U.S./French Estate Planning: A General Outline

February 7, 2014

What is an estate plan?
An estate plan is a blueprint of how your assets will be transferred to your heirs, during life or at death. In most cases, estate planning refers planning for what happens at the end.

Elements of an estate plan

Typically an estate plan consists of a pattern of lifetime giving, and then, at death, the plan—usually embodied in a will and/or trust – determines how assets will be dispersed.

In the U.S., a will is subject to probate, which is the procedure for recognizing the will as valid and enforceable, and for nominating the executor who will carry out the testamentary wishes contained in the will. A trust – which, in the States, is often used as a will substitute – may have been created during life (“inter vivos trust”) or by your will (“testamentary trust”). The trust is administered by a trustee and in most states, does not have to be approved by a probate court.

In France, a will is brought before a Notaire who opens a “succession” (French equivalent of
probate) and goes through the procedural steps of administering the will. An executor may be appointed in a French will, but the “executeur testamentaire” does not have the plenary powers hat a U.S. executor does with respect to a U.S. estate. The “executeur testamentaire” in France more or less helps the Notaire to do his job by acting as intermediary with heirs, helping to marshal assets and, in an international situation, helping to explain possible U.S. nuances. It is common and useful for an international lawyer, who is aware of the U.S. and French implications of an estate, to be retained by the heirs to help ease the succession proceeding through what is usually a tedious process, who can answer technical questions as they arise, and to advise on decisions that will have international implications.

Effect of your marital regime
If you are in a community property marriage one-half the assets are deemed owned by each spouse. Consequently, at death, the decedents’ estate will consist of his or her 50%. One form of community property regime, namely, “communauté universelle”, avoids tax at the death of the first spouse. However, there are some drawbacks to this.

Special characteristics of an international estate plan
The estate of an American citizen who had been residing in France at death is subject to the laws of both countries, including its tax laws. Generally speaking, U.S. law will apply to U.S. sitused real estate or a U.S. business, and French law will apply to French-based assets as well as “intangibles”, such as cash, stocks and securities, royalties from copyrights, patents, etc., wherever located.
A vexing problem for Americans is the “forced heirship rules” of France. Briefly, the forced heirship rules provide that issue (children, grandchildren, etc.) of the decedent are entitled to a specified minimum of the decedent’s assets. The percentage to which any child (or if the child is deceased, his or her children) is entitled depends on the number of children (or their own issue) left by the decedent. This includes not only children born in wedlock, but also children born out of wedlock. Any child (or the child’s heirs) has an absolute claim under French law to his or her forced share.
Is each person limited to only one will? Although not required, it is recommended that there be a separate for each country in which you have assets. The main reason is ease of administration but there may be other reasons, depending on the situation. For example, U.S.-based real estate is not subject to the French forced heirship rules, but can be willed in any manner the testator desires. This in itself may be sufficient reason to have a separate U.S. will for that asset. If a legacy to a spouse is involved, the French law provides a formula for allowing the surviving spouse to choose the best way to take her share.
CAUTION: If there is more than one will, care must be taken in the drafting so that one will does not supersede or override another.

Trusts
Although trusts cannot be found in the French law, foreign trusts are recognized by the French law, and use of them enabled U.S. citizens to pursue an intelligent estate plan (especially with respect to children and spouses). The use of trusts also opened the door to some useful tax planning, especially with respect to French wealth tax (ISF). However, that planning door was effectively closed by the French law of trusts enacted in July 2011. Although it is still possible to use an existing trust or even to create one, a stringent set of rules must be followed in order to avoid large penalties. The rules call for annual filings with the French fisc and create a system of “ownership” of assets that can generate unwanted inheritance tax in a multi-generational trust.

