US Tax – Safeguarding Finances of the Elderly, Stateside and Abroad

My latest article is copied below in full, as published by Bloomberg Tax, December 9, 2022 in Tax Insights, reproduced with permission, link here.The Bureau of National Affairs, Inc. (800-372-1033)

The growing trend of email and phone scammers, combined with the potential for diminished cognitive abilities due to aging, can imperil elderly people’s financial safety. For Americans overseas and multinational families, this dilemma takes on more significance—not just from the practical and logistical side of things, but also for the US tax aspects that can arise when an individual wants to assist another person whose financial assets may span the globe.

Practical Concerns

Living far away from an elderly family member often means undetected changes may take place. These can involve changes in mental capacity, who the elderly person chooses to speak to and trust, and changes in their financial activities and estate plans. In this article, I generally refer to parents and children because this is the most common scenario, but the situation can involve any elderly person.

While it’s emotionally difficult for the younger generation to take control of a parent’s or other loved one’s financial life, it’s equally difficult for the other party. These actions mean, to a certain degree, a loss of independence and financial freedom. Furthermore, the financial institutions and advisers involved must be comfortable with the eventual arrangements. They must maintain confidentiality about their client’s financial affairs unless they’re given specific permission to share the information with another party.

A balance must be struck to accommodate the various interests—safeguarding the finances of the elderly person while maintaining their independence as much as possible, meeting the logistical obstacles that may arise if living in different countries, and allowing the financial institution or adviser to meet its privacy and confidentiality mandates.

Joint Ownership of Financial Accounts

Generally, a parent can add a child as a joint tenant to their account. The relevant financial institution would have a fair amount of comfort in sharing information with each of the joint owners. This enables the child to monitor account(s) and detect financial fraud more readily. The child is not intended as a beneficial owner of the account but is named for convenience and acts at the parent’s instruction or for the parent’s benefit; funds are used only for the parent.

Unfortunately, such joint ownership may bring about unintended legal and US tax consequences. For example, if the parent were to pass away, ownership of the account would pass to the child. But perhaps this is not what the parent intended, especially if there are other children. In the absence of some directive (for example, a carefully prepared nominee agreement), the other siblings may be deprived of their share of what the parent intended to give them. US gift tax consequences could arise if the child is a US person and tries to “remedy” the inequitable result by sharing the amounts with his siblings.

From a US tax perspective, the interest and other income derived from the account belongs solely to the parent, but US tax issues may arise for the child. The parties must be careful with documentation and tax reporting. If the account is a foreign account, filing of the Report of Foreign Financial Accounts, or FBAR, may be required by both the parent and child (assuming both are US persons), even if the child is only acting as a nominee joint owner. Hefty penalties apply for non-filing.

Powers of Attorney

A power of attorney is a legally recognized authorization giving a designated person the power to act for another person—the principal—regarding all or certain of the principal’s property, finances, investments, or medical care.

A durable power of attorney is often given before the principal has any kind of mental or physical incapacity and is therefore fully capable of managing financial affairs. Thus, the parent remains in full control of the account. The power holder often will not have any knowledge about the assets or accounts of the principal. And unless the power holder inquires and gathers information regarding the principal’s accounts, a DPOA may not protect a parent against financial fraud. A DPOA will, however, give the financial institution or adviser more freedom to proactively communicate with the power holder if fraud is suspected.

The efficacy of the DPOA will greatly depend on how proactive the financial institution or adviser is willing to be. There’s no guarantee that they will share any concerns about the account with the power holder, and they’re not under any legal obligation to do so. Some financial institutions may not recognize the power of attorney, especially if it was executed in a jurisdiction different from the location of the financial account.

Signature authority over a foreign financial account raises FBAR filing obligations. A DPOA typically provides such authority; whether it’s ever exercised is irrelevant to the FBAR filing requirement.

Revocable Trust

The use of a revocable or living trust can solve some problems associated with the alternative solutions. In creating such a trust, the parent would be the grantor, or creator. The parent’s accounts would be titled in the name of the trustee charged with administering it. The trust agreement creates the legal relationship between the grantor, the trustee, and the trust beneficiaries; it spells out the duties of the trustees, interests of the beneficiaries, and other matters.

Creating a revocable trust is generally affordable, and its use permits the capable parent to maintain a great degree of financial freedom. If the parent is capable, they can act as a co-trustee with the child or with an institutional trustee. The parent can collect the trust income or direct how it shall be used. When the parent is no longer able to manage financial affairs, the trust agreement should provide for removal, perhaps with the oversight of a trust protector. When the parent no longer serves as a trustee, the co-trustee will step in to manage the trust for the benefit of the parent. The trust agreement also can provide what is to happen when the parent passes away, at which time the trust generally will become irrevocable.

The use of a trust protector also could be explored. This role is very different from the trustee’s since it might not be specifically defined. Powers given to a trust protector can be very broad and can include removing and/or replacing a trustee. When an aging parent serves as trustee, the role of protector can be helpful in this regard.

Careful preparation of the trust agreement can ensure financial safeguards. For example, it can require that written notice to, or written approval by, all co-trustees must take place upon the happening of certain events. It also can require that all remainder beneficiaries regularly receive the account statements. With these safeguards, unusual financial activity that might be a cause for concern can be detected and addressed more easily.

Families often live in different countries, and many hold multiple nationalities, so US tax and FBAR issues can easily arise. If the revocable trust is established as a foreign trust by a US grantor, it would carry significant tax and reporting duties for the grantor and the trustee. The status of the trust when it becomes irrevocable upon the death of the grantor also involves US taxation concerns. An irrevocable foreign trust raises FBAR, tax, and reporting obligations for the US beneficiaries and for the trustee.

Posted December 15, 2022

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