What makes a Trust a Custodial Institution for CRS

A trust is considered a “custodial institution” under the Common Reporting Standard (CRS) when a substantial portion of its business involves holding financial assets for the account of others, meaning the trust primarily functions as a custodian by safeguarding assets on behalf of beneficiaries, and a significant percentage of its income is derived from performing these custody services; typically determined by a “gross income test” where a certain percentage of income must come from holding financial assets.

Key points about trusts and custodial institutions under CRS:

• Primary function:  A trust must primarily act as a custodian, meaning its core activity is holding financial assets for others, not actively managing investments. 
• Gross income test:  To be classified as a custodial institution, a significant portion of the trust’s income must come from custody-related activities, often defined as a percentage threshold (like 20%) of its total gross income. 

• Reporting requirements: If a trust is classified as a custodial institution, it is required to report information about its beneficiaries and the assets it holds to the relevant tax authorities under CRS regulations.
• Residence of the Trust:  When considering trusts, it is necessary to determine in which jurisdiction the trust is resident for the purposes of the CRS and FATCA.  This is because it is the CRS and FATCA legislation as implemented in the jurisdiction of residence that governs classification and reporting. For these purposes, a trust is considered to be resident in the jurisdiction where one or more of its trustees are resident; the proper law of the trust is not relevant.
• Classification:  The Gross Income Test and the Managed By Test apply to trusts as they do to other entities.  The Managed By Test is usually treated as satisfied, in the case of a trust, where a professional trust company acts as a trustee of the trust.
• Financial Accounts:  Where a trust is a Financial Institution, its Financial Accounts include the interests of beneficiaries in the trust whether they have fixed entitlements or are merely discretionary beneficiaries (though if they are a discretionary beneficiary they are only treated as having a Financial Account in the year in which a distribution is made to them).
  • In addition, any settlor and any person exercising ‘ultimate effective control’ over the trust (e.g. some protectors) are deemed to have a Financial Account in it whether or not they have any equity interest as a matter of trust law. In normal circumstances, those Financial Accounts are to be reported as having the value of the totality of the trust assets.  The meaning of ‘ultimate effective control’ is the subject of some debate amongst practitioners.
• Controlling Persons: Where a Financial Account in a Financial Institution is held by a trust that is a Non-Financial Entity, the rules require the Financial Institution to report the Controlling Persons of the trust (in so far as they are Reportable Persons).  This means the settlor, the trustee, the protector (if any), the beneficiaries and any other persons exercising ultimate control over the trust.

Factors that may affect a trust’s classification as a custodial institution:

• Nature of the trust’s assets: If the trust primarily holds liquid financial assets like stocks and bonds, it is more likely to be classified as a custodial institution compared to a trust holding illiquid assets like real estate. 
• Level of investment discretion: If the trustee has minimal discretion over investment decisions and primarily acts as a custodian, it strengthens the classification as a custodial institution. 
• Jurisdictional regulations: Different jurisdictions may have slightly different interpretations of the “custodial institution” definition, so it’s important to consult local regulations