Taxation of assets at death
This is best explained by comparing the U.S. and French civil law and tax systems: In the U.S., when one dies, an “Estate” arises. The Estate is deemed to own the assets (and liabilities) until they are distributed by the court-appointed executor. The total assets of the Estate are valued and estate tax is levied on the total net estate (assets minus debts and other liabilities). In France, assets are deemed by law to pass immediately to the decedent’s heirs (whether or not there exists a will). The heirs are deemed to own the assets from the moment of death. No “estate” exists as an interim holder of the assets. This has several important consequences, one being that there is no single tax that applies to an “estate”. Instead, each heir pays inheritance tax at the applicable rate, determined by the heir’s relationship to the decedent. Spouses are taxed at zero percent. Children, grandchildren, etc., at rates ranging up to 45%. First cousins, nieces, great-nieces, nephews and great-nephews, 55%. Everyone else, 60%.
In the U.S. there is an exclusion from estate tax of $5,250,000 of estate assets, the exclusion being applicable during life and at death to all assets no matter who is the recipient. France allows a €100,000 exclusion per child; much less for other heirs.
Foreign Tax Credit
Any inheritance tax paid in France on assets of a U.S. citizen or resident, is allowed by the U.S. as a foreign tax credit when calculating the U.S estate tax. Obviously, the U.S. estate tax exclusion being so large, relatively few estate even have to worry about filing an estate tax return.

Custody of children
While it makes good sense to deal with guardianship in both wills (if there are two wills), if you are a French resident, it is best to specify this in your French will.

Lifetime planning
Under current law, each spouse one can give up to €100.000 per child every ten years. This should be done before a Notaire and ideally, reported to the French as a “don manuel” (Form 2735). It should also be reported to the I.R.S. on Form 709.


Real Estate in France: Purchase directly in owners’ names or indirectly through a holding company?

January 9, 2014

The question raised in the title to today’s Blog has been posed to me innumerable times. There is no stock answer. Different facts for different folks call for a tailored solution in a given case. There may be more than one possible plan that fits a purchaser’s needs. Clearly, planning for the purchase of French real estate has implications that must be considered, at the risk of suffering significant penalties, high tax costs, and eventually possible lawsuits among heirs.

Example: A client, non-resident of France, just asked whether he and his wife should purchase their dream secondary residence in the South of France jointly in their own names or through a holding company such as a French SCI. They wanted to know the ins and outs of each alternative. Here is my answer, somewhat modified and broadened:

The downside of buying in your own names is that you are bound by the French forced heirship laws with respect to that property, so each and every child of yours, present or future, born in wedlock or outside, and even born of one of you and a third party, will at the time of the decease of one of the joint owners, have a fixed inheritance interest in that property, whether or not the deceased owner is a resident of France at the time of death. Consequently, the principal reason for non-residents making their property purchase through an SCI or other form of holding company, is to avoid the French forced heirship rules. What is the underlying legal reason for this? The holding company shares are considered in international law as “intangible property”, and as such are governed by the law of the deceased owner’s domicile. If that domicile is in the US or England (for example), which does not have forced heirship in their law, then the holding company shares can pass freely in accordance with the deceased’s last will and testament, without giving preference or, indeed, any interest at all, to any person, child or not.

The fact that the forced heirship rules are avoided does not mean that the underlying French property is not subject to French inheritance tax; it surely is!)

If the property is owned directly by the individuals, it is best to have separate French wills relating to the real estate, which gives flexibility to an estate plan.

Caution: If you plan to rent the apartment furnished to third parties, use of an SCI or any holding company has distinct tax disadvantages. In effect, the company is treated as a commercial company, requiring a full set of financials, including a corporate tax return, to be prepared each year by a French “expert comptable” (CPA) and, moreover, as a commercial company, the owners do not get the benefit of the 22-year write-off for French capital gains purposes that would be available were the property owned directly by the owners or via an SCI that is not classified as a commercial company (i.e., has no furnished rental activity).

Worth mentioning here is the scourge faced by short-term renters in France. A long-standing French rule barring short-term renting (short-term defined as a lease of less than 12 months, or 9 months for students), is now being enforced with a vengeance, at least in greater Paris, with stiff fines being imposed on those caught doing it. It is not clear whether enforcement is so prevalent outside of Paris and its environs, but the risk is surely there.

