Trap For the Unwary: Reporting Foreign Banks and Financial Accounts
A Durable Power of Attorney is an important element of estate planning, and allows a person to appoint a trusted adviser, friend or family member to handle his or her financial and legal matters in the event of incapacity or other situation. Through a Durable Power of Attorney, the “principal” routinely provides his or her “agent” (appointee) with authority (including authority to sign) over financial accounts owned by the principal. This could surely include any accounts owned by the principal in foreign financial institutions. It is vital then that both principals and agents be aware of reporting requirements that come with such ownership or authority over foreign financial accounts. A recent publication from the IRS makes clear that account owners and those who have authority over the foreign accounts through a Durable Power of Attorney must comply with certain filing requirements or face potentially substantial penalties.
The Bank Secrecy Act, which gives the Department of Treasury authority to collect information from “US persons” having foreign financial accounts, comes with a reporting requirement called the Report of Foreign Bank and Financial Account, or “FBAR”. According to the rules, the term “financial accounts” is applied broadly-such accounts include savings accounts, checking accounts, brokerage accounts and securities derivatives or other financial instruments accounts; commodity futures or options accounts; insurance policies with a cash value; mutual funds or other similar pooled funds; or any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution. The FBAR rules require that “U.S. persons” that have an interest in a foreign financial account must file a FinCEN (Financial Crimes and Enforcement Network) Form 114 every year if the aggregate maximum values of all the foreign accounts exceed $10,000 at any time during the calendar year. Under the law, having signature authority, even if unused, over a foreign account is enough of an interest to trigger the reporting requirement, and the penalties for failure to file can be civil, criminal or both.
While this requirement has been around for quite some time, a recent publication from the IRS (the IRS has enforcement authority regarding the FBAR) has brought the issue to the forefront for estate planning attorneys and their clients, especially with regard to Durable Powers of Attorney. In its guide, the IRS stated that “signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account.” The IRS went on to make clear that the term “signature authority” includes those named as agents in a Power of Attorney. To illustrate the issue, the IRS included this example:
Megan, a United States resident, has a power of attorney on her elderly parents’ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.
Given this determination, it is clear that the person named as an agent in the power of attorney, along with the principal, is subject to the FBAR filing requirements if the POA gives the agent signature authority over the principal’s financial accounts, if foreign accounts exist, and those accounts exceed the $10,000 threshold. It is also easy under the circumstances to contemplate the potential of a principal or agent having no knowledge that he or she is obligated to file under FBAR rules.
This is important to us from an estate planning perspective given the significant role Durable Powers of Attorney play in estate planning. Additionally, because many powers of attorney provide an agent with immediate authority (as opposed to a “springing” authority triggered by certain criteria), this filing requirement could attach to the agent as soon as the POA is signed.
Estate planning attorneys should be mindful of this requirement when drafting Durable Powers of Attorney for clients, or when counseling clients who are named as agents by another party. Specifically excluding authority of the agent over foreign financial accounts unless and until expressly accepted by the agent is one way to address the issue, and it forces both the principal and the agent to acknowledge the existence of such accounts and the pursuant filing requirement.