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Five Wealth Management Questions to Consider before Moving Abroad
December 16, 2022
A lot of things need to be taken into consideration when moving to another country. This includes arranging visas and lodging, exploring your new surroundings, adjusting to a new culture, and so on. Meanwhile, paying attention to wealth management and asset protection while avoiding tax traps is equally crucial. Here are five critical cross-border wealth management questions to find answers for before relocating.
1. Will your current U.S. investment strategy still be effective?
Due to FATCA (Foreign Account Tax Compliance Act) regulations, most U.S. custodians will likely shut down your accounts once they realize you have moved out of the country. Strategies and investments that performed well in the United States may no longer be effective when you relocate. For example, most U.S. mutual funds and insurance products cannot be offered outside of the U.S. due to compliance issues. Other countries may also restrict residents from purchasing U.S.-based investment funds creating quite a dilemma for U.S. expats. To make matters worse, certain non-U.S. registered investments like non-U.S. registered mutual funds may easily turn into toxic investments for U.S. expats if considered as a PFIC (Passive Foreign Investment Company) by the IRS. Engaging professional cross-border professionals in tax, legal and financial matters may prove to be worth the trouble and expense in most cases.
2. Will your present adviser, custodian, or investment institution still be able to assist you?
Building a relationship of trust with a knowledgeable financial advisor is priceless. Most U.S. investment advisors are focused on assisting their U.S. resident clients. Their expertise is limited to local U.S. regulations and financial products thereby making it challenging to continue providing sound financial advice to clients who move abroad. Furthermore, their compliance department will probably have issues with providing service to non-U.S. residents. Unfortunately, these challenges have caused a lot of frustration on both sides of the client-advisor relationship as they involuntarily have to dissolve their relationship. The same goes for financial advisors from other countries. Some of them don’t even understand what PFIC and FATCA stand for, and those who do, know enough to stay away from Americans living abroad as a consequence of cross-border compliance issues. This could only imply that once you leave U.S. soil, your current financial advisor probably won’t be able to help you and dealing with non-U.S. advisors may also be a bad idea. Avoid expensive mistakes by doing your homework, check with your financial service providers, or consult with a cross-border professional before you depart.
3. How will your current investment accounts be treated and taxed in your new jurisdiction?
Each country’s tax rules and regulations are distinct. Your new country’s taxation on U.S.-based investment and retirement accounts may have a huge difference compared to the IRS’s definition. Understanding tax treaties between the U.S. and your host country is also vital.
A Roth IRA, for example, is a terrific way to save for retirement on a tax-free basis in the United States, but the Roth IRA’s tax-free status is not recognized in many countries, like Japan or Australia. On the other hand, under the rules of their bilateral tax treaties with the United States, certain countries may fully recognize the tax-free character of Roth accounts. Other nations may enable you to make tax-free withdrawals but may also charge an annual tax on the growth of your Roth account, thereby causing double taxation and turning the Roth IRA into a toxic asset.
4. Are there tax saving strategies available to Americans living abroad?
Tax savings strategies are scarce and limited enough for U.S. residents let alone for Americans living abroad. But this does not mean it’s a lost cause. We just need to be mindful of rules and regulations that pertain to non-U.S. residents, not to mention your country of residence. Take for example a contributory IRA strategy where a U.S. resident may easily contribute earned income into his or her IRA and possibly use it as a tax deduction while growing investments tax deferred. However, a non-U.S. resident utilizing the FEIE (Foreign Earned Income Exclusion) who does not earn enough to hit the FEIE threshold may not qualify for IRA contributions. Although this strategy may not work for this U.S. expat, perhaps other strategies like a Roth IRA conversion strategy on existing IRA or 401(k) accounts in the U.S. may work to their advantage depending on several factors.
5. Will your estate plan work in your new country of residence?
Estate planning is an essential aspect of cross-border wealth management. Estate and inheritance tax laws and probate processes will vary from one country to another. Even a simple “will” may fail to transfer your assets according to your wishes if its provisions do not conform with the succession laws in your country of domicile.
Revocable trusts, for example, are structured for tax and legal efficiency in the United States but are ineffective in many other jurisdictions, which may result in unexpected and costly complications in some cases. Some countries perceive inheritance through a trust arrangement as originating from a third party, thereby resulting in a greater tax rate than if it came directly from a family member. Another possibility is that your resident country may entirely disregard your U.S. trust. Even countries with a long history of utilizing trusts may impose punitive taxes on foreign trusts based on how they are constructed. Matters get even more complicated in the case of multinational families with various citizenships (i.e. A U.S. citizen married to a foreign national).
Disclaimer:
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.