Another downside to the use of an SCI or other holding company is the annual tax form (Form 2746) that must to be filed each May 15th to avoid the 3% annual tax imposed on companies owned by a corporation or other entity. Granted, if done in a timely fashion, filing is merely a nuisance, but it is still another item that must be on your checklist. (One can avoid the annual filing by sending the tax people a “lettre d’engagement”, that is, a pledge to provide the information requested in the Form 2746 upon request from the fisc.)

I don’t here consider issues of divorce or other forms of termination of ownership by one a co-owner, but for some people that subject is on the list of what should be considered in structuring real estate ownership.


Second Home in France – Non-residents – Use of Holding Company

August 2, 2013

Should a non-resident buying real estate in France opt to own through a holding company?   It is not just a matter of different strokes for different folks. It is of course possible to own it directly, that is, without using a holding company.   There are substantive reasons for owning through a holding company, the most common being the desire to circumvent the French forced heirship rules.  The forced heirship rules result in all issue (children, grandchildren, etc.) of the owner(s) having an enforceable right to a pre-determined share in the property effective at the owner’s death — all issue, including those from a former marriage and issue from within or without wedlock.  Use of a holding company usually allows an estate to be structured without the impact of the forced heirship rules, hence its attraction.

If heirship is not a consideration, then it may be acceptable to own the real estate directly. 

What types of holding companies are most common?  The SCI (société civile immobilière) is the most commonly used.  It is a simple French company that allows two or more shareholders to own the property in proportions as they determine.  A U.S. LLC or S-Corp is also possible.  Why one and not the other?  Numerous considerations may come into play.   If a non-French entity is used, the owners must usually file an annual form with the French tax department providing information about the property and current owners.  The cost of not doing so is a potential 3% annual tax based on the current value of the real estate. 

Retaining a special fiscal representative at the time of eventual sale of the property by a non-resident is required no matter how the real estate ownership is structured – holding company or not.  The cost of the fiscal representative is up to 1% of the sale price of the property.  While this cost is an offset against taxable capital gain (i.e., a basis adjustment), it is a consideration. 

There was formerly the mistaken belief that ownership through a holding company resulted in no inheritance tax in France.   However, ownership of property through a holding company has no mitigating impact on the taxability of the real estate in France at the time of death.  French law and the U.S. – France estate tax treaty provide that for purposes of the French inheritance tax, ownership through a holding company is tantamount to owning the underlying property itself.

Prior to July 2011, ownership of holding company stock by one’s family trust made eventual estate administration easier and usually less costly. Since that date, however, French real estate owned directly or indirectly by a U.S. trust or any other trust requires annual reporting of the trust to the French tax department and introduces complications and possible future tax costs that should be avoided at all costs.  So, adding a holding company to the miox in order to eventually lodge the shares of the holding company in a trust no longer makes sense.


Why You Need A Lawyer When You Purchase A Property in France

May 7, 2013

First, a note of transparency:  I am a lawyer, qualified to practice in France (as I am in the U.S.). Thus, my position as expressed here must be viewed in that context.  However, I think you will find, after reading this entry, that my opinion is not biased but rather is based on common sense, practical experience and a feeling of concern for foreigners who purchase real estate in France without full knowledge of the process and risks.

What is the process?  Once you have identified a property – usually with the help of a real estate agent – you will enter into a purchase-and-sale agreement (PSA), known as a “promesse de vente” or “compromis de vente”.  The PSA is eventually followed by the actual closing, i.e., transfer of title to the property, the closing usually occurring two to three months after signature of the PSA.  An essential player in the purchase transaction is the Notaire.  The Notaire is legally trained, specializing (after extra and intense supplemental education) in various forms of property transfer.  The forms include transfers of title to real estate, transfers by gift or at death, etc.  It is the Notaire and his team who usually prepares the PSA and sees to it that all legal and administrative steps involved in the eventual transfer of title are carried out.  This includes, among many other items, checking property title (there is no title insurance per se in France—the Notaire is responsible for the passage of good title), seeing to it that various municipal compliance tests (lead, asbestos, termites, electricity) are done and made available to you, clearing the purchase with the municipality, etc.  There may be one Notaire acting for both buyer and seller, or one Notaire for each chosenby each party.  As the buyer pays the notarial fees, if there are two, the single fee is split if there are two.  We usually recommend one for each. 

