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U.S. Expat Cross Border Financial Planning Checklist
By: Joel Barretto, CFP ®
April 12, 2022
Uprooting yourself, let alone your entire family, to a foreign land can be quite overwhelming to say the least. Between packing the essentials, selling or renting out the house, settling your affairs, notifying your bank and credit card companies, etc., you are bound to miss a few things here and there.
When migrating from the United States to a new country, you also need to consider arranging visas and lodging, exploring your new surroundings, adjusting to a new culture, banking, school for the kids, language barriers, and so on. Equally crucial, though, is paying attention to financial issues and avoiding expensive cross-border financial planning mistakes as you venture into this new world (pun intended).
Here are a few critical cross-border financial management questions to answer before relocating:
- Will your present investment strategy still be effective?
Strategies and investments that performed well in the United States may no longer be effective when you relocate. For example, U.S mutual funds cannot be offered outside of the US. Some jurisdictions prohibit residents from purchasing U.S.-based investment funds unless they deal with a U.S. investment advisor. Simultaneously, U.S. citizens must avoid purchasing non-US investment funds that the IRS would categorize as financially toxic PFICs (Passive Foreign Investment Companies). Furthermore, now that you are earning in a different currency, this adds another layer of risk to your investment strategy, due to currency fluctuations.
- Will your present U.S. financial adviser, custodian, or investment institution still be able to assist you?
Most U.S. financial advisors and institutions are mainly focused on managing their local clients. As a result of the Foreign Account Tax Compliance Act (FATCA), many U.S. financial advisors and investment companies refuse to interact with individuals abroad regardless of their U.S. citizenship, due to FATCA compliance and regulatory issues. This could imply that once you leave U.S. soil, your present adviser or broker won’t be able to effectively help with your cross-border financial planning needs.
So why not engage the services of a local financial advisor in the country you are moving to? Understand that while the U.S. government encourages investments coming into the country, they discourage investments from going out. By engaging with a foreign financial advisor who may suggest investments in what the U.S. considers as offshore investments, certain tax regulations, like PFIC and FATCA are in place to penalize U.S. persons from investing outside the U.S. Instead of being startled later when your alternatives are considerably more limited, check with your financial service providers before you depart or engage with a cross-border wealth management expert.
- How will your current U.S. pensions schemes and investment accounts be treated and taxed in your new jurisdiction?
Each country’s tax rules are distinct. Your new nation of residence’s taxation of your US investment and retirement accounts may differ significantly from the IRS’s treatment of such funds.
Roth IRAs, for example, are a terrific way to save for retirement and avoid future taxation in the United States, but their tax-free status is not recognized in many countries, like Japan. Other countries may even charge you capital gains tax on the growth of your Roth IRA. On the other hand, under the rules of their double taxation treaties with the United States, certain countries, like the UK, recognizes the tax benefits of foreign pensions schemes, like Roth accounts to a certain extent. Other nations enable you to make tax-free withdrawals but charge an annual tax on the amount of your Roth account.
- Can you break U.S. residency and save on taxes?
If you’re planning on staying in another country for a long time, you’ll want to break your state residency to avoid paying state income taxes. To prevent receiving a surprise state tax bill, you must take decisive action, such as selling property, closing or moving bank accounts, canceling car registration, and so on. You’ll almost certainly need to file a final part-year or non-resident state tax return, plus possibly make a statement to the state tax office to legally end your relationship.
- Will your estate plan work in your new country?
Estate planning is an essential aspect of cross-border wealth management. Every country sets its own set of estate and inheritance laws, as well as probate processes, similar to how each country establishes its own set of tax rules. Even a simple will may fail to transfer your assets according to your wishes if its provisions contradict the succession laws of your new country.
Revocable trusts, for example, are structured for tax and legal efficiency in the United States but are ineffective in many other jurisdictions. Worse, they may result in unexpected and costly complications in such countries. Many nations, for example, perceive inheritance through a trust arrangement as originating from a third party and hence subject it to a greater tax rate than if it came straight from a family. Another possible risk is that your new nation entirely disregards your trust and, as a result, your wishes. Even countries with a long history of employing trusts impose punitive taxes on trusts based on how they are constructed.
You should also check on the inheritance tax laws in your country of domicile. Some countries may charge you an inheritance tax if you happen to inherit assets from anywhere while living in that country.
Estate tax treaties may help alleviate some of the estate and inheritance tax issues while living in another country. There are only about 15 countries that the U.S. has an estate tax treaty with.
- Should I change the address of record to my new foreign address on my IRA, 401(k), and other investment accounts in the U.S.?
Although it is a good idea to let your credit card company know of your move to another country, changing the address of record on your IRA, 401(k) and other investment accounts to a foreign address may result in the closure of your accounts with U.S. financial institutions due to FATCA compliance regulations. This can be especially problematic for qualified retirement accounts as it can trigger an untended lump sum distribution which may cost you penalties (under age 59 ½) and a huge ordinary income tax bill for the year depending on the amount you have in these accounts. You may consider either imposing on a relative or friend to use their U.S. address or consider rolling over your qualified plans into an IRA with a custodian that allows the use of foreign addresses.
- With all these restrictive financial limitations due to regulations like FATCA and PFIC, how am I going to save for my future goals (i.e., retirement) while living abroad?
While it is true that living abroad makes financial planning a lot more challenging for U.S. related persons, there is always light at the end of the tunnel. First is to make sure you eliminate your biggest investment expense — tax and compliance. By working with cross-border professionals in tax, legal and wealth management, you will have a better chance to overcome these obstacles.
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.
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