United States: Trustees, Are You Suffering From "Accountholder" Confusion?

Last Updated: November 23 2018
Article by Ivan Lu and John Shoemaker

Words Matter

So, you're cruising along in the pre-FATCA/CRS world, providing fiduciary services for your clients, setting up accounts in either the name of the trust, foundation, underlying company or other wealth planning structures and processing mandatory or discretionary "distributions." Depending upon the location of the client structure and the bank where the account is held, you have varying KYC/AML and similar rules to follow...a hodge-podge so to speak. But one thing remains consistent in the wealth planning conversations you have with the end-user client – that the fiduciary structure is the accountholder and that the client is the beneficial owner (the "BO").

Along came July 1st, 2014 and everything changed. If your fiduciary structure is a Foreign Financial Institution, you now have "accountholders" in your structure, separate from the structure itself as an "accountholder" as well. All of this "accountholder" talk now gets very confusing. Even if your structure is an NFFE or NFE, you now have "Controlling Persons" that may not exercise anything like what a layperson thinks of as control (we'll save that for another Blog Post).

Traditional Accounts

Up until FATCA began on July 1st, the term "account" in the global wealth planning industry referred to traditional financial accounts. These traditional accounts took the form of bank accounts, investment accounts, securities accounts and so on and so forth. These accounts held assets and securities (traditional bankable assets) kept in the fiduciary structures. These accounts were always held in the name of the fiduciary structure (for example, the ABC Trust company as trustee of the XYZ trust, The John Doe Foundation, Securities investments Limited). These accounts were only documented from a US perspective when they chose to hold US securities. This was done as part of the Qualified Intermediary (QI) regime.

For the most part, the system was simple and straightforward. The accountholder is the structure and the BOs are those individuals behind the structure. As the name entails, the BOs would eventually benefit from the assets held in the account, but they were not accountholders.

The New FATCA/CRS Accounts

Gone now are the days where "account" simply meant those traditional accounts. FATCA created the concept of "accounts" in a fiduciary wealth planning structure. CRS picked up this concept and spread it globally between most jurisdictions outside of the United States.

The quick and dirty explanation goes something like this: FATCA/CRS divide the world into Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE).1 FFI's responsibility under FATCA is to report certain data in regard to their U.S. Reportable Accounts. Obviously, this means they now have (up until now undefined) accounts and accountholders. The FATCA Regulations and the Intergovernmental Agreements2 define accounts for FFIs that are Investment Entities3 as an Equity Interest or a Debt Interest. Debt Interest is undefined (again, this is a subject for another Post), but Equity Interest is defined based on the type of entity, as follows:

" Partnerships: a capital or profits interest in the partnership (basically, a partner)
" Trusts: Owners (or Settlors), Beneficiaries and others "exercising ultimate effective control over the trust
" Companies: strangely, there is no direct definition of equity interest in a company (yet another Post topic, surely) but we'll assume shareholders fit the bill.

Regardless of the specifics that we will delve into later, now the term "accountholder" is used in ways that trustees, lawyers, financial advisors, accountants and – most importantly – clients are not necessarily familiar with, and that can lead to confusion.

How do we avoid confusion? The FATCA/CRS "Upstream-Downstream" Dimension

In the day-to-day interactions between trustees, lawyers, financial advisors, accountants and clients in the world of global wealth planning, the terms "accounts" and "accountholders" are key to communicating documentation requirements and accurately conveying the distributive intent of both the Trustee and the BOs. To avoid the confusion that FATCA/CRS creates, we typically suggest the use of the distinguishing terms "upstream account" and "downstream account".

Upstream accounts are the accounts held with traditional banking and investment companies in the name of the fiduciary wealth planning structure. Downstream accounts are the new accounts created by FATCA/CRS, held now by the BOs and others. Why upstream and downstream? Well, as Hal Holbrook so eloquently instructed us in All The President's Men, "follow the money"...the flow of assets, at the end of the day, is the simplest and easiest defining point for what our structures are often set up to achieve and also what FATCA/CRS reporting regimes are interested in. In this flow, interest, dividends, capital gains and other sources of increases in wealth flow into the upstream account, down through the structure eventually then out to the downstream accountholders. This is a simple, easy and elegant explanation that any layperson client can quickly grasp.

The Discussion Point

Are you experiencing client confusion in regard to these new FATCA/CRS accounts? Almost all participating FATCA/CRS jurisdictions have begun automatically exchanging information, so now is the time for a FATCA/CRS "health check" before home tax authorities begin follow-up enquiries and audits. High net worth individuals and families, their advisors and fiduciaries of multi-jurisdictional wealth planning structures should seek proper guidance to ensure that they meet all requirements ahead of these external and internal enquiries.


1 For CRS the "foreign" designator is removed and thus there is one less "F" in the acronyms. For simplicity's sake we'll stick with FFI and NFFE in this post.

2 I will go into more detail with specific citations on this subject in a subsequent Post.

3 "Investment Entities" is the most probable Entity Classification for fiduciary wealth planning structures with a corporate trustee or with assets that are professionally managed. See Peter Cotorceanu's excellent series of articles on the subject in The FATCA Elephant Series.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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