As parents, we are experts when it comes to our children: how they like their sandwiches sliced, which stuffed animal is most beloved, and how to reassure them after a bad dream. However, when it comes to your child's citizenship, there may be more you need to know. We've previously written about the circumstances in which your child may have acquired US citizenship here. If you've just discovered that your child is actually a little 'Yankee,' you may now be wondering what you need to know to become an expert in this new facet of your child's life.
First and foremost, it is important to resist the temptation to 'deal with it later' or 'worry about it if it comes up.' As a US citizen, your child is liable to US federal tax and reporting obligations, possibly from an early age. In addition, as your child grows up, they are likely to run into issues opening bank accounts or making certain investments when banks discover their citizenship during the due diligence checks. By that point, your child will have a significant tax and administrative headache facing them. There are, of course, many benefits to US citizenship as well, and your role as their parent may be to help your child weigh up the 'pros and cons' of what US citizenship means for them in the broader context of your family situation. Taking advice now and educating your child about their US citizenship and the significance that it holds will mitigate the risk of missed opportunities or unnecessary tax burdens. Here are a few of the questions that parents of US citizen children ask us most frequently:
Question: My child is young and does not have any connections to the US. What should I be doing for them now?
Registering a birth abroad and travel to the US: Children born in the US acquire US citizenship at birth, evidenced by their US birth certificate. For children born abroad to US citizen parents, citizenship is often still conferred automatically but additional steps are required to establish their status as a US citizen.
You should register your child's birth abroad with the US Embassy, which will provide a Consular Report of Birth Abroad ('CBRA') certificate. This serves as official evidence of US citizenship of children born abroad to US citizen parents and that they acquired US citizenship at birth. Ensuring that your child has appropriate proof of citizenship can be imperative for helping them maintain various legal documents, including a US passport (which your child will be required to have if traveling to the US), in addition to registering to vote in US elections.
Filing and reporting requirements for minor children: As a US citizen, your child is liable to US federal income tax on their worldwide income and gains regardless of where they are actually resident. Generally speaking, minor children may have a federal income tax liability even if they are young enough to be claimed as dependents. Whether they need to file their own US tax or information returns (or whether you can include their income on your own return) will depend upon the amount and the source of your child's income (i.e., whether your child has earned income, unearned income from interest or dividends, self-employment income (eg, from babysitting or tips), or a combination of these).
In addition, as a US citizen your child also may have FBAR filing requirements. Generally, children are responsible for filing their own FBAR reports in any year that they have more than $10,000 in an annual aggregate total in foreign accounts. However, if they cannot reasonably file their own FBARs for any reason, their parents, guardian or other legally responsible person must file it for them.
Children's savings accounts and PFICs: You should also be mindful of your child's US citizenship when considering popular savings and investment vehicles designed for children who are resident in the UK. For example, a generous UK grandparent may offer to set up a Junior ISA for your child, not thinking of the potential US tax consequences that may arise. Like adult ISAs, while growth in a Junior ISA is generally tax free in the UK, in the US the ISA is not recognised as a 'tax wrapper' and these accounts will be taxed like any other. Importantly, it is also likely that the majority of investments eligible to be held in a Junior Stocks and Shares ISA (as opposed to a Junior Cash ISA) will be considered a passive foreign investment company ('PFIC') for US federal tax purposes, which would subject your child's Junior ISA to punitive tax and interest treatment under US federal income tax rules.
Question: I'm in the process of updating my estate plan. Is there anything I should do differently now that I know my child is a US citizen?
Answer: Yes, there are decisions you can make now with respect to your estate plan that can help ensure that your US child does not face unintended US federal tax consequences in the future.
First, if your child is older and you wish to consider appointing them as an executor of your will or as trustee (or, in some instances, a protector) of any ongoing testamentary trusts, it will be important to consider what powers such appointment will give your child with respect to the ability to exercise discretion over distributions from your estate or the trust fund of any ongoing trusts. If your child has discretion to appoint assets for their benefit, they could be deemed to have a general power of appointment ('GPOA') for US federal estate and gift tax purposes, which would mean that the value of your estate could be includable in their own US taxable estate.
Second, if your child is young and you intend to leave assets for their benefit in trust, it will be important for the trustees of that trust to take US tax advice regarding the tax status of the trust, as punitive tax rates can apply in the US if US beneficiaries benefit from non-US trusts (as set out in further detail below).
Question: Apart from my from US citizen child, our family is non-US and has various non-US trusts in place for future generations, including my child. Does my child's US citizenship have an impact on our family trusts?
Answer: Yes. If your child is a beneficiary of a non-US trust (a 'foreign' trust for US federal tax purposes), it is important to determine the US tax status of the trust for filing and reporting purposes. Like several other jurisdictions, including the UK, the US places a high compliance burden on US beneficiaries of foreign trusts.
There are onerous reporting requirements and sometimes punitive US tax consequences for US beneficiaries of certain foreign trusts. For instance, both your US citizen child and the trustees of the foreign trust may have current filing and reporting obligations, which can arise regardless of whether your child receives distributions or actual benefit from the trust. Additionally, depending on the tax status of your family's foreign trust, your US citizen child may be subject to complex and costly tax regimes, such as the 'throwback tax rules.'
It will be important for your child's US citizenship to be considered in any trust planning, whether these are historic trusts or trusts planned for the future.
Question: Can't I just avoid all of this by expatriating my US citizen child?
Answer: Expatriation is certainly a possibility for any US citizen who no longer feels that they wish to be an American. This is a personal decision for your child and not an act that you can complete on their behalf while they are young. Generally, children under the age of 16 will not be permitted to expatriate because they are deemed too young to understand the significance of their actions. You can help your child determine whether US citizenship is right for them, given their own circumstances and the broader implications that it may have for your family, by helping them obtain their own legal advice.
Individuals who relinquish their US citizenship may be considered 'covered expatriates' by the IRS if certain thresholds are met, and they may be subject to special US federal income tax and transfer tax provisions upon relinquishing their citizenship. However, there are two limited exceptions to the covered expatriate rules for US citizens.
First, if your child expatriates before the age of 18½ years and has not been a US resident for more than 10 years, they will be exempt from the covered expatriate rules.
Second, if your child was a dual citizen of the US and another country at birth, is tax resident in the other country, and has not been a US resident for more than 10 out of the prior 15 years, they will not be subject to the covered expatriate regime even if they expatriate as an adult. If your child falls within this exemption, it may well be that they would prefer to wait and see whether they would like to benefit from their US citizenship (eg, move to the US to work or attend university) before deciding whether it is right for them to give up their citizenship.
The issues surrounding your child's US citizenship may seem substantial at first glance, but they certainly are not insurmountable. By informing yourself and your child of the obligations and potential pitfalls linked to their US citizenship, you can help your child to manage their US tax filing and reporting obligations, to mitigate the risk of exposure to punitive US tax regimes, and, in due course, to determine whether the benefits of US citizenship are worth the extra administrative burden in the wider context of your child's personal, professional and family circumstances.
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.