FATCA fact: Under new US tax law, Indian Trusts will now have to disclose details to Internal Revenue Service

Over the past decade, many Indian business families have organised themselves under trusts — a bankruptcy remote structure — to preserve wealth, protect the rights of various members, and plan for the next generation. Now, this arrangement is coming under strain for families with members staying in the US, the Economic Times reports.
According to FATCA — the Foreign Account Tax Compliance Act passed by the US government to unearth black money of US residents outside the country — trusts in India will have to disclose all details to the tax office if any of the trust beneficiary is a US resident. Most families in India are not comfortable with sharing such information to the US Internal Revenue Service. Under the circumstances, most tax professionals and trust services companies are exploring new arrangements and advising beneficiaries who are US residents to distance themselves from such trusts.
Tax practitioners and trust experts ET spoke to said that FATCA has come as a shock. “All trustees of a discretionary trust with US residents as beneficiaries will have to abide by FATCA. Or else, they can amend the trust deed to remove such trustees from the list of beneficiaries. In such a situation they may be new arrangements and agreements between members to fulfil the objective of the family,” said senior chartered accountant Dilip Lakhani.
According to Venkatesh Prabhu, assistant vice-president, Milestone Trusteeship Services Private Limited, “In case of discretionary Trust, it’s not enough for beneficiaries to distance themselves from a trust for not reporting under FATCA. Even the residency status of a trust’s settler, protector, advisors, trustee who directly or indirectly control the working of the Trust and have significance influence on the Trust could be considered for reporting under FATCA.”
In a discretionary trust, a structure that most families have preferred, beneficiaries do not have a fixed entitlement. In India, a beneficiary doesn’t have to pay as long there is no distribution of funds. But, there are fears that US tax department could interpret the matter differently and consider notional income to tax the beneficiary.
Faced with unexpected legal challenges, some are creating structures — like the conditional benefactor clause which would trigger at a later stage — to escape the glare of the American tax authorities.
Here, the Indian citizen becomes made the conditional beneficiary, said another senior tax advisor, requesting anonymity. Some agreements include remitting the fund to family members in the US as “maintenance of close relatives” —a category of cross-border fund transfer that has risen dramatically in the past one year.
Sharing of information under FATCA would also reveal names of Indians who figure in offshore trusts. According to Jeenendra Bhandari, partner at tax and audit firm MGB and Co LLP, “Until now many overseas family trusts would have hidden beneficiaries and more often than not one of the beneficiaries would be an Indian. But going ahead both US and Indian authorities would share information under the new tax treaty and due to which these hidden trustees would come under the radar of not just US tax authorities under the FATCA but now even Indian revenue authorities.”