Sources of legal advice.  Buyers are often under the impression that they are getting all the legal advice they need about their property purchase from the Notaire.  Notaires are certainly well-informed about their subject matter but, due either to their limited view of your particular needs, to cultural limitations, or to language limitations, they usually restrict themselves to offering basic information or perhaps responding to your direct questions—which may not cover all the questions you should be asking.  Further, many real estate agents—who are not lawyers—have acquired a certain amount of knowledge of a real estate transaction due to their involvement in many and, though they should not, do indeed offer advice of a legal nature.  Anyone who has been involved in a matter that requires input from a lawyer, knows that lawyers view a transaction in a special way.  For one thing, we see it holistically, meaning that we see each element in terms of the overall transaction.  So, while a bit of advice may be accurate, it may not be correct in terms of the buyer’s short-term or long-term goals.   

What value can a lawyer add?  A lawyer especially one versed in the laws of the U.S. and France, will be able to advise you on some or all of the following:

  • Should you create a holding company for your property and if so, what form of company?  What are the advantages and disadvantages of a holding company?
  • What possible opt-out clauses can be added to the PSA to protect your interest in the purchase?
  • What estate planning measures should you be thinking of when purchasing a property?
  • What are the French and U.S. income tax and capital gain implications of your property holding?
  • What are the French wealth tax implications?
  • The lawyer will read the PSA line by line and point out any irregularities or other points of interest of which you should be aware.
  • He will coordinate with the Notaire or both Notaires, which will relieve you, the buyer, of that chore and also be much more efficient. 
  • He will advise on such mundane issues as whether your purchase should ultimately be held by your U.S. revocable trust (the answer is decidedly no!), and help you explore how else your planning objectives can be realized.  
  • He will help you understand the current problems in France with short-term rentals. 
  • He will explain the French forced heirship rules (ie, the rights of children) and how to minimize their effect.
  • There are other issues too numerous to raise here, but the reader can see that there is valid justification for why a lawyer should be brought into the picture.  Also, if the lawyer is American, as is yours truly, he understands “where you are coming from” or, better, “where you should be going”.
  • Finally, of the various fees the buyer must pay when purchasing a property – notarial fees, broker fees, possibly bank fees in the case of a mortgage property, the lawyer’s fees are usually based on time spent and, as a percentage of your total transaction cost, are by far the lowest, while his advice is of considerable value he may make the day or save the day for you.

PROPOSED FRENCH TAX LAW CHANGES, as of 7/7/2012

July 7, 2012

It seems that summer sun stimulates French legislators to ramp up the heat on their constituants (and others) by enacting new laws, as in July, 2011, and this month proposing others, that will keep many — taxpayers and advisors alike — from enjoying a trouble-free summer.  This last week saw the publication of a raft of proposed law changes.  The ones I chose for listing here are those most likely to affect expats and non-resident investors in France.   

The name of the game is clearly Deficit Busting.  Its intent is to reduce France’s current deficit.  As expected, the onus of the new measures will fall most heavily upon corporations and “wealthy individuals”. 

Here are the highlights of key provisions contained in a draft of the proposed new French tax law, which will be debated by parliament in the coming weeks before a finalized version will pass into law.    Attention:  As indicated in the text below, some provisions, most notably in the wealth tax (ISF) area, are intended to be retroactive. 

