Meghan Markle – What’s the issue?
This week has seen a flurry of headlines regarding the newest British monarch, Meghan Markle, and her exposure to the US tax system. We’ve seen dramatic headlines such as:
Meghan Markle in tax ‘nightmare’ causing crisis for Queen and Prince CharlesDaily Express, 19-11-2018
Meghan Markle could be forced to reveal how much money Prince Harry gives her due to strict US tax lawsMirror, 2-3-2018
While these sorts of headlines are common, many contain completely inaccurate assumptions on the US tax law that the Royal family may be subject to.
Here, we’ll give a brief overview of the issues at hand:
Meghan, Duchess of Sussex
To begin with, as a US citizen, Meghan Markle is automatically a tax resident of the USA. This means that Meghan is subject to the same tax laws and rules, as anybody living in the US. As a result, Meghan does need to file tax returns annually to the USA, declaring her worldwide income (ie income from Royal events), investments, and any trusts or companies that Meghan may have a relationship with.
This is a fact, but, does it expose the rest of the Royal family?
Many news articles have made the assumption that Prince Harry automatically falls under the same legislation as Meghan, as he is married to a US citizen.
This is incorrect, and Harry himself is under little obligation to the IRS.
The Royal couple have the option of the filing category, Married Filing Separately. This essentially separates out the income of the couple, and results in only Meghan’s income being reported to the US. In the case of jointly owned investments, only Meghan’s share should be reported to the IRS.
The tax situation for Meghan however could be quite dire. While the UK has a tax treaty with the US, Meghan will have quite a significant amount of income available to her. Some, which may actually belong to Harry, but as it may be available to Meghan, reporting (and tax) will be likely.
FBARs – Report of Foreign Bank Accounts
This is one area where Prince Harry, and other Royal family members may have some exposure to the US tax system.
An FBAR is a Report of Foreign Bank & Financial Accounts, whereby a US citizen is required to report the existence of any bank accounts held outside the US, along with the corresponding maximum value during the year.
This means that any bank account jointly owned by Meghan and Harry, will need to be reported to the US, also exposing the values of the accounts. In addition to this, any accounts which Meghan is placed as a signatory on will also be exposed to the US tax system.
While there are no tax implications of this form, it will no doubt create privacy concerns for the Royal Family.
Prince Charles, and the wider Royal Family
Despite some furore in the press, there is potentially little exposure to the remainder of the Royal Family. Prince Charles, nor Queen Elizabeth will necessarily have any need or obligation to report to the IRS as a result of Meghan’s entrance into the family.
On another note however, gifts given to Meghan by the wider Royal family may result in reporting being required by Meghan such as Form 3520 to report gifts from foreign persons.
It has been reported that Meghan will (or has already) become part of a family trust belonging to the Royal Family.
Foreign trusts face severe scrutiny from the IRS, and Royal Family tax planners will be doing all possible to ensure that Meghan’s dealings with the trust are limited. Prince Harry receives large distributions from the above trust annually, and pays UK tax on these distributions. Should Meghan be the recipient of these, or any actions are performed which result in Meghan being considered an owner of the trust for US tax purposes, dire tax consequences could await.
As you can see above, while there is reason for the Royal family to be concerned about ensuring their family assets do not fall under the US tax regime, the marriage of Harry and Meghan does not automatically create any issue before the IRS.
Tax planning is essential for US citizens entering into marriage or partnerships with non-resident alien (non-US citizen) spouses.
The above article is intentionally vague, as to not make assumptions on the assets owned or controlled by the Royal Family of the UK. Depending on the factors involved, the exposure to the Royal Family of the US tax system could be greater or lesser than discussed above.