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Transcript

David Kuenzi:

Hello everyone and welcome to today's webinar. I see lots of folks still joining us, so we'll plan to start in a few more minutes to give everyone ample time to log in. While we wait, my name is David Kuenzi.

Hanna Kennedy:

And I'm Hanna Kennedy and we're with Creative Planning International. We provide investment management and financial planning to cross-border investors and Americans abroad.

David Kuenzi:

Thanks, Hanna. And with that, I think it's time to get started.

For those of you who just joined, my name is David Kuenzi and I'm a partner and the Director of International Wealth Management at Creative Planning International. Welcome to our webinar on Americans Retiring Abroad, where we will walk through four financial tips to consider before moving overseas.

Before we get going, a little about myself. Prior to joining Creative Planning, I founded an independent advisory firm more than 15 years ago that specializes in working with Americans living and retiring abroad. I was also a frequent contributor to the Wall Street Journal, where I covered US expat financial planning topics.

Since joining Creating Planning in 2020, we have expanded our international team to over 20 investment and planning professionals dedicated to working with our US expat clientele. We now work with more than 1500 families in 90 countries around the world. Furthermore, many on our team have lived abroad, are expat families themselves, are parts of mixed nationality families, so we understand firsthand the challenges of being an American abroad.

Now, back to you Hanna.

Hanna Kennedy:

Hi everyone. My name is Hanna Kennedy and I'm an International Wealth Manager based out of San Diego, California. I've spent my entire career in finance as a wealth manager, working with Americans abroad and also helping non-US citizens.

Just a few quick tips before we start our presentation today.

During the presentation, you'll be able to ask questions by entering them into a question box on your screen. We'll be compiling these during the presentation and we'll reach out after the webinar with answers and further assistance.

You can also request to schedule a meeting with a member of the international team or a dedicated team that works with Americans abroad and non-US citizens with investments in the US. We'd love to talk to you and understand your unique situation as an American who is considering retiring abroad.

Retiring abroad has been more popular than ever. It can be an exciting adventure offering new experiences with the potential to lower your overall cost of living. While the economics and lifestyle look increasingly attractive, as an American abroad, there are specific challenges you can face. For example, how will I be taxed? What will I do with my investments, and will my current estate plan work if I remain abroad permanently?

David Kuenzi:

Today, Hanna and I will provide answers to some of the most important questions people will have as they consider a move abroad. The four major areas we'll be covering are: How to manage and potentially minimize your taxes, how your estate plan may be affected, what you need to know about social security and healthcare coverage, and what to do before you move.

Let's get started with our first consideration, which is a major one; taxation.

The United States is the only country in the world that taxes on the basis of citizenship. That means that no matter how long you live outside of the country, or even if you never intend to return, the US will continue to tax you on your worldwide income if you are an American citizen or green card holder. Other countries tax on the base of residency. That is, they tax residents of their country regardless of citizenship.

So what does that mean as an American who wants to move abroad?

It means that you will face a uniquely complex tax environment where you're taxable in the US on the basis of your citizenship and you're simultaneously taxable in the country that you're residing in abroad. The net result is that Americans abroad often face a burden of dual taxation. But through careful tax planning and financial planning, you can mitigate and perhaps eliminate paying taxes on the same income twice.

Let's start by reviewing some possible ways to avoid double taxation.

One way is applying foreign tax credits. US taxpayers can claim a foreign tax credit on their US tax returns for income taxes in the host country. These credits generally reduce the taxpayer's US tax liability by an amount equal to the foreign income tax paid.

However, if the tax rate in the country of residence is lower than the US federal rates, the credit will not be sufficient to completely offset the tax payer's US tax liability, and you will have to make up the difference with a US tax payment. If the tax rate, on the other hand, in the other country is higher than the US federal rates, then foreign tax credit generated by paying taxes in the other country will be sufficient to completely offset the US tax liability.

Tax treaties provide another helpful tool to help us reduce double taxation. Tax treaties are agreements between the US and other countries designed to coordinate taxation on income that may be taxable in both countries.

The US maintains tax treaties with more than 60 countries. The key provisions in these treaties for American retirees are those that specify how each country will tax the other country's pensions, including IRAs and 401(k)s and government old age pensions, including US Social Security. Each treaty is slightly different and therefore has different implications for how retirement income will be taxed.

With all this in mind, let's walk through some scenarios that begin to explain how American retirees might be taxed in the country of residence and what that means for their US taxes. To do that, I'm going to divide the world into three categories of countries based on how they will tax American retirees.

First, countries that tax Americans on worldwide income. This group includes most of Europe, Japan, Australia, India, New Zealand, South Africa, and a few other countries. In these countries, American retirees will have to rely on tax credits to avoid double taxation. Most countries that tax on worldwide income also have higher tax rates than the US. Therefore, for Americans in these countries, foreign tax credits will likely offset all of their US tax liability. Because local rates are higher than US rates, the effective tax rate will be the higher local country tax rates.