  1. The normal TVA rate will remain at 19.6%.
  2. The “social contributions tax” imposed on investment income, recently increased to 15.5%, will be maintained.  Note, this is in addition to normal income tax assessed on such income. 
  3. The wealth tax (ISF), which was lightened in 2011 so that the maximum tax that could be paid is 0.5% (one-half of one percent), will be restored to its former levels.  Those who profited from the reduction during 2011 and 2012 will receive a supplemental tax bill in the fall based on the pre-2011 rules. 
  4. Gifts to children, grandchildren, etc:  Pre-Hollande changes had raised the tax-exempt amount to €159,325, per parent per child (that is, €318,650 per child if both parents participate in the gift).  This amount was renewable every 10 years.  The proposed new law would reduce this to €100,000 per parent per child (that is €200,000 per child if both parents participate in the gift).  Worse, the period of renewal of the €100,000 exemption will be lengthened  from 10 to 15 years.
  5. Bequests to children, grandchildren, etc.  These rules are identical to the gift changes.  Obviously, though, the doubling up of transfers from the two parents is not possible in the case of death (except in the rare case of a simultaneous death of the two parents).  Where there had been gifts made during the previous 15 years, the total of those gifts would reduce the €100,000 tax-free allotment available at death.
  6. There is no proposed change in the tax-free treatment of bequests to spouses.  Although not mentioned in the this first publication of proposed changes, presumably this would also apply to PAC’d couples.
  7. The proposal seems to indicate that the above gift and inheritance changes will take effect as of 1 January 2013.
  8. Of significant importance to non-residents of France, real estate related income, namely, rental income and capital gains, will, as of January 1, 2012, be subject to the social contributions tax of 15.5%, referred to in item 2 above.  This “contribution” is added to the income tax on rental profit or capital gain on sale.  Applying this rule to U.S. citizens and residents, the capital gain rate, which is currently 33.3%, will effectively become 48.8%.  There are reasons to believe that this huge increase will not be passed into law as such.  However, that is the proposed change to be aware of for now. 
  9. The 30-year tax-free holding period rules (what used to be 15 years until February 1, 2012) remains unchanged.  So, for those who have owned property for at least 30 years, there will be no capital gains on the eventual sale.  But, question: would that exemption apply as well to the 15.5% contributions tax?  We have to wait and see.
  10. Stock options will be affected.  To suppress the use of stock options, taxes on both the employer and recipient employee are proposed, making the use of stock options much less attractive.  These rules will apply to option plans of non-French companies as well, so expat employees of US multinatinals would be hit by the higher cost of options. 
  11. Other forms of compensation, that traditionally received a lesser tax hit, will be brought into the general compensation basket and taxed as ordinary compensation.       

Again, I hasten to mention, that these are proposed changes.  The final tax bill may be watered down, but of course, there may be other provisions added.

Of particular note is the absence of any mention of the new trust rules that took effect this year.  Those rules, enacted in 2011, have yet to be explicated.  There are several uncertainties in that law, not the least of which is how, when and where  trustees are to report foreign trusts.


Tax and inheritance issues for non-residents seeking to purchase property in France

April 4, 2012

The following is based on a letter I wrote to a client, a non-resident of France, who plans to purchase property in France.

Allow me to outline the area of French law that you should be aware of, as well as pointers related to your proposed real estate acquisition.  

 1)          French income tax issues.  As a non-fiscal resident, the only income tax issue you need to concern yourself with is French income tax on rental income.

2)         Tax on wealth.  If the net value of your French residence does not exceed 1.3m euro, that tax will not be a concern for you.  If it does exceed that amount, we should explore that further.

3)         Inheritance tax.  At the death of the owner(s), there is a potential inheritance tax.  Estate planning is indicated:  Should you make lifetime gifts to children—what are the pros and cons?  What inheritance tax rates apply to each of the parties in this scenario?

