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Dianne Mehany Speaks to Law360 on 5 Tax Considerations When Marrying a Foreign Prince

May 25, 2018, Law360

The American actress Meghan Markle married Prince Harry at Windsor Castle on May 19, but her tax obligations to the U.S. will continue unless she renounces her U.S. citizenship. As a U.S. citizen, the Duchess of Sussex is still required to share certain information about taxable income, foreign bank accounts and wedding gifts with the Internal Revenue Service to avoid potentially steep fines.

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As a U.S. citizen, not only does the duchess have to disclose gross income, but any foreign bank accounts that are worth $10,000 or more must also be disclosed to the IRS, or else she may face penalties or even criminal charges, according to Dianne C. Mehany, a member at Caplin & Drysdale, Chtd.

“U.S. persons living abroad must typically file a myriad of information returns,” she said. “Principal among these is the FBAR, reporting interests in foreign financial accounts if they exceed $10,000 in the aggregate. Other forms apply, too, though, such as Form 8938, which is largely duplicative of the FBAR, but with a much higher filing threshold.”

Typically failing to file FBARs carries a civil penalty of $10,000 for each nonwillful violation, but if the U.S. government determines a taxpayer’s violation is willful, then a penalty of 50 percent of the account or $100,000 — whatever is greater — will be assessed for each violation. Every year a taxpayer does not file an FBAR counts as a separate violation.

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But Mehany pointed out that the tax implications might be different if the duchess borrows jewelry from a royal trust, because she would have to report the use of jewelry, even if the value does not exceed $100,000, if that fine jewelry is owned in trust.

“If, for instance, the queen has placed her valuables inside a foreign grantor trust and the queen is still considered the ‘owner’ for U.S. purposes, Ms. Markle must only report the use of the fine jewelry as a trust distribution,” Mehany said. “No tax is imposed.”

But Congress passed statutes in the late 1990s that made it hard for a non-U.S. person to qualify as an owner of a grantor trust, so if the queen’s jewelry trust is a nongrantor trust, neither a foreign citizen nor a U.S. citizen can be treated as the owner for U.S. tax purposes, so the duchess would actually remit tax on the distribution from the trust, she said.

For the full article, please visit Law360's website (subscription required).

Excerpt taken from the article "5 Tax Considerations When Marrying A Foreign Prince" by Amy Lee Rosen for Law360.

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