American Expat Financial Problem: Many Americans who live abroad end up marrying non-Americans. From an investment and financial planning point of view, this can create opportunities as well as dilemmas

Recommendation: Use the tax code to keep as much money as legally possible away from US taxation

2017 Guide to Investment Management and Financial Planning for Americans Abroad

The planning strategy should be to keep as much income as possible out of the taxation jurisdiction of the IRS.   There are a variety of ways to do this in mixed marriages.   For example, if the non-U.S. spouse is earning significant income then “married filing separately” is the appropriate election when it comes to U.S. taxes.   This election limits deductions and credits, but prevents the IRS from taxing the non-citizen spouse’s income.

Husbands and wives also need to plan carefully around estate and gift tax issues.  At death, there is no limit to the size of the estate that can be transferred tax free to a surviving U.S. citizen spouse.  However, if the spouse is not a U.S. citizen, estate taxes will be immediately imposed at a rate of 40% on the entire taxable estate amount.

The estate tax exemption amount is $5.45m (for 2016).  This means that asset only in excess of this amount will be subject to the estate tax.  However, for a wealthy U.S. citizen with a non-Resident Alien spouse, it is important to recognize that this exemption amount applies to assets left to the non-Resident Alien spouse without benefit of the unlimited exemption amount that prevails when both spouses are U.S. citizens.   Trusts can be used to address this problem.

Spouses can also transfer up to $148,000 a year (for 2016) to their non-citizen spouse gift tax free.  This provision can provide a very useful planning device for Americans with spouses who have residence in a lower tax regime country.  By making an annual spousal gift, the money can be permanently removed from the tax purview of the U.S. government, both in terms of capital gains and dividend income taxes ,and estate taxes.

The U.S. tax code provides a plethora of tax advantaged ways to save for your children’s education.  Coverdell accounts and 529s are usually the best options.  Americans abroad are often surprised to find that many universities outside the United States are “qualified” institutions:  this means that tax-free distributions from these accounts can be used to pay tuition and expenses at these non-U.S. schools.   Furthermore, because of the large amounts of money that can be sheltered from taxation through 529s, these accounts have great value as long-term estate planning tools in the right circumstances

What is a Cross Border Family?

Thun Financial uses the term “cross-border” broadly to refer to any investment planning circumstance that involves families of mixed nationality and/or whose financial affairs extend across borders.  Cross-border families include Americans living abroad, U.S. residents of foreign origin, and non-U.S. residents who are investing within the United States.  Such families commonly have a mix of citizenships and/or immigration statuses. Cross-border families typically hold a range of financial assets and business interests that are subject to taxation in more than one national jurisdiction.

Download the complete 2017 Guide to Investment Management and Financial Planning for Americans Abroad