4)        Rights of children.   The French have what they refer to as “forced heirship rules”, meaning that a child has an enforceable right to a share of his or her parents’ estates.  This sometimes uncomfortable and unwanted rule (especially if there are children of a prior marriage) can be circumvented for a non-resident by purchasing through a holding company, or else, in certain cases, by executing a French will relating to the French property and its contents.  This very important issue, the choices, and the consequences of each should be thoroughly understood by you.  

5)         Local taxes.  Not many to consider, but they should be known and understood.

6)        Capital gains on sale.  These rules have been changed recently and should be explored. As you are a U.S. citizen, any capital gain is reportable both in France and in the U.S., with appropriate tax credits.  French capital gains rates change, but the rate applying to a U.S. resident (more broadly, to most anyone outside the EU), has remained at 33.33%.  There is a reduction of taxable gain, related to the period of holding, so that after 30 years, the residence may be sold tax-free (in France, that is).

7)         Purchasing the property.   When you have chosen a property, you should consult with us before you sign any document, e.g., a promesse d’achat; promesse de vente or  compromise de vente.  Brokers and sellers are often to eager for you to obligate yourself and will urge you to sign prior to a thorough vetting of the documents.   Brokers will often tell you that signing a promesse d’achat is necessary to hold the property.  That may be true, but you also may be taking the first step toward entering into a binding countract with conditions you may regret.  This is certainly true with the contract of purchase and sale (“promesse de vente” or “compromis de vente”).  Property searchers who you meet on the internet or otherwise may state that they know the legalities because they have been through it a thousand time, and therefore consulting a lawyer is not necessary.  Not so.  Not at all.   A lawyer is an essential part of the deal, and often is the cheapest in terms of cost.   

          We will vet the document for a variety of elements that should or, in come cases, shouldn’t be in it.  We will discuss questionable or unclear points with the seller’s Notaire.  We will advise on the surrounding issues as enumerated in this blog, as well as the overall cost of the purchase, including notarial fees, transfer taxes, etc.  In short, a lawyer, especially one versed in French and U.S. law, is indispensable.  You must have a good Notaire.  Notaires come in all shapes and sizes.  Some are excellent—i.e., reactive, proactive, intelligent; but many are otherwise—the source of frustration, delays and sometimes worse.  We work with an excellent firm here in Paris.  As a Notaire has national jurisdiction, one located in Paris does not compromise your position if you are buying in the provinces.   We will introduce you to our Notaire, but then we do all of the intermediary work and coordination of the deal.  We will “hold your hand” from the get-go up to and including the final closing, which may be two or even three months after signature of the initial contract of purchase and sale. 

8)        You should decide whether to take title in your name individually, in joint names with your wife, or otherwise (e.g., through a holding company, as mentioned above).  Part of this depends on the property regime that applies to your marriage.  Is it separate property or community property?   This crucial fact has to be carefully determined.  

9)     If you plan to finance the purchase, other points come into play.

10)      If you rent out the property at any time during the year, as you indicate you may, there are certain rules concerning short-term rentals of which you should be aware. 

11)       If you set up a holding company, you will need a bank account for the company and you will need to gain familiarity with the rules concerning how such a company is run and what French (and possibly U.S.) reporting requirements exist.

12)      As I am assuming you do not plan to move here, I will not discuss visa requirements, but otherwise, we should consider visa issues and the effect French residence might have on your French income tax and other taxes.  If you are planning to become a resident, that would influence some of the points discussed above.

 


Stuff You Should Know About Reporting Foreign Bank Accounts and Certain Foreign Assets to the IRS

April 4, 2012

Are you concerned, confused or baffled by the IRS foreign financial asset reporting requirements?  If you are a  U.S. citizens, green card holder or otherwise a U.S. income tax resident, the first thing you should know is that you must report and pay taxes on worldwide income.  While that particular rule is generally known, confusion arises about the disclosure forms that have been issuing from the IRS in seemingly ever-increasing number, and their companion regulations and instructions. 

Basically, you are required to report foreign assets.  These forms are informational only, i.e., no tax consequences, but failure to file the required forms in a timely manner can result in heavy penalties.  The following is a summary of what you may need to file, and when they are due, the last section being concerned with penalties. 

