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February 01, 2012 at 07:00 PM
Not long ago, an American walked into advisor Robert Keats’ office with a very big problem. The man, worth tens of millions of dollars, lives in Canada and had failed to file his U.S. income tax returns correctly with the IRS. Talk about a big oops.
“He didn’t get a specialist and we got the clean-up,” says Keats, founder of Keats, Connelly & Associates, a cross-border financial planning firm in Phoenix, Ariz. “Cross-border planning is a lot more complicated than people think. Most advisors underestimate it. You’ve got to know where the minefields are.”
The bigger the assets and earnings, the more important it is for the internationally mobile client to plan ahead. Taxes, insurance, estate planning and investments are all treated differently, depending upon the country. Slip-ups — spending so many days in a country that you become a resident for tax purposes, for example, or failing to disclose foreign holdings — can undermine even the best laid financial plans.
The number of Americans (excluding military and government employees) living abroad recently reached a new high of 6.32 million people, according to the U.S. State Department. No surprise then that, anecdotally at least, many advisors are reporting an uptick in cross-border clients.
Orlando, Fla.-based Christina Pinto, a certified financial planner with Moreno, Peelen, Pinto & Clark, has U.S. clients in Colombia and, at the moment, she is spearheading a push to bring Colombian enterprises to the U.S.
“Our world is so much smaller. I can take a flight on JetBlue and be in Colombia in two and a half hours. It’s that accessible,” says Pinto, who is associated with Independent Financial Partners. “The fact that things are getting closer, whether it’s through flights or technology, makes it easier for clients to go back and forth. It’s not as distant as it once was. I foresee a developing clientele.”
While globalization does play a role, there is also an emerging phenomenon that advisor Adam Koos, president of Libertas Wealth Management in Dublin, Ohio, has dubbed “Plan B, Somewhere Else.”
Two of his clients are moving part-time to Mexico and Puerto Rico, respectively, not just to get away from the Ohio winters but to reside in places where they can live better for less. “Look at our economy, our annual deficit, our do-nothing Congress,” says Koos. “Confidence is down. People are starting to think about this for financial reasons. I haven’t seen that before.”
Keats recently observed a rise in high-net-worth Americans moving to Canada to become citizens as part of a wealth preservation strategy. Notably, Canada does not have the equivalent of an estate tax.
And, in Israel, advisor Douglas Goldstein, director of Jerusalem-based Profile Investment Services, has witnessed a surge in Americans moving there for a better financial situation since the 2007-2008 U.S. market collapse.
“This is the new Florida for New York Jews,” says Goldstein, who advises the expat community. “The economy is better here than in the U.S., and Israel encourages immigration by giving a 10-year tax holiday on passive investments. There’s a huge amount of opportunity here and great entrepreneurial spirit. People who want to build something can come here and be very successful.”
But, experts warn, be careful what you wish for. Without proper counsel, life as an expat can come at a huge cost.
As cross-border specialist Raoul Rodriguez Walters, CEO of Portland, Ore.-based Mexico Advisor, puts it: “U.S. advisors need to know that their careful planning can be undone if they do not consider the issues that living in a foreign country can cause. And that’s a lose-lose — for both the client and the advisor.”
Pre-Planning Is Key
The most important consideration for the internationally mobile client is to “know before you go.” Keats, for example, has an American client with a $20 million portfolio who just moved to Canada with his Canadian wife. As a result of pre-planning, Keats was able to shave off $100,000 to $200,000 in the couple’s income taxes for each of the next five years.
The U.S. is the only country in the world that taxes its citizens based on citizenship rather than residence so tax planning is one of the fundamentals of cross-border advice.
“You are subject to U.S. income taxes on worldwide earnings, it doesn’t matter if you are in Australia or Mongolia,” says Los Angeles CPA Steve Frankiel. “The U.S. allows you to offset your U.S. income tax liability if the tax is paid in another country. There are times when there is leakage and you get taxed twice. The general idea is to pay only one tax.”
One key piece of tax planning: a series of IRS elections that entrepreneurs can make that will reduce their tax burden when they open a facility overseas. “There are times when the U.S. government allows you to choose how a foreign entity is treated for U.S. purposes,” Frankiel adds. “Evaluating each of these elections may have a significant beneficial impact.”
Estate and insurance planning also play critical roles. In Mexico, for example, if you hold a house jointly and die intestate, there is no guarantee that your spouse will get the house. “This is something you would assume in the U.S., not so in Mexico,” says Rodriguez Walters, who suggests coordinating U.S. and Mexico estate plans along with drafting Mexican health-care directives and powers of attorney. He also encourages clients to undergo an insurance review, based on their new circumstances. Many Americans, he adds, tend to be overinsured for property liability, not a big issue in Mexico, and underinsured for basic damage coverage associated with fire, earthquakes, flooding and hurricanes.
