When relocating from the U.S. to a new country, there are all the normal considerations – sorting out visas and housing, exploring your new surroundings, adapting to a new culture, etc. Equally important, though, is paying attention to protecting your wealth and avoiding tax traps as part of both your exit from the US and your entry to a new country. This article is general in nature, and we strongly recommend seeking country-specific advice before becoming a resident in a foreign country. Each country has its own unique tax laws. How your new country of residence will tax your U.S. investment and retirement accounts may be quite different than how the IRS taxes those accounts.
Strategies and investments that worked well in the U.S. may not work after you move. For example, U.S. mutual funds cannot be sold outside the U.S. Under its current EU regulations, the European Union generally does not allow EU residents to buy U.S.-based investment funds unless they work with a U.S. investment advisor. At the same time, U.S. citizens should also avoid buying non-U.S. investment funds that will be treated unfavorably by the IRS. Non-US funds include foreign-listed ETFs, foreign mutual funds, and unit trusts. Foreign life insurance structures can also fall under their highly punitive rules.
Due to compliance and regulatory complexities, many U.S. investment firms refuse to work with individuals outside the U.S. This could mean that your current advisor or broker may no longer be able to serve you once you are overseas. Check with your financial service providers before you go, rather than be surprised later when your options are much more limited.
Retirement planning from outside the U.S. is also significantly more complex. Roth IRAs are a great way to save for retirement and avoid future taxation in the U.S., but the unique tax-free nature of Roth accounts is not recognized in many countries, including Japan. The U.S., in turn, may not recognize the status of certain foreign pensions. In July 2021, the IRS identified Maltese pension plans, previously advised to be protected under the U.S.-Malta tax treaty, as abusive and ultimately denied them pension tax treatment. Many Americans spent thousands of dollars to establish these plans, only to face adverse tax consequences and legal fees to clean them up.
Estate planning is a key component of cross-border wealth management. Just as every country has its own tax laws, every country has its own estate and inheritance laws and probate procedures. Even a simple will may fail to distribute your assets as you wish if its stipulations conflict with your new country’s succession laws.
Probate tools such as revocable trusts are designed for tax and legal efficiency in the U.S., but will not be effective in many other countries. Even worse, they may create unanticipated and punitive complications in those countries. For example, many countries treat inheritance via a trust structure as coming from a third party and therefore subject it to a higher tax rate than if it came directly from a relative. Another potential risk is that your new country completely ignores your trust and, hence, your wishes. Even the UK – a country with a long tradition of using trusts – imposes punitive taxes on trusts depending on their structure.
Much of the world has strict forced heirship rules and high estate or inheritance tax rates. Before you leave the U.S., ensure that your estate plan does not make an already difficult situation even worse for your loved ones.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
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