Next, are countries with no or low taxes. These countries are found throughout Asia, the Middle East and Latin America. Notable examples include Costa Rica, Mexico, Columbia, Panama, Ecuador, Nicaragua, Hong Kong, Singapore, and many others. Since these countries will not tax US sourced retirement income, American retirees will therefore default to US federal tax rates that still apply because of US citizenship based taxation.

Finally, we have countries with special tax programs. This group is comprised of a handful of special cases where, because of tax treaty provisions or special expat tax programs sponsored by the host country, local income tax rates for American retirees will be low or zero. These countries include France, Portugal, Greece and Italy.

Hopefully, this categorization gives you a sense of the diverse tax scenarios that American expats retirees may encounter. Each country's tax rules are unique, and each one will interact with your US taxes in a slightly different way. Effectively managing these complexities is key to reducing overall taxation.

Before we wrap up our discussion of dual taxation let's go over a few other key cross-border tax considerations that are important to keep in mind if you are thinking about retiring abroad.

First, with only a handful of exceptions, tax treaties do not recognize Roth accounts as tax-exempt. Therefore, Roth accounts may be taxable in many countries that tax worldwide income, even though they are tax-exempt in the US. If the country you want to retire in taxes Roth distributions, consider withdrawing the Roth funds before you move. Alternatively, you may want to plan to delay Roth distributions until you return to the US or leave them as part of your estate To US beneficiaries.

Second, health savings accounts and 529s are not covered by any tax treaty. So be aware that many countries that tax worldwide income, these accounts will be fully taxable.

Third, some countries penalize US mutual funds. This could make your US mutual funds or ETFs particularly tax inefficient in your new country of residence. Make sure you work with an advisor who understands not only how the US taxes investments but also their investment tax rules of the other country.

Fourth, before leaving the US, make sure you terminate your state domicile or residency so you don't continue to be taxed at the state level. This is easier in some states than in others. We work with our clients to make sure that this is done properly.

The key takeaway here is to understand your potential tax obligations before you make the move overseas, and make an informed assessment of how your tax exposures will change once you move and be ready to execute appropriate tax strategies before and after you move. Understand that mistakes made here may be extremely costly.

Now I'll turn it over to my colleague Hanna Kennedy, who will walk you through the next few important topics to consider; estate planning and receiving social security and healthcare while abroad.

Hanna Kennedy:

Thanks, David.

As you are beginning to understand, there are a lot of details that are involved when considering a move abroad. We're providing an overview today, but these are all certainly big aspects of what we'd work through together based on your personal situation and goals if you decide to work with our team.

Now, I'm going to get back into the next key financial considerations when it comes to retiring abroad, which is estate planning.

While the intention of your estate plan may not change while you retire abroad, taking up long-term residence in a new country means that your estate plan is now likely subject to new sets of laws and complications.

So what are a few ways that this could affect you?

First, recognize that if you live permanently outside the US at your death, it may be difficult or impossible to have your estate plan go through the US probate process. The alternative to US probate is country of residence probate, which will require a locally prepared will.

Therefore, we recommend Americans abroad have a local will prepared that encompasses your worldwide assets, including your US financial assets. This approach is especially appropriate in countries with comprehensive local estate and inheritance tax systems commonly found in Europe, Australia, Japan, and other developed countries.

Trusts are commonly used in the US to circumvent probate and speed up the passing of assets to heirs. Unfortunately, the US trust will rarely work as intended if you pass away while living abroad.

Now, why is this?

Most countries are likely to disregard a US trust and require a local probate process. Also, trust may actually trigger punitive income tax or inheritance taxation.

Finally, the US financial institutions may also disregard the instructions of the trust if you die while domiciled abroad or if you live abroad permanently.

And finally, what about beneficiary or transfer on death instructions?

For example, many of you have beneficiaries on your 401(k) accounts. However, if you pass away while abroad, your financial institutions may not recognize your designated beneficiaries, and your account may not pass on as you intended. In short, don't expect your investment accounts to pass to your intended heirs if you pass away overseas.

So, as we are beginning to see that the process of a state resolution will be very different if we pass away overseas than if we were to die while living in the United States, we need to anticipate this reality and prepare appropriately.

Moving on to the issue of estate and inheritance tax; the US has a high estate tax exemption and therefore many Americans living abroad will not be subject to US estate tax. On the other hand, many other countries have inheritance taxes with much lower exemption levels. This is especially true in Europe and Japan. Furthermore, many countries will impose their inheritance tax on an inheritance that you may receive from parents or other relatives in the United States.

So it's important to plan now to reduce as much as possible for an inheritance tax.

At Creative Planning International we are very familiar with these rules and advise on these issues all the time.

The key takeaway here is to be prepared to update your estate plan. Relying on your existing US estate plan is almost always a mistake. Doing nothing runs the risk of your assets not passing to your intended beneficiaries or heirs, being held up in a lengthy foreign probate process, and potentially paying much more in local country inheritance than is necessary. International wealth managers at Creative Planning work with clients to make sure their estates will be resolved as quickly and as efficiently as possible.

