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Financial Planning > Tax Planning

Retiring Abroad: Is Paradise Losing Its Luster?

By David Weldon

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Every year it seems that more Americans decide to pack it all in, reward themselves for decades of hard work, start a new chapter in their life, and retire to a foreign land.

The dream retirement locales may be defined by pristine sandy beaches, lush tropical rainforests, or centuries-old romantic cities to explore. But they usually all have one thing in common – the perception among retirees that they offer a simpler, and less expensive, place to spend one’s later years.

But maybe not so much anymore.

Following record numbers of Americans making the retirement move abroad in 2013 and into this year, 2015 may see a drop in the exodus. The reasons: an improved U.S. economy, a weaker economy in many foreign lands, and continued changing tax laws that reach out to just about everywhere now.

“I’m not seeing as much of the wanderlust among the retirees or near-retirees that I talk to about retiring abroad,” said Kerry Hannon, a retirement planning consultant and author of the book “Great Jobs for Everyone 50+: Finding Work That Keep You Happy and Healthy.” The reasons she hears: better job opportunities here, much better healthcare in the U.S., and increased taxation on foreign assets as long as one maintains their U.S. citizenship.

The tax changes began in 2014, with the enactment of FATCA (Foreign Account Tax Compliance Act). This law requires foreign financial institutions that have entered into agreement with the U.S. to report all accounts of U.S. citizens that have taken up residence. That includes foreign banks, stockbrokers, hedge funds, insurance companies, trusts, etc. The IRS now expects them all to name names.

So what’s new for 2015? Strength in numbers. The U.S. has entered into agreement with even more foreign countries under the FATCA, and indeed, many foreign countries are striking their own agreements with each other.

Tax havens are becoming a thing of the past. If your clients will soon live abroad, work abroad, make money abroad, or keep money abroad, Uncle Sam will know.

The unfortunate reality for many American retirees is that old saying, “out of sight, out of mind”—they begin to forget about tax compliance issues they thought they had left behind. It’s not surprising; these retirees are too busy having fun in their new-found free time.

That makes it all the more imperative that the retiree get their financial house in order before they pack their bags, and get smart advice on what they need to report once they relocate. You have a lot of work to do with your client, and maybe with some foreign help of your own/

“If a person works abroad and maintains accounts abroad, they need to make sure that they are reporting all of their foreign accounts on their income tax, as well as on their FBAR (Foreign Bank Account Reporting,” said Attorney Felicia Seaton, who specializes in estate and taxation issues for American workers that retire abroad. As a U.S. financial planner, you certainly can’t be expected to up on foreign tax regulations, estate law, or workplace compliance.

Seaton herself travels regularly between the United States and Israel, where she has maintained a home for years. She understands how U.S. laws pertain to Americans living abroad, as well as how local laws in Israel may conflict. Most financial planners don’t have the benefit of knowing the rules on both sides of the equation.

All of this is why its’ so critical for soon-to-be or recent American retirees to seek out the advice of U.S. financial planners, and for those planners to, in turn, reach out for foreign tax advice. Documentation and reporting of known income, investments, wealth, real estate, trusts, and wills should all be prepared while the individual or couple is still on U.S. soil.

There are a number of reasons why this is important, but one of the most obvious is that it takes a specific number of months living in another country to actually establish residency there. If financial matters aren’t clearly acted on beforehand, a person can find themselves somewhat in limbo should anything go wrong. Also, the U.S. tax laws are the most far-reaching, so those are the ones your client most needs to satisfy early on.

“There are other factors that can come into consideration which have to do with people’s connections with where they are,” Seaton said. “Perhaps they still maintain a residence in the United States; they have a car there; they still have a job there (many U.S. jobs can be performed abroad, online); they didn’t obtain a driver’s license in the new country. There may be questions of residency for tax purposes.”

To illustrate how complicated things can get, Seaton shares a horror story about one couple she worked with.

“Mom and dad moved abroad in retirement. They owned a couple million dollars-worth of investments in the U.S., almost nothing abroad. One passed away. The other was incompetent at the time that the first one passed away. So no estate planning got done between the first and second death. Everything was joint-owned with either survivorship in the U.S., which is good for probate, but now that both have passed away, the children were left with having to make sense of over 20 different investments—some with a brokerage house, some individually owned stocks, some life insurance policies, and some that had gone to unclaimed property when dividend checks went uncashed because there was nobody to sign-off on them,” Seaton said.

The lesson to be learned: “It’s very imperative that we sit down and do estate planning with a client and implement it as soon as possible, so we can start to reduce exposure to U.S. estate tax,” Seaton says.

Seaton also agrees that estate planning can get harder to do once an individual or couple has relocated abroad, especially if they are living near children and grandchildren.

“There can be a lot of distractions. Estate planning is a difficult process anyway without distractions. Particularly when the U.S. is so far away, and motivation wanes,” she says.

Another important consideration in all of this is that many Americans that retire abroad end up moving back to the United States.

“Clearly the romance goes out of it at a certain point,” Hannon added. “Once you live somewhere long enough it becomes routine.”

To help make sure your perceived paradise is all it’s cracked up to be, Hannon recommends that Americans make the move in “baby steps”.

That is, go for six months. “See if it really is a place you want to be long term. I do encourage people to try it out first. You want to really become part of the fabric of the community to see if it is a good fit for you,” Hannon said.

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