Pictures of moving abroad aren’t often accompanied by the less appealing aspect of managing your finances. However, planning your finances well in advance can help you avoid stress, surprise tax bills, and complicated estate problems later on.
It is important to understand the scope of your relocation. Are you relocating for a short-term stay, a non-permanent relocation or a permanent emigration? Your answer will affect the way you structure your account, where you pay taxes and how you draft documents for estates and whether you have US residence bonds (e.g. voting, property or company ownership).
We urge our clients to consider three layers:
- Lifestyle plan: How long do you plan to be gone? How often will you visit the US?
- Legal/tax residence: Where will you be able to have tax residency?
- The Legacy Plan: where would your assets go and under which country’s rules, in case your life is affected by something?
Once you have that understanding, then you are able to tackle the technical aspects with greater confidence.
Estate Planning
The majority of clients who travel abroad have a US will, medical directives and powers of attorney, as well as beneficiary designations on their accounts. A lot of countries recognize foreign wills, however that does not mean they are legal in the real world. Possessing US accounts, real estate, businesses, a residence or an overseas bank account creates a portfolio that spans across several countries, each having different rules and tax implications.
In some instances, it’s advisable to keep your current US will to protect US assets and then create an appropriate local will in your new country to cover assets that are located there.
Rule Of Forceful Heirship
Certain nations (especially within Europe, parts of Asia and Latin American) have imposed heirship laws. This means that you are unable to decide who will inherit certain assets. Some assets may have to be reserved legally for children or spouses regardless of what your US will state. Naturally, this could cause conflict with blended families, unmarried partners, or charitable bequests.
Powers Of Attorney And Medical Directives
There is a possibility of contradiction between a power of attorney contract in the US and the legal requirements locally. What works in one location might not be applicable in a different place. Drafting local versions is easier and facilitates co-ordination between US and agents outside the US.
US Estate Tax Exposure
US taxes on gifts and estate rules are applicable regardless of whether you live in another country. For clients with more wealth, treaties and cross-border planning can aid in reducing the double taxation and structural problems in international estates. Before moving, you should review the estate planning with a professional with expertise in cross-border affairs.
Tax Planning
When Americans are contemplating the possibility of moving abroad, tax issues often figure among the top concerns. If you’re a U.S. citizen or long-term green card holder, your worldwide income is usually taxed regardless of where you reside. The move to another country generally requires you to traverse the two different tax systems. The most important thing is to understand how these systems work.
Double Taxation Is A Risk
A primary thing to consider is whether you’re eligible to receive US tax relief when you travel abroad. A lot of Americans utilize Foreign Earned Income Exclusion or foreign tax credits. or in certain nations, agreements for totalization which help coordinate Social Security requirements. These tools can help in reducing or eliminating double taxation. However, the rules aren’t clear and you must be sure to align them with the way the new country you are in treats your earnings.
Earnings In Comparison With Investments
Tax treatment for income and investments differs across the globe. Certain countries tax income from all over the world while others charge net worth or wealth tax. Some countries even treat US retirement accounts and certain US funds differently from how the IRS handles them. In certain places, gains that are tax-deferred in the US might be taxed annually.
Taxes On Cross-Border And Business Ownership
If you run your own business or an additional job or have a rental property, the possibility of additional complications arises. The way in which your structure is set up or the way that your rental income is distributed can result in an overseas tax-paying presence and additional filing requirements or the threat of double taxation. These problems can be resolved, but only if you make plans for them prior to when you move.
Being abroad can also add additional reports to your financial lives. The filings you make don’t always mean more tax. However, you have to keep a trail of bank accounts in foreign countries and other financial assets to be able to refer back to them in the future. This is also true for the local reporting requirements of US pension accounts.
Investments
When you relocate overseas, one of your most important financial concerns is where your bank accounts will reside. Many people have several accounts in the United States including broker accounts, IRAs, and 401(k)s along with employer plans in their new country as well as local investment or bank accounts abroad. You must know which accounts to keep and which ones to close.
The rules across the world aren’t all uniform. Certain US custodians let non-residents keep existing accounts, but limit new trading activity or demand updated address documentation. However, some do not collaborate with clients who reside in specific countries. Additionally, your new destination may have more taxes for US ETFs, funds or classify them as “offshore” investment options.
This is why having an advisor on your side can be beneficial. A qualified guide can help you choose the best U.S. accounts to keep and where you need to establish locally-based accounts and how you can plan an international strategy that is in line with your long-term objectives.
Risk Of Currency And Cash Flow
Moving abroad is a way to add risk management for currency to your financial strategy. We assist clients in finding out where their future expenditure will occur, which one feels the more natural for their “base,” and whether their income is in the same currency as their daily expenses. This will help determine how much to allocate to the US versus non-U.S. assets, as well as how to calculate retirement distributions.
Tax-Efficient Investing Across Borders
A few common cross-border investment problems to be aware of:
- ETFs or mutual funds which are tax-efficient in one country, but not in another
- Capital gains treatment (short and long-term)
- Different dividends regimes for interest
- Local “wrapper” accounts (like ISAs, TFSAs, or pension plans) which might or might not have tax advantages from perspective from the US viewpoint
Make sure you align your investment portfolio based on research in accordance with the tax laws of the country you are moving to.
Social Security, Insurance As Well As Retirement Benefits
The move to another country could remove the financial security nets that you’ve relied upon. Start by obtaining the health plan you have. Select between a local health system, private insurance, and an overseas expat insurance plan depending on the way you intend to deal with emergencies or routine care as well as long-term medical issues.
Review your life and disability insurance. A lot of policies don’t carry on after you relocate overseas, and some even stop offering benefits after you have established residency in another country. Find out what’s still in force, and what’s not, and whether you’ll require additional protection in your new location.
Make sure you pay attention to your social security and pension benefits. In certain countries, your working hours can count towards the local pension eligibility. Some countries have a totalization agreement with the US that helps you in coordinating social security credits and avoid double taxation. You should also understand how the U.S. taxes your Social Security benefits when you live overseas.
Steps To Take Before Moving
This is a basic checklist that we typically go through with our clients:
- Be clear on your timeline and the goals
- Temporary vs. Long-term vs permanent move.
- Review your estate plan
- Make changes to your will and powers of attorney or medical directives.
- Talk to an estate lawyer in the country you are planning to settle to determine if you require a local will or any other documents.
- Engage a cross-border tax team
- Know your future filing requirements for both nations.
- Plan for foreign earned income and tax credits for foreign income, and the possibility of double taxation.
- Audit your investment lineup
- Check with your custodians to confirm that they can assist you when you move abroad.
- Learn how your host country is taxing US accounts and money.
- Make sure you coordinate a global allocation that is consistent with your broader goals.
- Change beneficiary designations
- Retirement accounts, life insurance, HSAs and taxable accounts (if you’re using TOD/beneficiary designations).
- Revisit your risk management
- Life, disability, health as well as property and liability insurance in both countries.
- Keep everything in order and document it
- Keep important documents in a digital format and provide access to trusted contacts (family, advisor, executor,).
Your Finance Story Is Moving Abroad As Well
Moving overseas is a financial as well as legal choice however, it’s also a transition in life. We frequently see clients grapple with guilt at leaving the family behind or their roots, and fear of “starting over” financially. A mindful planning process can help provide greater understanding and assurance, not just financial security. Contact Parr & Ibarra CPA in Arlington, Texas for more details.
