual beneficiaries.
Something as innocent sounding as a pet trust can have significant consequences as soon as a foreign bank account is involved.
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at email@example.com.