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Financial Planning > Tax Planning

Avoiding Pitfalls When Retiring in Paradise

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Chairs on BeachFor many of your clients, the idea of retiring abroad may seem like a ticket to paradise. It can be, but there are a number of laws, regulations, and common sense advice you need to know about when advising them on such a move.

For one thing, the Foreign Account Tax Compliance Act (FATCA) takes effect this year. There will be no tax havens to be found – anywhere.

As explained by, “The Foreign Account Tax Compliance Act, better known as FATCA, was passed in 2010 as part of the HIRE act. Starting in 2014 foreign financial institutions (FFI) will be required by the US government, under FATCA, to report financial information regarding accounts of US citizens, US persons, Green Card holders and individuals holding certain US investments to the IRS. This law requires foreign financial institutions such as your local back, stockbrokers, hedge funds, insurance companies, trusts, etc. – to report directly to the IRS all their clients who are ‘US persons.’ FFIs that don’t become complaint will be subject to a 30% withholding on these investments, which will directly impact FFI clients.”

Income tax issues are in fact one of the most important areas where your clients need your help. Attorney Felicia Seaton offers some insights on the basic tax laws for your clients retiring abroad, and what is different this year.

“I wish to start by noting that the US is the only country in the world that requires its US citizens to report all income earned worldwide, no matter where they reside. This means that no matter where they reside, they are still required by law to file US tax returns,” Seaton said.

“US laws differ with regard to your reporting obligations if your clients reside abroad, and their income tax obligations may differ as well. The requirement to file an FBAR differs based on residence, for example,” Seaton said. “The requirements for filing a Form 8938 with their US tax return differ. They may be eligible for foreign tax credits, and a treaty between the US and the country where they reside may apply to them when filing their income tax or other tax returns. Of course, they may also be required to file income and other tax returns with the country where they reside.”

One of the un-pleasantries that your client should consider is preparing their Will before the move. Their wishes may need to be on record in two different countries.

“They may need a Will in the country in which they intend to reside,” Seaton said. And “beware”, it must be prepared by a professional who is licensed in that country. “They will not need such a Will until they own property (whether real or other) in that country. They will need to make sure that all of their US assets are correctly titled,” she said.

Seaton also advises that your client maintain a valid, durable power of attorney prepared in their home state while they are still on US soil. This avoids the need for a guardianship.

“It will still be valid after they move. I also strongly advise clients to implement their probate avoidance estate planning prior to moving. This is because probate is a difficult process for loved ones who may also reside overseas,” Seaton said.

Seaton spends her time traveling back and forth between the US and Israel, and many of her clients hold dual citizenships. This can also complicate matters.

“There are significant tax issues that impact dual citizens, which need to be addressed by US citizens residing abroad,” Seaton said “For example in Israel, a US citizen’s Social Security retirement payment may be reduced if that person is receiving a payment from an Israeli pension, under certain circumstances.”

In addition, Social Security retirement is completely tax free under the US-Israel income tax treaty.

“I have seen many incorrect income tax returns, where clients could have saved money they paid in taxes,” Seaton said.

“Finally, there are many retirement vehicles available in Israel, for example, that differ from any known in the US. It is worthwhile to look into these possibilities. However, be mindful that there could be additional income taxation on any investments in non-US mutual funds, so always consult US tax and legal professionals before making choices,” Seaton said.

Moving across state can be stressful enough, let alone moving to another country. There are some steps you can help your client with up front to make the journey easier.

That may start with referring your client to other specialty advisors. You can’t be expected to be an expert on tax and immigration laws and regulations everywhere, so reach out to others that are.

“Your client will need tax and legal advice in both countries, not only advice regarding the US or the new country,” Seaton said. “Do not anticipate being able to find someone who is a ‘one-stop shop’. It is best to use a professional’s services that specialize in one country’s laws or practices. Become a team for the client’s best interests and greatest benefit.”

Older workers are “phasing into retirement” more than ever before, added Kerry Hannon, a retirement planning consultant and author of the book “Great Jobs for Everyone 50+: Finding Work That Keeps You Happy  and Healthy … And Pays the Bills.” Simply put, a growing number of older workers remain working to some extent.

“They don’t retire totally, they scale back,” Hannon said. That holds true for many Americans that retire abroad she says.

Every country has its own employment laws, and Hannon says advisers should into whether their client will need a visa or sponsorship.

Another trend that retirement planners should note: many Americans that retire abroad often don’t do so permanently. Whatever the reasons, Hannon says advisors should work with their clients as if the move might be temporary.

Many will spend a few years in a foreign country, and decide to return to the US. The reasons are many, Hannon explains. They may miss family and friends. The experience may not be all it was cracked up to be. Or it may be driven by economics.

A misconception that many Americans have about retiring abroad is that it will be cheaper, Hannon said. Taxes may be lower in another country, but the cost of living might be higher in another area, such as healthcare. That catches many people off guard, especially retirees that need expanded medical services, she said.

English speaking countries are popular destinations for obvious reasons, but they also tend to be the most expensive places to retire. South America and Central America are becoming popular retirement spots as a result.

Finally, advise your clients to spend some extended time in a possible retirement destination, Hannon recommends. That will enable them to experience what it is really like to live there.


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