In 2010, President Obama signed into law a jobs bill referred to commonly as the HIRE Act. The law provided federal funding for a variety of job creating activities (roads, bridges, police, etc). Title V of the act, referred to as the "offset provisions", created a new section of the tax code called the Foreign Account Tax Compliance Act (FATCA) for short.

The stated goal of FATCA is to improve tax compliance of US and foreign individuals with regard to international transactions and any offshore accounts. The method to enforce FATCA is an elaborate mandate by the US that every foreign financial institution (over 100,000 world wide) either close their doors to US persons OR enter into a voluntary information sharing agreement with the US IRS in which they disclose a myriad of information about the US person, their account as well as any individual transactions to take place on the account.

Foreign banks that fail to enter into such an agreement with the IRS on or before December 31, 2013 are relegated to a bank blacklist in which any dollar based transactions being directed to such foreign bank is charged a 30 percent withholding tax on the gross amount of the transfer.

So for example, if US person Mr. Jones purchases a property from Columbian National, Jose Valdez for $100,000 and Mr. Valdez' bank in Columbia is a non compliant foreign bank, THEN when Mr. Jones sends a wire transfer to pay for the property, his own bank will automatically deduct $30,000 and send the amount to the IRS as an advance tax payment on behalf of Mr. Jones. Of course Senior Valdez will not accept $70,000 instead of $100,000 for payment of the property. If Mr. Jones tries to cover the difference and send $30,000 more, his bank will withhold another $9,000 and so on and so forth until it would actually take over $141,000 in funds sent to have Senior Valdez receive $100,000.

Of course, Mr. Jones is unlikely to agree to pay $141,000 for the $100,000 property. Either Mr. Jones will insist that Senior Valduz do his banking at a US compliant bank to avoid the withholding tax, or the deal will break down and fall apart.

Obviously, this will have a deterrent effect on all transfers of funds outside the United States, to any banks that don't have information agreements similar to the US 1099 system in place. It will be important for international real estate developers, brokers, agents to make sure they locate banks in their area that are (or intend to become) compliant with the IRS' new information sharing regime or their ability to close US buyer customers will be greatly undermined.  

FATCA also expands greatly the type of foreign financial assets that are reportable by the US person directly to the IRS. The FATCA rules are implemented through a new tax schedule which was adopted early in 2012 (but retroactive to the 2011 tax year). The form not only addressed foreign financial accounts presently reportable under the Foreign Bank Account Report (FBAR) due each June 30, but any other type of financial instrument including stocks, bonds, loans, ETFs, gold certificates, etc.

Interestingly, neither physical gold bullion held outside the US, NOR FOREIGN REAL ESTATE is covered by the new regulations and remain non reportable to the US IRS. This should be utilized by all international real estate professionals as a positive sales proposition and benefit for their US buyers to purchase non US real estate.  Since many US persons are looking to diversify their assets outside the US, but do not wish to have complicated legal structures or onerous reporting requirements, owning foreign real estate is a simple method to achieve global asset diversification.

Another overlapping consideration to many affluent and wealthy clients is the soon to expire Bush tax cut extensions, which went into effect January 1, 2011 and expire December 31, 2012. All of the nuances of the tax cut extensions are beyond the scope of this article. One element, however, concerns the lifetime exemption from gift and estate tax, which in 2012 is $5,120,000 per person (or $10,240,000 for a married couple) and is very important to this discussion.

The exemption allows people during their lifetime or at death to transfer assets to their children, grandchildren, or any other heir. The estate or "death" tax as it is sometimes referred, was phased out completely under the original Bush tax cuts in 2010, but the elimination of the tax sunset and was scheduled to come back into effect January 1, 2011 at the old pre Bush tax rates, barring pro active Congressional action.  

As part of the Bush tax cut "extension" agreed upon between Congress and the White House, the unlimited exemption at death in 2010 was replaced with a compromise "life or death" exemption amount of $5,000,000 indexed for inflation (which is why it is $5,120,000 in 2012). The extension, however, was only for two years, meaning without additional positive action between the White House and Congress before the end of this year, the amount exempt from gift and estate tax will again automatically revert to $1,000,000 (pre Bush era level). Most tax and political commentators believe that in the current political and election year climate, the chance of such compromise legislation is virtually impossible.

So for people who would like to move up to the maximum $5,120,000 out of their estate without paying any gift and estate tax, the window to do so is rapidly closing. For transactions that exceed $1,000,000 after January 1, 2013, a tax rate of up to 55 percent is now set to apply.

Folks concerned about both the expiration of the Bush tax cut extensions as well as the FATCA regime,  (and often also long term stability of the dollar) the solution is to transfer a portion of their net worth up to the current exemption amount to a foreign/offshore trust. There are other structures as well to consider including Foundations, LLCs, LLPs, etc., but for most people the international trust is the correct vehicle to protect and preserve their wealth over generations. Hard assets, such as foreign real estate and precious metals often anchor such overseas portfolios because they are true stores of long term wealth and can weather the storms of devaluation or hyper inflation.

Our advice to such people is to maintain compliance with all US tax and regulatory requirements, but do so from the perspective of having their own critical nest egg positioned outside the US before the end of 2012. This means filing initial gift returns on the transfer of the gift to the foreign trust as well as the disclosure form for the creation of the foreign trust itself. The financial assets in the trust are reported on the new IRS form 8938 and the older FBAR requirement musts still be observed as well. If your accountant or CPA is not conversant with these rules, then find one who is. The fines and penalties for failure to file are simply too great to not observe them correctly.

So "take action and be compliant".  These should be your guiding principals as we move toward the end of 2012. The Ancient Mayans predicted that the world would come to an end on December 21, 2112. I actually know some folks planning big "end of the world" parties for that date. For the rest of us those predictions seem highly unlikely. What is far more certain, however are the looming changes to our current tax, regulatory and compliance system that will usher in the next two Januaries.

You have the opportunity now to prepare yourself, your finances and your financial future ahead of these changes. As one of my professional colleagues recently commented "If you can see the run away train speeding down the tracks in your direction, you shouldn't get run over by the train".

If you need assistance, contact our law firm, Nagel & Associates, LLC, home of the "Personal Asset Protection Plan" and let us help you protect your financial future. Call us at 412-749-0500 for a no cost consultation or visit us on the web at www.Nagellaw.com