The rise of AI has made scams increasingly sophisticated and more convincing to potential victims. When combined with cognitive issues due to aging or disabilities, these scams pose significant financial risks for vulnerable individuals. Family members often want to help. For those with global financial assets, multinational families and Americans living abroad, greater challenges are faced due to geographical distance and more complex U.S. tax laws.
This article examines three possible methods to assist in handling vulnerable financial affairs.
Each situation is unique; there is no one-size-fits-all approach. Monitoring and assessing mental capacity, social associations, and financial activities can be demanding and emotionally challenging. All parties, including financial institutions and advisors, must understand the U.S. tax implications of the arrangements ultimately implemented.
- Joint Ownership of Financial Accounts
Joint ownership involves two or more individuals sharing ownership and access to a single account. It not only facilitates financial management and ensures ease of access to funds but can help in the monitoring and detection of financial fraud since each owner can obtain information and notifications from the institution. The funds are beneficially owned only by the vulnerable party (typically, a parent). The other party (usually, the adult child) while titled as an owner, does not have any beneficial right to the funds.
Key features of joint ownership include equal access to funds; shared responsibility for the account, including overdrafts; and often, the right of survivorship. This means if one owner dies, the surviving owner(s) automatically inherit the deceased’s share of the account. While joint ownership provides many benefits, it also comes with legal and tax implications. There is the risk of financial mismanagement by one owner, and complications in estate planning can arise if clear instructions are not in place.
In a joint account with a parent, if the parent dies, the account passes to the joint-owner child. This may not align with the parent’s intentions if there are other children. Without a clear written agreement, they may be deprived of their share. If the child who inherited as joint owner tries to share the account with siblings, U.S. gift tax issues could arise. Interest and other income from the account belong solely to the parent, but this raises U.S. tax issues for the other joint owner.
These various issues can be addressed with a properly drafted nominee agreement. This ensures clarity with the arrangement, setting out the rights and duties of the beneficial owner and the party merely acting on his behalf. Proper tax reporting is also crucial.
If the account is outside the U.S., further tax issues arise. If both parties are U.S. persons, each may need to file a Report of Foreign Financial Accounts (FBAR). Form 8938 for beneficial owners of foreign financial assets may also be required.
Co-owners must understand all of these aspects and establish clear agreements to manage the account effectively.
2. Powers of Attorney
A power of attorney grants a designated person (the power holder) the authority to act on behalf of another (the principal) regarding their property, finances, investments, or medical care. There are different kinds of POA’s. A “durable” POA is established while the principal is still capable and can control their financial accounts.
A DPOA may not effectively protect the vulnerable against financial fraud. First, it may not be recognized by the financial institution if executed in a jurisdiction different from that where the account is located. This means generally that the institution will not provide information about the account to the power holder. One must check carefully with the financial institution. Second, safeguarding finances with a DPOA will depend heavily on the proactivity of the financial institution to communicate with the power holder should it suspect something is amiss with the account. There is no obligation to contact the power holder in the event of suspected fraud. Unless the power holder actively inquires about the principal’s accounts and has established a good line of communication with the financial institution, the DPOA may not offer much protection.
Importantly, the DPOA power holder will have signature authority over the account. If the account is outside the U.S., this may trigger FBAR filing obligations even if the authority is never exercised. Quite troubling in this regard is that a power holder may be unaware of the authority granted under the POA until the principal becomes incapacitated.
3. Revocable Trust
While there are different types of trusts, a revocable (“grantor”) trust can address many of the difficult issues previously discussed. From a tax perspective, the creator (grantor) of the trust is treated as the tax owner of the trust assets for U.S. income tax purposes, just as if the creator still owned them. The trust as an “entity” is disregarded.
Here’s how it works: The vulnerable individual, as the trust creator, titles their accounts in the name of the trustee. The creator can serve as trustee or serve with another as a co-trustee, allowing continued financial freedom while capable. If the individual becomes incapable, the co-trustee can take over, or a successor trustee appointed.
A trust protector can be designated to oversee and approve certain important decisions (for example, withdrawals or fund transfers exceeding certain thresholds). The protector can also remove or replace the trustee, adding additional protection if the vulnerable individual becomes incapable.
The use of trusts raises numerous U.S. tax and FBAR issues, especially for families in different countries with multiple nationalities and global assets. Without question, competent U.S. tax advice is required in such cases.
Conclusion
Complex legal, tax, and practical challenges arise when managing the finances of vulnerable persons, especially when parties or assets are located abroad. By understanding the implications of joint account ownership, powers of attorney, and revocable trusts, families can better protect their loved ones’ financial security while addressing cross-border complications.
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