Changes Ahead for Professional Trustees

For professional trustees, this year was a break from the apparently never-ending changes in laws, rules and regulations that have been imposed on trusts for more than a decade.  Despite the break from the shifting federal landscape, 2014 prepared trustees for two significant regulatory changes: implementation of the Foreign Account Tax Compliance Act (FATCA) and “unbundling.”

FATCA targets non-compliance by U.S. taxpayers who have non-U.S. assets, attempting to ensure that U.S. persons pay taxes on their worldwide assets.  FACTA requires U.S. taxpayers to report their offshore assets as well as foreign financial institutions (FFIs) to report accounts owned by U.S. taxpayers.  Because “FFI” is defined broadly, a trustee of a non-U.S. trust is subject to FATCA reporting and registration, even if the trustee is a U.S. financial institution.  The consequences of failing to register and report are severe—a 30 percent U.S. withholding tax will be imposed on U.S. source payments made to the FFI. 

Trustees will also confront “unbundling” of fiduciary fees contemplated in final regulations under IRC section 67(e) in 2015.  “Unbundling” refers to the need for a trustee to separate out from that single fee the amount that represents investment management fees that are subject to the 2 percent floor for deductibility of miscellaneous itemized deductions.  The balance of the fee represents the amount that can fully be deducted on the trust’s income tax return as purely trust administration.

Even though 2014 has been relatively quiet for professional trustees, many changes are set to occur in 2015 and beyond.

See Gail E. Cohen, A Quiet Year—But Change is on the Horizon, Wealth Management, Dec. 22, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.