5 Tips to Help Ensure a Smooth Move Overseas
U.S. expats living abroad face unique financial complexities, and it’s essential to take steps to prepare your finances while you’re still living stateside. If you wait until you’re living abroad, you could face additional tax consequences in your local country when modifying your investment. Following are five important factors to keep in mind as you plan for your move overseas.
#1 – Timing
It’s important to carefully consider the timing of your move based on your new country’s residency rules. For example, in some countries if you’re physically present for more than 183 days in a single tax year, you may be subject to tax on your worldwide income for the entire year. This means any earned income and realized gains you received earlier in the year may be taxed in your new home country.
Work with your international wealth manager in the months leading up to your move to restructure your assets and determine the right timing for your move abroad.
#2 – Real estate
Before moving abroad, you’ll want to have a strategy in place for any stateside real estate as well as real estate in your new country of residence. Make sure to:
- Consider the timing of any U.S. property sales – It may make sense to sell your U.S. property prior to becoming a foreign tax resident. If you sell U.S. real estate after establishing residency in a new country or during the year in which you establish residency, any gains may be taxable in your new country.
- Decide whether to buy or rent your home – Carefully consider whether it makes sense to buy or rent a home in your new country. Countries may have specific restrictions on the type of property foreigners can own, and real estate outside the United States may be less liquid with higher transaction costs than we experience stateside.
- Establish financing – If you plan to obtain a mortgage in your new country of residence, be aware that mortgage terms may be different than in the United States. For example, some countries don’t allow a mortgage repayment term to extend past a borrower’s certain age, such as 70 or 75.
Also, some overseas lenders offer options to reduce your mortgage interest rate, such as obtaining life insurance or opening an investment account with the lending bank. It’s crucial to exercise caution with these options, as some can result in significant U.S. tax consequences.
#3 – Asset structure
There are several reasons why it may make sense to restructure your assets before moving abroad. These reasons include:
- Taxation of couples – Some countries tax spouses individually rather than jointly, which means restructuring your assets and income before your move could result in tax savings. Some countries consider the transfer of assets to a spouse a taxable gift, which may make asset restructuring costly in your new resident country.
- Roth distributions – In many countries, Roth IRA distributions are taxed as income. If you rely on a Roth IRA for income, it may be wise to distribute assets while you’re still living in the United States.
- Government retirement pensions/accounts – In some cases, government pensions or retirement accounts may not be subject to income tax in your new resident country. You may not want to combine your government retirement savings with your other retirement assets to help ensure you receive this tax benefit. In some cases, acquiring citizenship in the local country may mean government pensions become taxable.
#4 – Investment management
American expats must navigate several challenges when investing from abroad. These challenges include:
- U.S.-based investment accounts – Many U.S. financial institutions don’t allow foreign residents to maintain accounts and may freeze or even liquidate your accounts after you move abroad. However, there are many advantages to maintaining your U.S.-based investment accounts while living overseas, as the U.S. markets are the largest and most liquid in the world and tend to have the lowest fees. Also, by investing in U.S. markets rather than foreign markets, you can avoid multiple reporting requirements.
While many U.S. banks and brokerage firms don’t work with non-U.S. residents, it’s possible to maintain a U.S. investment account while resident abroad by working with a qualified advisory team, such as Creative Planning International. - Investing as a foreigner – Many countries’ financial regulations or brokerage firm restrictions prevent foreign investors from establishing accounts, which can make it difficult to diversify your investments while living overseas.
- Taxation of PFICs – One of the most common and significant investing mistakes made by U.S. expats is purchasing a foreign mutual fund. The U.S. tax code categorizes non-U.S. registered mutual funds as passive foreign investment companies (PFICs), and these investments are taxed very punitively by the United States. In addition, each PFIC must be reported annually on U.S. Tax Form 8621, which requires complex accounting and is very time consuming to complete.
Foreign brokerages rarely offer U.S.-domiciled investment funds, so it can be very easy to inadvertently invest in a PFIC in an overseas account. A great course of action is to avoid these investments entirely by continuing to invest in a U.S.-based brokerage account.
#5 – Gift, estate and inheritance planning
Estate and inheritance laws in your current country of residence may mean your U.S. estate plan doesn’t hold up well once you move abroad. Consider the following:
- Asset transfers – These are very different for an investor who dies abroad rather than in the U.S., as U.S. financial institutions may freeze U.S. accounts if an account holder dies outside the country (evidenced by a foreign death certificate). Asset transfers may not occur until either a U.S. probate begins or an IRS estate tax release is issued. Proper planning is required to help ensure surviving family members will be able to meet any financial needs while assets are inaccessible.
- Wills – A U.S.-based will may not be sufficient to transfer worldwide assets, which can present challenges for your heirs should you pass away while living overseas. It’s important to create an estate plan that incorporates worldwide assets.
Depending on local tax laws, you may need to create a situs will to govern the distribution of property held within a specific country. The situs will should be designed to work alongside your primary will to cover all your assets.
Instead of creating two wills, another option is to implement a multi-jurisdictional will to govern the distribution of property in different countries. Just be sure to work with a qualified international estate planning attorney who has experience addressing the succession laws of multiple countries. Doing so can help ensure the provisions of your will are acceptable and recognized in all relevant jurisdictions. - Inheritance – The United States doesn’t impose an inheritance tax on inheriting heirs; however, some foreign countries do. Different countries impose inheritance taxes in different ways. For example, some countries tax inheritances as a gift or as capital gains. Others have more complex taxation, such as Japan, which applies a “trailing transfer tax” that can follow you even after you’ve relocated to a different country.
If you receive an inheritance from an American citizen while you’re living overseas, it’s important to take steps to reduce your tax exposure. Your international wealth manager is the best source for information regarding your country’s inheritance tax rules. - Tax planning – Many countries have gift, estate and inheritance tax rates that are much higher and have lower exemption amounts than in the United States. If not properly planned for in advance, gifts and bequests to children and spouses can result in unexpected tax liabilities. Work with your international wealth manager and estate planning attorney prior to moving abroad to help ensure your estate is structured in the most tax-efficient manner possible.
