Five Key Cross-Border Wealth Management Questions to Answer Before Moving Abroad
Jake Mongler, Thun Financial Advisors, Copyright © 2020
When relocating from the U.S. to a new country, there are all the normal considerations – sorting out visas and housing, exploring your new surroundings, adapting to a new culture, etc. Equally important, though, is paying attention to protecting your wealth and avoiding tax traps. Here are five key cross-border wealth management questions to answer before you move.
Will your current investment strategy still work?
Strategies and investments that worked well in the U.S. may not work after you move. For example, U.S. mutual funds cannot be sold outside the U.S. Under its MIFID II regulations, the European Union will generally not allow EU residents (whether they are EU citizens or not) to buy U.S.-based investment funds unless they are working with a U.S. investment advisor. At the same time, U.S. citizens should also avoid buying non-U.S. investment funds that will be deemed tax-toxic PFICs (Passive Foreign Investment Companies) by the IRS.
Will your current advisor, custodian, or investment firm still be able to help you?
Due to compliance and regulatory complexities, many U.S. investment firms refuse to work with individuals outside the U.S. This could mean that your current advisor or broker can no longer serve you once you are overseas. Check with your financial service providers before you go, rather than be surprised later when your options are much more limited.
How will your new country treat and tax your current investment accounts?
Each country has its own unique tax laws. How your new country of residence will tax your U.S. investment and retirement accounts may be quite different than how the IRS taxes those accounts.
For example, Roth IRAs are a great way to save for retirement and avoid future taxation in the U.S., but the unique tax-free nature of Roth accounts is not recognized in many countries, such as Germany, Italy, and Japan. On the other hand, the UK and France fully recognize the tax-free nature of Roth accounts under the terms of their double taxation treaties with the U.S. Still other countries, including the Netherlands and Denmark, allow you to take tax-free withdrawals, but assess an annual tax on the Roth account balance.
Can you break U.S. state residency and save on taxes?
If you are moving overseas for the long term, you will want to break state residency to avoid paying state income taxes. To ensure you do not get a surprise state tax bill, you will need to take definitive actions – sell property, close or move bank accounts, drop vehicle registration, etc. You will likely also have to file a final part-year or non-resident state tax return and possibly make a declaration to the state tax authority to formally cut ties.
Will your estate plan work in your new country?
Estate planning is a key component of cross-border wealth management. Just as every country has its own unique tax laws, every country establishes its own unique set of estate and inheritance laws and probate procedures. Even a simple will may fail to distribute your assets as you wish if its stipulations conflict with your new country’s succession laws.
Probate tools such as revocable trusts are designed for tax and legal efficiency in the U.S. but will not be effective in many other countries. Even worse, they may create unanticipated and punitive complications in those countries. For example, many countries treat inheritance via a trust structure as coming from a third party and therefore subject it to a higher tax rate than if it came directly from a relative. Another potential risk is that your new country completely ignores your trust and hence, your wishes. Even the UK – a country with a long tradition of using trusts – applies punitive taxes to trusts depending on how they are structured.
Much of the world has strict forced heirship rules and high estate or inheritance tax rates. Before you leave the U.S., ensure that your estate plan does not make an already difficult situation even worse for your loved ones.
These five questions are simply the tip of the iceberg, but they are important considerations as you start your new adventure off on the right foot.