The next area I'll cover is about receiving social security and healthcare coverage while abroad.

First off, social security is an important source of income for many Americans, but the big concern for those who are retiring abroad is will they continue receiving their benefits, and how will these benefits be taxed overseas?

Well, the good news is is that US Social Security will pay benefits to pretty much everywhere, anywhere outside of the United States. In most cases, your US Social Security will only be taxed by the United States, with a few notable exceptions being Canada, Germany, Ireland, Italy, Japan, and the United Kingdom. Another plus is that the US Social Security Administration is very familiar with wiring your social security payment to a foreign bank account.

Now, what about health insurance while abroad?

Healthcare quality and costs are also important considerations for people retiring abroad. However, many healthcare choices like Medicare will be different for those retiring abroad.

First, it's important to note that Medicare will pay only for services that are provided inside the United States. You may want to continue paying Medicare premiums, however, in case you desire to return to the United States or seek treatment in the United States sometime in the future.

Premiums and penalties rise dramatically if you fail to apply immediately upon eligibility at age 65. If there is any chance that you may return to the US or seek treatment stateside, then you should enroll in Medicare and start paying the premiums on time.

You may also want to consider purchasing local coverage or an expat healthcare policy in your country of residence. Some of these options include buying into the national healthcare systems in countries such as France or enrolling in private health insurance coverage with global expat coverage. For both of these options, rates are very reasonable but will not cover treatment in the United States.

So the key takeaways here are that your social security benefits will not be negatively impacted by your move abroad. Healthcare benefits, including Medicare, are more complicated and it's important to research local healthcare options, and make a plan before you go that assures continued coverage in your new country.

Now I'll turn it over back to David, who will walk you through our last topic; what to do before you move.

David Kuenzi:

Thanks, Hanna.

As you can see, we have certainly gone through a lot of topics today. While moving abroad can be a wonderful experience, there is a lot that needs to be considered. So before we wrap up, we want to cover some practical financial steps that you will want to execute before you move.

First, most of our clients need a specialized US expat tax preparer. We don't recommend relying on your existing tax preparer unless you have confidence that they have lots of experience preparing tax returns for Americans living outside the United States.

Second, anticipate the need to file taxes in your new country as well. Reach out to tax preparers in that country. Anticipate your country of residence tax rules, and be ready to take action before you become a tax resident there, if necessary.

Third, find the right bank and brokerage firms to work with. US brokerage accounts are routinely closed for Americans when they move abroad. Each financial institution has different rules and most are highly restrictive when it comes to working with expats.

Fourth, find the right advisor, and in this case, a fiduciary financial advisor who not only provides advice that is in their client's best interest, but also one who has experience working with Americans abroad and understands the challenges that Americans face when it comes to living overseas. An expat fiduciary financial advisor can help you make smart decisions regarding your income, investments, taxes, estate planning, and more.

At Creative Planning International, we apply our specialized expertise and years of experience working with expat clients around the world to help them achieve their financial goals despite the cross-border complexity. Furthermore, we work with a wide network of experienced and trusted tax preparers around the world who can help our clients with their US and country of residence tax filings.

We introduce our clients to the right local law firms that can help them prepare local estate planning documents as needed. We also work closely with our custodians, Schwab, Fidelity, Pershing, and Goldman Sachs so that we can open and maintain the accounts our clients will need without risk of service interruption. And as fiduciaries, the advice we provide is with your best interest at heart. Most importantly, we bring our team's experience and expertise to coordinate all of these moving cross-border puzzle pieces to make sure that our clients are making the right financial moves when they move abroad.

The key takeaway: Put a financial team together before you depart. Having the right financial team on your side can make your transition to a life abroad more seamless so that you can enjoy this new chapter of your life.

I know that we just went through a lot and this is just an overview. As a quick recap, here are four key takeaways from today's presentation.

1. Understand your potential tax obligations. Each family will face a unique tax scenario based on how local country taxation interacts with their US tax obligations.
2. Be prepared to change your estate plan. Do not assume that your existing estate plan will work as planned after you move abroad. Be prepared to draw up a new plan that is compliant with local probate and succession law.
3. Your social security and healthcare benefits may be impacted. Almost all US citizens will receive US Social Security benefits even if they live abroad. Medicare coverage is more complicated and may need to be supplemented with local health insurance.
4. Put a financial team together before you depart. Having the right financial team on your side can make your transition to a life abroad more seamless so that you can enjoy this new chapter of life.

Hanna Kennedy:

We understand that planning a move overseas can be overwhelming. We're here to make that transition as smooth as possible. At Creative Planning International, we partner with our clients to create customized solutions to help them reach their financial goals. We're a dedicated team of international wealth managers, financial planners, operations managers, and traders who specialize in wealth management for global citizens.

David Kuenzi:

Contact us today to schedule a confidential, no obligation meeting. We'd love to help advise you on this exciting new chapter in your lives.

After this presentation, you'll receive a replay and we'll reach out to you to see if you have questions or would like to schedule a meeting with a member of our team. Thank you very much for joining us.