U.S. Treasury Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts.”  This form is commonly referred to as the “FBAR.”   Part III of Schedule B of Form 1040 reads as follows:

_____________________________

7a  At any time during 2011, did you have a financial interest in or signature authority (emphasis mine) over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?

If “Yes,” are you required to file Form TD F 90-22.1 to report that financial interest or signature authority?  See Form TD F 90-22.1 and its instructions for filing requirements and exceptions to those requirements.

b.  If you are required to file Form TD F 90-22.1, enter the name of the foreign country where the financial account is located.

 8. During 2011, did you receive a distribution from or were you a grantor of or transferor to a foreign trust? If “Yes,” you may have to file Form 3520. See instructions on back.

_____________________________

While this section of the U.S. tax return has been in existence since the 1970s, it had been largely ignored by many people, especially those living in the U.S., that is, until recent years when the IRS launched its ever widening campaign to identify unreported foreign assets owned by US taxpayers.  It is now imperative that you be aware of these forms and that you diligently conform to the filing requirements.   If you are required to file the FBAR (which is filed separately from the basic tax return), it must be filed on or before June 30th, regardless of any extension you may have to file your basic Form 1040.  

IRS Form 8938 “Statement of Foreign Financial Assets.”  This is a new form and applies for 2011 tax returns (and of course future returns), and results from the notorious FATCA law.  This form is, as they say, a doozy, and requires a close reading of its detailed companion instructions.  It is due to be filed when your basic tax return is filed, including extensions. 

When filing is not required. Neither form is required if you at no time during 2011  had $10,000 or less in aggregate foreign financial accounts and less than $50,000 in aggregate foreign financial assets, and you had no signature authority over a foreign financial account.

As stated, the FBAR must be filed by U.S. taxpayers who owned or had signature authority over foreign financial accounts with an aggrebate value exceeding $10,000 at any time during 2011. What is a “foreign financial account”?  It is includes foreign bank and brokerage accounts as well as  foreign insurance and annuity policies.  Note well, a financial account in a branch of a U.S. bank that is physically located abroad comes within the definition of a foreign financial account.  On the other hand, an account at a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.

Form 8938 is required if you have an interest in certain foreign financial assets in excess of $50,000 (or, if married filing jointly, $100,000) on the last day of the calendar year, or in excess of $75,000 ($150,000 for joint filers) at any time during the year.  If you reside abroad, higher thresholds apply: If you are not filing a joint return, they are $200,000 on December 31st or more than $300,000 at any time during the taxable year.   If you are married filing jointly, those threshholds are doubled.   Disposition of those assets may also have to be reported.   The definition of “specified foreign financial assets” includes not only assets reportable on the FBAR but also shares of stock in foreign corporations and securities of non-U.S. companies (listed companies on a foreign exchange), as well as an interest in a foreign entity (including foreign trusts and estates). If any such foreign asset is held in a U.S. account, it need not be reported.  On a positive note, for those who do not otherwise have to file a U.S. tax return, filing Form 8938 is waived.

Real estate and movable personal property outside the United States are not required to be reported EXCEPT if owned through a foreign entity.  This is most common among those who own foreign real estate through a holding company such as an SCI.  Shares of such company must be reported in Form 8938. 

Penalties:

Failure to file an FBAR.  If the failure to file is determined by the IRS to be willful, the penalty can be up to the greater of $100,000 or 50 percent of the balance in the foreign account(s).  Moreover, the penalty is assessable each year for willful failure to file.  There may also be criminal penalties.  These penalties are not automatic.  You can show absence of willful failure to file and of course if the income from theose accounts have been duly reported, it will weigh heavily in your favor in mitigating or eliminating the penalties.

Failure to file Form 8938.  The penalty for failure to file the Form 8938 is $10,000, and an additional penalty of up to $50,000 is applied if you continue not to file after a demand by the IRS.  There may be other penalties as well.