The author of this article is Alex Lyden , chief fiduciary officer, director of Delaware Trust Services, and trust counsel at Evercore Trust Company, NA and a partner at Evercore Wealth Management. 

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Alex Lyden

When there is disruption or uncertainty, there is a natural urge to seek shelter elsewhere. While it may be prudent for a US citizen or green card holder to diversify an investment portfolio by increasing exposure to foreign markets, moving financial assets overseas comes with significant challenges and potential pitfalls. 

Opening a bank or investment account
The first challenge will be finding an institution that is willing to open an account. Most foreign jurisdictions have onerous “know your client” and anti-money laundering rules and are therefore reluctant to open accounts for non residents. Additionally, most foreign governments have agreed to report any accounts held by US persons to the US government, as stipulated by the US Foreign Account Tax Compliance Act, or FACTA.

Reporting the account    
Any US person who owns or controls one or more foreign financial accounts with more than $10,000 at any point during the year must file a Report of Foreign Bank and Financial Accounts – also known as an “FBAR” – with the Financial Crimes Enforcement Network, or FinCEN, annually. The civil penalty for failure to file, if non-willful, is up to $10,000 per return, and it can be up to the greater of $100,000 or 50 per cent of the account balance if the failure is willful. In addition, criminal penalties may include fines and imprisonment.

US persons may also need to file a Form 8938 with their tax return to report assets over a certain dollar amount based on tax filing status. For those married, and filing jointly, the total value of assets must be more than $100,000 on the last day of the tax year or more than $150,000 at any point. Penalties for failure to file are up to $10,000, with an additional $10,000 for each 30 days of non-filing after receiving notice, and a potential maximum penalty of $60,000. 

Tax considerations
US persons are taxed by the United States on their worldwide income, in addition to any tax imposed by the country where they or their assets are located. While many countries have a tax treaty with the US that prevents or minimizes double taxation, there may be mismatches in tax type or timing that prevent the taxes from offsetting each other. In addition, the US taxes its citizens on certain foreign assets, such as foreign mutual funds, under the punitive passive foreign investment company regime. 

If a US person transfers funds to an offshore trust, they will be treated as the owner of that trust for income tax purposes in any year that there is a US beneficiary, meaning that the tax treatment would be the same as if they held the assets in their individual name. The US owner of a foreign trust must also file Form 3520 and must ensure that the foreign trust files a timely and accurate Form 3520-A , which is then attached to the owner’s Form 3520. 

It should also be noted that certain foreign retirement plans or accounts are categorized by the US as a foreign trust arrangement and therefore trigger Form 3520 filing requirements. Penalties for failure to file a Form 3520 for ownership of a foreign trust are significant, generally equal to the greater of $10,000 or 5 per cent of the gross value of the trust’s assets. Additional penalties will be imposed if noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply. 

Moving assets abroad requires significant consideration and planning.