It is estimated that there are between six and seven million U.S. citizens living outside the USA. As many formerly “emerging” markets become more developed Americans are finding that life in places like Ecuador, Uruguay, and Thailand may offer a good standard of living at reasonable cost, a more interesting lifestyle within a more open society, and quite often comes with a tightly-knit community of expats who share similar lifestyle goals. Furthermore, recent tax legislation makes it more difficult for American citizens living abroad to maintain financial accounts and has led to a substantial increase in the number of persons renouncing U.S. citizenship.
Financial planners are increasingly finding that many clients have crossborder financial issues with which they require assistance. Such issues are often complex and providing financial advice not only requires specialized knowledge but may also be fraught with liability and regulatory concerns for the planner. It is impossible to summarize all U.S. expat issues in this space but in the paragraphs that follow I touch upon a few important considerations from both the client and the advisor perspective.
Investments: As a result of what is called “FATCA” financial institutions (both U.S. and non-U.S.) increasingly prefer not to deal with U.S. citizens living abroad as a result of onerous tax reporting requirements. This leads to the situation that some American expats are being asked to close their U.S. financial accounts. This may not be an issue for a regular bank or brokerage account where the funds can be moved to the country of residency, but for an IRA or 401k, where there are tax consequences to taking distributions, this might be a serious concern since one generally cannot move a U.S. retirement account to an equivalent account in another country on a taxdeferred basis.
Taxation: The United States is one of only two countries that taxes income based on citizenship and permanent residency rather than actual residency or domicile. This means that American citizens and Green Card holders cannot escape the IRS even if they move abroad. There are two specific personal income tax forms for reporting non-U.S. assets, and a number of credits, deductions, and exclusions pertaining to U.S. tax reporting for non-U.S. residents. In addition, the treatment of U.S. tax-deferred accounts and investments may be quite different in the country where the individual is resident than in the USA. There is also an expatriation tax that may apply in certain cases when giving up U.S. citizenship or long-term residency.
Estate Planning: This is potentially a very important and often overlooked area of financial planning for American expats. The unlimited marital deduction is not allowed for non-U.S. citizen spouses and the $5M+ estate tax exclusion is not available for non-resident aliens. There are also crossborder issues with the treatment of trusts and wills, as well as guardianship and health directive concerns that may need to be addressed. There are ways of addressing all these issues but assistance from an estate planning attorney familiar with such matters from both the U.S. and the “other country” perspective is key.
Similar issues arise in other financial planning areas such as insurance (for example the difficulty and expense of getting life insurance for a U.S. citizen living abroad), retirement planning (currency risk and an inflation rate that may be much higher than that in the USA), and planning for children (usefulness of 529 plans and UTMA accounts for non-U.S. residents).
Pitfalls also exist for the financial planner who advises non-U.S. residents. Most U.S. professional liability insurance will not cover this situation. There are also regulatory issues since many countries have regulations pertaining to marketing and giving investment advice, and in some instances even with respect to other financial planning activities that are unregulated in the USA, such as pension transfer advice in the United Kingdom for example.
The bottom line when giving advice on cross-border matters is that the U.S. fiduciary advisor has a duty to understand the issues involved and the limits of his or her knowledge and experience. He or she must be able to legally give advice not only in the USA but also in the other country, and needs to have a network of cross-border specialists in estate, taxation, and other financial fields.