INTERNATIONAL ASSETS IN A MARITAL ESTATE

A marital estate with international assets presents a category of problem that neither the matrimonial litigator nor the forensic accountant is ordinarily engaged to handle, and that most tax practitioners do not encounter.

It is also where the largest unexamined exposure usually sits — because in cross-border matters the penalties attach to the failure to report, not to the tax. The exposure can exceed the value of the asset.

WHAT TENDS TO APPEAR

• Foreign trusts. Reporting on Forms 3520 and 3520-A, with penalties computed as a percentage of the trust corpus. Whether the structure is a grantor trust changes who is taxed on what.
• Offshore holding companies. Controlled foreign corporation analysis, Forms 5471 and 5472, subpart F and GILTI inclusions that arrive without any distribution.
• PFICs. Foreign mutual funds and many pooled investment vehicles. Absent an election, the excess-distribution regime under section 1291 imposes tax plus an interest charge that compounds over the holding period.
• Non-US pensions. Treaty treatment varies by country. Some are deferred like a domestic plan; some are currently taxable; some are reportable trusts.
• Foreign accounts. FBAR and FATCA reporting on Form 8938, both independent of whether any tax is due.
• Foreign real property and the entities that hold it.

THE DIVORCE-SPECIFIC PROBLEM

Division forces disclosure. Assets that were not reported, or were reported by one spouse only, become visible in discovery — and a spouse who signed a joint return may have exposure regardless of who held the account.

That creates a genuine tension. Correcting historic non-compliance may be necessary and may also be adverse to one party in the negotiation. Whether a failure to report was willful is a legal conclusion with criminal implications, and it should be reached by counsel, under privilege, before anything is filed.

WHAT THE FIRM DOES

• Characterizes each foreign asset and identifies the reporting that attaches to it
• Quantifies exposure, including penalty exposure, so it can be priced into the division
• Assesses joint-return liability and relief available under section 6015
• Advises on the disclosure route where historic reporting is incomplete — streamlined procedures, voluntary disclosure, or delinquent information returns
• Works with the litigator so the settlement allocates the exposure rather than ignoring it

Related: Foreign Accounts & Voluntary Disclosure and Joint Returns & Innocent Spouse Relief.