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. 

Cross-border specialists also advise clients to test-drive their portfolios under the rules of their new home country. Keats, for example, has American clients convert all 401(k) accounts to Roth IRA’s when they move to Canada. The former is taxed at a 50 percent rate, the latter is tax-free.

Frank Reilly, president of Reilly Financial Advisors in San Diego, serves clients in 14 countries, with his core clients in Saudi Arabia. It’s not just the classic financials that his firm watches out for. For instance, he helps clients structure their pay between their housing allowance and expat premium to the greatest advantage. In 2010, as the euro crisis heated up and the dollar gained strength, he advised clients who held mortgages in euros not to convert them at that time to dollars. And then there are the “little things” such as fielding questions about auto insurance and home ownership laws.

It’s also the little things that Reilly helps sort out when clients return home. “It’s a shock when you come back from an extended time abroad. There are smartphones, with the extra costs for texting and data. We have clients who are shocked just trying to make sense of basic cable, extended cable, HD, DVR,” says Reilly. “Moving either way, it’s difficult. There are just a lot of little things you’ve got to get figured out.”

One Former Expat’s Story

When Jeff Born got an overseas posting to Fiji, he relished the thought of practicing what he had preached for years as a professor of international finance. And who better than someone with a Ph.D. in finance to understand the ins and outs of living and working in a foreign economy?

“We did a lot of country-specific reading and felt we were as informed as we could be going in,” says Born, who served as the inaugural dean of the business and economics program at University of the South Pacific from 2006 to 2008. “But still, I have to say those first few months were quite overwhelming. Trying to make sense of a new culture and way of life was confusing.”

The fact that Fiji is a developing country made things even dicier. Here is Born’s best advice for anyone contemplating a move abroad:

Regarding taxes: Download the appropriate IRS forms and instructions before taking a job to see what rules govern earnings in an overseas location. “I have a Ph.D. in finance and I worked in a tax accounting firm in my youth and I found it challenging,” says Born, now the faculty director of the executive MBA program at Northeastern University in Boston. “I can’t imagine what a ‘normal’ citizen would think.” His biggest regret: Not getting a tax advisor.

Paying bills back home: This is a tough one, particularly in a developing economy, according to Born. Become familiar with the rules for repatriating any income that one might earn in a foreign location back to the U.S. (to pay bills, a mortgage, gifting to children, for example) because it might not be as simple as getting a bank draft or wiring money. Born also says to be prepared for bank fees that “would make a U.S. banker blush” and the possibility that transfers may be made at unfavorable exchange rates.

 Work permits: It may be wise to negotiate a work permit for a spouse or significant other in advance of a move. In other words, don’t assume that just because you are bringing a highly qualified partner that he or she will be allowed to work in country. In Born’s case, his wife Mary Ann operated a travel agency directed at her U.S.-based clients by using Skype and the Internet.

Currency risk: When moving to a developing economy, currency risk is a way of life. Born suggests studying the recent history of exchange rate movements before a move in order to gain an understanding of when rates are “good” and when they are “bad,” information that can be used to an advantage.

The retirement card: Be very careful before permanently relocating to a foreign locale as part of a retirement strategy. “While Social Security checks may follow you and the cost of living may be lower, your ability to access important services like health care may be substantially limited if you are a non-resident,” adds Born. “It could only take one serious illness with a medi-flight back home to the U.S. to wreck one’s retirement plans.”

Hidden costs: The Borns took a bath on their Hyundai because of the huge tax on it, not unusual for an island nation. A car that would have cost them $15,000 in the U.S. was $10,000 more in Fiji. Also, as he was unwinding from his position, Born was unable to pop his pension benefit from the university or, because of banking laws, to withdraw all of his funds from his local account. “Not a great outcome,” says Born.


By The Numbers

An estimated 6.32 million americans, excluding military and government employees, live in 160-plus countries today, according to the U.S. State Department.

Think about it. If all of those Americans resided in one state it would be the 17th most populous state in the nation.

Here are the places outside the U.S. where more than 100,000 Americans reside: Australia, Canada, China, Dominican Republic, France, Germany, Greece, Israel and West Bank, Italy, Mexico, Philippines, Spain and the United Kingdom.

(Source: Association of Americans Resident Overseas.)