FATCA & Hold All Mail

Foreign Account Tax Compliance Act and Hold All Mail

By now, most major financial institutions and service providers are winding up the review of their client base to ensure that undocumented US centric clients are properly identified as it relates to the Foreign Account Tax Compliance Act (FATCA) and its regulations.

From our own experience, this exercise allowed us to reconfirm that our clients were still non U.S. persons by obtaining new W8-BEN forms. However, we found examples of third party power holders and beneficiaries that were deemed US resident for FATCA purposes and these persons were properly documented by obtaining new W9 forms.

In an attempt to cure all inferences of US indicia, we reviewed all of our customers mailing addresses. Many of whom had Hold All Mail (HAM) addresses in the U.S. to assist with the copious amounts of mail sent to each client monthly. This inference of U.S. residency had to be cured to eliminate any doubt of the client being a non U.S. person. The cure process involved sending a letter to the client to have them confirm that the U.S. HAM address was only being used to facilitate the management of mail.

As an alternative to a US HAM address, we recommended the FidPro Hold All Mail Service, one of few Hold All Mail providers not located in the U.S. FidPro Hold All Mail clients did not require a cure letter. This turned out to be a significant saving for the firm and our clients were not required to send followup confirmation.

If there is an indication that your client is a US person, this should be explained. In the absence of a plausible explanation for the US indicia, you may want to recommend to your client that they seek independent tax advice to confirm their status before the 17th of August 2015.

For all Bahamian Financial Institutions or BFI’s the local FATCA Portal can be accessed here.

“On Why One Should Separate Duties”

Why it’s important to Separate Corporate from Legal Services

If you’re contemplating the incorporation of a local company or International Business Company (IBC), then you may wish to consider the concept of separating your corporate and legal services. The basis for this is continuity of business. More often than not, corporate services form a portion of the legal services rendered by the client’s attorney. Unfortunately, there are times when expectations are not met and the client and attorney are forced to end the relationship. If the termination is not amicable, it could lead to disruption of the registered office and agent services previously provided by the client’s attorney. I.e. Regulatory requirements such as annual fees and filings will not be maintained due to the inability to collect disbursements from the client.

By using a Financial Corporate Service Provider to act as registered agent and office exclusively, no matter how dysfunctional the relationship between the client and his legal support might become, the company is able to continue without disruption. This element of continuity is important. It saves the client money, it’s more efficient and augments the robust attribute of limiting the liability of the company’s beneficial owner.

If you’re about to start a new business and you want to hire an attorney to represent you and your company’s interest, consider meeting with your Corporate Service Provider first. Chances are, they’ll save you money in the long run.

On International Business Companies or IBCs as Split Share Companies

The Split Share International Business Company (IBC)

A Bahamian International Business Company or IBC can be used as a split share company that is both effective and affordable to administer.

The process for creating a split share company involves amending the Articles and Memorandums of the IBC so that the Ordinary shares of the company represents the future income and/ or any type of future gain of the structure and the Preferred shares represent the existing assets and liabilities that are treated as capital.

The IBC can also be split into the same class of shares as indicated above but instead of income and capital, the shares are used to delineate between a charitable purpose (ordinary shares) and a directed purpose (preferred shares).

In both examples, the setup of the IBC represents a form of planning that can shelter clients against tax exposure as well as provide succession planning. A revocable, fully directed trust owns the redeemable, preferred shares corresponding to the capital of the company, and a second irrevocable, discretionary trust is used to hold the ordinary shares corresponding to the income.

The “Split” between the income and capital of the company via issuance of different classes of shares, theoretically allows the client to segregate himself from the income generated by the holding company.

Provided that the client has fully relinquished control and benefit of such income (due to the irrevocable trust), neither the settlor or beneficiaries are subject to tax reporting obligations in their home country. I.e. No income tax reporting obligation until receipt of an income distribution.

In summary, as long as the Trustee retains full discretion on the income trust, there are no tax or reporting obligations in most jurisdictions.

On Letters of Wishes vs Trustees Notes or is it all a direction?

Precatory Words or Direction?

“ I should emphasize that I am in no way limiting your discretion or in anyway creating any binding trusts or obligation upon you but merely making you aware of how I would prefer the Trust Fund to be dealt with subject to the powers and discretion conferred upon you under the Trust “.

Can the precatory words above provide protection or is it actually a direction which could determine the mind and management of a trust? (“Garron” decision April 12 2012)

If a trustee is inclined to follow a Letters of Wishes (LOW), its imperative that the decision making process is documented to illustrate that discretion was exercised. If not, is it possible that the LOW can be construed as a direction?

LOWs are most often more definitive than the trust instrument. Whilst the trust is considered a core document that contains the terms and conditions of the fiduciary relationship, the LOW is non binding and will usually contain the specifics of the settlor’s intent. This means that in most cases, trustees rarely disclose the LOW unless requested by the settlor. (Londonderry’s Settlement).

Trust practitioners recommend the use of notes as a means to document the intent of the settlor. A well written memorandum marked “without prejudice” will not only capture the settlor’s intent but also ensure that his wishes are kept completely private and confidential.

Do you have a reason to question whether your trust is discretionary or directed? Perhaps your trust is discretionary but your LOW is not. Does your LOW provide sufficient information to assist the trustee without crossing the proverbial line of no return.

On the International Business Company of the second part

“The Bahamas’ International Business Company”

IBC 2

The Bahamas International Business Company or I.B.C., has kept pace with the demands of high net worth clients due to benefits such as tax efficiency, ease of administration and low costs. In comparison to the Cayman and British Virgin Isles. equivalents, the Bahamas I.B.C. is fully supported by an Agency Internet Module or AIM that allows the registered agent to manage the I.B.C. via the internet.

More importantly, there is tremendous pressure from the U.K. Home Office to direct British Overseas Territories and Crown Dependencies to transition to a Public Registry of Companies. As the Bahamas is an independent nation, this could be a game changer as there are numerous reasons why clients require confidentiality that are not tax or fiscal related.

Because a trust is not considered a legal entity in most common law jurisdictions, an I.B.C. is frequently used together with an Asset Protection Trust to properly custodize the trust fund. This arrangement provides significant tax benefits against U.S. estate taxes as well as succession planning.

When the time comes to consider a trust, its important to remember the benefits of using a Bahamian I.B.C. as the holding company for your trust assets.

The FidPro Blog

Tag Archives: Estate Planning