Are US clients worth the headache or inevitable in a global economy? In eprivateclient's 2018 Guernsey report 'Building on Trust', Trust Corporation International Directors Andrea Daley Taylor and Kenneth Wrigley explain why trustees should persevere.
America is the world's leading economy, with recent figures showing that 43% of the world's millionaires reside in the USA, by far the biggest concentration of wealth in the world. By comparison, just 7% reside in the UK, 6% in Japan and 5% in China. Furthermore, the global economy grew by 6% during 2017 - the fastest growth period since 2012 - and, perhaps unsurprisingly, more than half of this growth was generated by the US.
While this wealth concentration will inevitably shift over time, there is no reason to expect that it will happen soon as the conditions that have, until now, contributed to the US's reputation as an investment hub and a 'safe haven' for the high net worth community are as relevant now as they have ever been. Indeed, the US has an established and robust legal system that promotes and protects domestic wealth, it has centres of innovation that have long bred some of the world's wealthiest and are set to continue to do so. On top of that, the US 'quality of life' consistently attracts the internationally mobile whose wealth was generated elsewhere.
In addition to this, various steps have been taken in the US to protect privacy rights, sending a clear message to the high net worth community that, while well-regulated, it also values privacy and confidentiality – something which is increasingly important to clients in the current climate of global transparency.
All things considered, the growth of the already considerable US client base is inevitable and its attraction for the Guernsey-based fiduciaries is an obvious one. So, why is there sometimes a reticence to take steps to access this market and exploit the opportunities that are potentially there for the taking?
The answer has to be that engaging with US-connected clients involves navigating the complex and ever-evolving world of US tax and regulatory legislation, a task not to be taken lightly and not to be taken at all without specialist advice. Is it really worth the headache?
To put this in context, the typical 'touch point' for a Guernsey trustee is when a beneficiary, knowingly or otherwise, becomes a US citizen and, from then on, is subject to a plethora of tax and reporting obligations, all of which the 'informed trustee' must understand.
Among other factors, there are the punitive throwback rules applying to undistributed trust income and the implications of investing through PFICs to consider. There is also an obligation to submit an annual Foreign Bank Account Report (FBAR) which means that all US persons with foreign bank accounts holding an aggregate value of $10,000 at any time during the year must report on each account annually as well as provide details of worldwide income. All of these requirements must remain firmly on that trustee's radar.
There's clearly more need than ever for fiduciaries to possess specialist expertise in this area - the level of skill and awareness required to administer the client's affairs and the general intellectual challenge associated with clients with a US nexus has increased and continues to do so.
Any trustee will need to appoint a US tax specialist and educate staff thoroughly on the regulatory and reporting frameworks and applicable timings. The trustee will also need to consider if the existing 'in-house' financial reporting system is capable of providing the information required to ensure compliance with US reporting obligations, such as distinguishing between long and short term investment gains - all too often these systems are UK-tax focused.
The reality is that getting it wrong can be expensive. Indeed, failure to file a FBAR can carry with it a civil penalty of $10,000 per non-wilful violation, per annum. Ignorance is not necessarily a defence and a continued failure to educate oneself on the FBAR reporting requirements may be seen as evidence of "wilful blindness" resulting in an increased penalty, potentially to the greater of $100,000 or 50% of the highest account balance during the period.
While many filing and reporting obligations lie with the US citizen they may, in turn, seek to hold their trustee responsible, perhaps for a lack of information flow between the trustee and the beneficiary or even for not alerting them to the possibility of their US citizenship, if US indicia has been recorded in the trustee's records. For fear of making sweeping generalisations, the litigation risk appetite of the average US client is arguably greater than in some other cases, especially with such high tax penalties at stake. Offshore trustees may for this very reason be nervous about putting themselves in the line of fire by working with clients who may not be used to the style and approach of a more hands-on trustee. The latter may hold them to account, and not necessarily before the Guernsey courts – a potentially protracted and costly exercise.
Given this need for significant investment in terms of both education and time, it is understandable that a cost-benefit exercise will need to be undertaken by offshore fiduciaries – will this investment pay off or would it be simpler to exclude US tax payers from one's client base altogether?
The latter stance may, however, be regarded as short-sighted because, in addition to the disproportionate amount of wealth in the US alluded to above, there are noticeable and quite favourable differences in cultural attitudes to the concept of wealth generation and preservation. There is a general acceptance of, and commitment to, the requirement to plan one's affairs and, given the complexity of the IRS code, most Americans require tax advice to understand and fulfil their personal tax obligations.
This presents opportunities for the clients and industry generally which are not restricted to the 'super rich' - in fact, there are a number of accepted US estate planning methods for even very modest wealth which often involve the use of domestic trusts. Consequentially, as a nation there is a welcome familiarity with trusts and a true recognition of their value in structuring matters.
With this in mind, what can be done by offshore fiduciaries to mitigate the risks outlined above without restricting business opportunities with a US-nexus?
The essential components have to be firstly to ensure a sufficient level of appropriate in-house expertise, knowledge and practical experience on the matters that are likely to be relevant to one's US-connected clients and, secondly, to develop a network and enlist the assistance of professional service providers to help in specialised areas. In close proximity to Guernsey, London has a well-resourced pool of highly-specialised and competent tax and legal advisers who are able to assist with the spectrum of issues that arise when interpreting the complexities of US legislation and regulation in an international context.
In conclusion, with an investment of time and resource in internal education and professional development, the implementation of appropriate infrastructure to facilitate US reporting and, finally, the establishment of a strong network of US tax and regulatory specialists, there is no reason why the progressive trustee should feel obliged to shy away from US-connected clients and the potential opportunities that accompany them.
After all, no pain, no gain as they say!
An original version of this article first appeared in the eprivateclient 2018 Guernsey Report 'Building on Trust', May 2018.
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