Estate Planning 2 – Beware of the US IRS

And, while we are on the topic of estate planning…

One of the most wide-reaching reforms introduced by former US President Obama was the Foreign Account Tax Compliance Act (“FATCA”) which virtually enforced an obligation on non-US based financial institutions such as Australian banks to provide information to the US IRS on accounts held by its citizens outside of the US. As the US is one of only 2 countries in the world which require citizens (regardless of their residency) to comply with their local tax rules and filing obligations, this change was significant.

Australia is among the many countries to sign up for the FATCA rules and so its local financial institutions are obliged to comply.

As a consequence, you may have noticed for example, when opening a new bank account, the bank will forward to you a document that may be used to inform the US IRS if you have any citizenship or other connection with the US. Under the FATCA reporting obligations, the US IRS may ask your bank for this information to establish whether there are any US tax reporting obligations that must be complied with.

By identifying with the financial institution if you are a US citizen, there is another consequence to be beware of – and it relates to US gift and estate duties. Even though you may no longer be a resident of the US, by holding US citizenship there could be US tax consequences where you hold directly, or indirectly (for example, through your superannuation fund), property in the US including shares in US companies.

US citizens are not, however, the only focus of the US IRS when it comes to applying their rules to US property.

Non-US citizens who inherit wealth from a US citizen that comprises property in the US may also be exposed to US death or gift duties – which may come as a surprise to some.

So, if you have any exposure to the US, whether it be by way of citizenship or by inheritance, it would be worth your while when reviewing your estate affairs to explore the potential for the US IRS to be interested. Being forewarned is clearly better than finding out some years later, as the US penalty regime is harsh.