UK trusts and the FBAR: beneficiaries and trustees

Does a UK trust have to file its own FBAR

No. FinCEN's instructions count a trust as a United States person only when it is formed under the laws of the United States. A trust created under the law of England and Wales, Scotland or Northern Ireland falls outside that definition, so the trust itself has no FBAR, whatever its accounts hold.

The instructions add that the federal tax treatment of an entity does not decide whether it files. A trust formed under US law files if its foreign accounts pass the threshold, even where its income is taxed to someone else. A UK trust does not file simply because someone is taxed on its income. Its US income tax classification is a separate question with its own rules, and it does not change the FBAR answer. Our post on who counts as a US person for the FBAR sets out the full definition.

What FinCEN does reach is the people. The IRS Internal Revenue Manual on the FBAR (opens the official IRS page in a new tab) lists trust interests among the ways a US person can have a financial interest in an account held by someone else, and signature authority applies to anyone who can instruct the bank. Three roles matter in a UK trust, and one American can hold more than one of them.

• Beneficiary with a present interest in more than half of the assets or income
• Trustee who can instruct the bank, or who holds the account in their own name
• Grantor, called the settlor in the UK, treated as owning the trust for US tax
• Trust formed under US law with UK accounts: a US person filing in its own right

When does a trust beneficiary have a financial interest

A US beneficiary has a financial interest in a trust's foreign accounts when they have a present beneficial interest in more than half of the trust's assets or income for the calendar year. The IRS manual phrases the income side as receiving more than half of the trust's current income.

GOV.UK describes the common types of UK trust (opens the official GOV.UK page in a new tab). In an interest in possession trust, the trustees must pass all the income to the beneficiary as it arises, though the beneficiary has no right to the capital. A sole life tenant of that kind receives all the current income, which is more than half, and is likely to meet the test on the income side alone. In a bare trust, an adult beneficiary is entitled to all the capital and income at any time, which points the same way.

A discretionary trust is different. The trustees decide who receives income or capital, how much and when. A beneficiary who may benefit only if the trustees choose has no fixed present entitlement, and generally has no FBAR financial interest from that status alone. The same reading applies to someone who benefits only after a life tenant dies. Form 3520 and Form 8938 questions can still arise for these beneficiaries, and the facts of each deed matter.

When is a beneficiary excused because the trustee files

A beneficiary whose only link is that more-than-half interest does not report the trust's accounts if the trust, a trustee or an agent of the trust is a US person and files an FBAR that discloses those accounts. Both conditions must be met: a US person in that role, and an FBAR actually filed listing the accounts.

The exception appears in FinCEN's filing instructions and in the IRS manual's list of FBAR filing exceptions (opens the official IRS page in a new tab). It applies to the beneficiary's financial interest through the trust, not to accounts the beneficiary owns personally, and not to any trust account the beneficiary can also operate. If the beneficiary is a co-signatory on a trust account, that authority stands on its own.

For most UK trusts the exception is not available. A trust under UK law is not a US person, and where every trustee is British and no US agent files for the trust, nobody qualifying is filing. The US beneficiary then reports the trust's accounts on their own FBAR. Where one trustee is an American who files and lists the trust accounts, the beneficiary may rely on that filing, and we confirm the trustee's report covers every account before doing so.

Does a US trustee of a UK trust report the accounts

Yes, where the trustee can control the money or holds the account. A US trustee who can instruct the bank, alone or with a co-trustee, has signature authority over the trust accounts, and reports them even though none of the money is theirs. Where the account is in the trustees' own names, the trustee may have a financial interest instead.

FinCEN defines signature authority as the authority of an individual, alone or with another, to control the disposition of assets in an account by direct communication with the bank. Many UK trust mandates need two trustees to sign, which still counts. A trustee reporting on this basis gives the owner's name and address in the signature authority part of the form. Our post on a power of attorney over a parent's UK account covers the same signature rule for attorneys.

The definition of financial interest begins with the owner of record or holder of legal title, whether the account is held for that person or for someone else. UK trust accounts are often opened in the names of the trustees. The IRS manual (opens the official IRS page in a new tab) says such an owner has a financial interest even when the account is kept for the benefit of others. How the account is titled therefore decides which part of the FBAR the trustee completes, so we read the bank's mandate as well as the deed.

• Trustee who can sign on the trust account: signature authority, reported
• Account opened in the trustees' names: possibly a financial interest as legal title holder
• Trustee who cannot instruct the bank: no signature authority over that account
• Trustee who is also a beneficiary: both interests examined separately

What about the American who set up the trust

A US grantor has a financial interest in a trust's accounts when they are treated as owning the trust for US federal tax purposes. FinCEN points to sections 671 to 679 of the tax code to decide that. A grantor treated as owner reports the trust's foreign accounts on their own FBAR as accounts in which they have a financial interest.

This catches Americans in Britain who settle money on a UK trust for children or grandchildren. Whether the grantor is treated as owner turns on the trust's terms and on who the beneficiaries are, and we work through the grantor trust rules before deciding how to report.

Ownership also brings the trust returns. The IRS says US persons file Form 3520 (opens the official IRS page in a new tab) to report certain transactions with foreign trusts and ownership of foreign trusts under sections 671 to 679, and that a foreign trust with at least one US owner files Form 3520-A (opens the official IRS page in a new tab) each year with information about the trust, its US beneficiaries and any US owner. These are IRS returns, separate from the FBAR filed with FinCEN. Our pages on Form 3520 and Form 3520-A explain each.

A worked example with a will trust

Take a US citizen employed as a teacher in Manchester. Her British grandfather's will left his savings on an interest in possession trust: she receives all the income for life, and the capital passes to her children after her death. The trustees are a solicitor and her uncle, both British, and the trust holds a bank deposit and an investment portfolio.

She receives all the trust's current income, so she has a financial interest in both trust accounts. Neither trustee is a US person, so the trustee exception is not available. She finds the highest value of each trust account during the calendar year, adds them to the highest values of her own UK accounts, and compares the total with $10,000. If it is over, she files one FBAR by 15 April, extended automatically to 15 October, listing her own accounts and the trust's.

Her children, if they are US citizens, have only a future interest while she is alive. On the wording of the test they hold no present interest and report nothing for these accounts yet. If the family later appointed her as a trustee with power to sign, she would also have signature authority, though one FBAR still covers everything she must report. Whether her income receipts fall among the trust transactions that Form 3520 reports is a separate question we check alongside the FBAR.

What to gather before filing for a trust

Start with the trust deed or the will that created the trust, the names and nationality of every trustee, and the bank and investment statements for each account. Those three items answer the questions in this post: what interest you hold, whether a US trustee files, and what each account was worth.

Ask the trustees for the highest balance or valuation of each account during the calendar year, the institution's name and address, and the account number. Ask too whether any trustee or agent already files an FBAR listing the accounts. The IRS FBAR page (opens the official IRS page in a new tab) is clear that the FBAR is not filed with the tax return, so a trust's UK tax filings and your Form 1040 do not cover it.

We prepare trust FBARs through our foreign income and FBAR reporting service and the trust returns through our estate and trust planning service. Families with several trusts and holding structures are covered by our high net worth division, and inherited accounts by our post on inheriting from UK parents. Missed years and the routes for correcting them are set out in our guide to FBAR and FATCA for UK residents.