A Guide to Investing and Financial Planning for Americans Retiring Abroad

Transcription

1 A Guide to Investing and Financial Planning for Americans Retiring Abroad Pre-Retirement preparations and planning Tax and legal implications of retiring abroad including FATCA Banking and financial accounts: practical matters Portfolio management (including 401(k)s or IRAs) while retiring abroad Currency risk management U.S. citizenship based taxation and country of residence taxation Social Security and Medicare considerations Estate planning strategies for retirees abroad 2018

2 Introduction Retirement abroad has never been as popular as it is today. While longer, more active retirement years have been one reason American seniors are increasingly retiring abroad, financial considerations are also a compelling incentive. The cost of living outside the U.S. (especially for health care) continues to decline, and many desirable retirement destinations now provide very competitive cost of living standards compared to the U.S. Even as the economics look increasingly attractive, investment planning considerations make retiring abroad less simple than it first appears. In fact, financial planning is a critical first step in making sure that your resources are well managed in an international, crossborder environment that poses special complexities and challenges. These planning concerns run the gamut from how to create appropriate currency diversification in retirement income streams, to the legal aspects of managing probate across borders. Other issues may be more mundane but are equally important to execute effectively. Examples include: moving cash between accounts in different countries and currencies; managing Social Security and Medicare benefits while abroad; reviewing adequacy of insurance coverage; maximizing wealth and mitigating cross-border taxation of investment and retirement income; managing compliance pitfalls and complexities. This report outlines the steps necessary for a smooth financial transition to retirement abroad and effective ongoing wealth management once abroad. It focuses on the issues that must be addressed by the retiree well BEFORE taking the plunge of moving abroad. If done properly, timely deliberative wealth planning will provide peace of mind that no unanticipated financial surprises will upend a happy, exciting and financially secure retirement abroad. About Thun Financial Thun Financial Advisors, L.L.C. is a U.S.-based, fee-only, Registered Investment Advisor that provides investment management and financial planning services to Americans and expatriates in the U.S., and Americans abroad (including many retirees). We maximize long-term wealth accumulation for our clients by combining an index allocation investment model with strategic tax, currency, retirement and estate planning. We guard our clients wealth as though it was our own by emphasizing prudent diversification with a focus on wealth preservation and growth. More in-depth treatment of these topics is provided in additional proprietary research available on Thun Financial Advisors Research

3 U.S. Taxes, Local Taxes, and Planning to Avoid Double Taxation Uniquely American Exceptions: FATCA and Citizenship-Based Taxation Tax systems vary widely, country to country. Some countries tax only locally sourced income (Hong Kong, Malaysia and Singapore, for example). Most developed countries (Japan and most of Europe) tax all residents on their entire worldwide income. Many countries combine aspects of both these systems of taxation. The United States is one of only two countries in the world that taxes based on both citizenship and residency. This citizenship-based taxation means that no matter where an American decides to live, the U.S. Internal Revenue Service will expect him or her to file U.S. Federal tax returns, reporting all sources of income regardless of its origin. Of course, filing a tax return does not necessarily mean one owes U.S. taxes. Americans abroad are able to reduce or eliminate their U.S. tax liability by applying: the foreign earned income exclusion, and/or tax credits for taxes paid in their foreign country of residence. Because the U.S. generally recognizes the first right of other countries to tax U.S. citizens residing in their countries, the U.S. also provides foreign tax credits to offset U.S. taxes payable with foreign taxes paid. This relief is helpful but incomplete. The practical result is that many Americans living abroad still face some amount of double taxation. The magnitude of double taxation depends to a large degree on how effectively the complex interaction of U.S. and local tax rules are managed. Careful tax and investment planning can minimize, and even eliminate, the negative impact of double taxation for Americans living abroad. All American citizens retiring or living abroad will have to contend with uniquely American legal and tax mandates that substantially complicate their financial lives. One important and commonly encountered mandate is FATCA the Foreign Account Tax Compliance Act. FATCA is U.S. legislation passed in 2010 that compels every financial institution around the world to report directly to the IRS on financial accounts held by Americans. American expat retirees should assume that all of their U.S. and non-u.s. financial accounts are visible to the IRS. This transparency underscores the importance of full and correct reporting of non-u.s. assets. The catch is, however, that non-u.s. assets are generally subject to special, complex reporting requirements and are often taxed at punitive rates. This is especially true of most types of non-u.s. sourced investment income. The combination of FATCA and citizenship-based taxation leads most Americans abroad to conclude that it makes the most sense to keep their investment accounts and the center of most of their financial affairs back in the U.S. Yet, to live abroad, a local bank account is almost always necessary. Next Step Do your homework BEFORE YOU GO by speaking to experienced tax-preparers, financial advisors, and other experts familiar with the unique situations facing expat retirees. Thun Financial Advisors Research

4 Opening and Maintaining Accounts The first important step for Americans retiring abroad is to establish financial accounts with U.S. banks and custodians who will not close their accounts, if they take up permanent residence outside of the United States. The closure of bank accounts for Americans abroad has become increasingly common in recent years as a result of the confluence of the Patriot Act, FATCA, Know Your Client ( KYC ) Rules and more regulation of the financial services industry, in general. The practical effect of FATCA and these other laws and rules has meant that opening a local account for Americans abroad has become more difficult. An American will likely need to open an account with one of the larger banks in country because these larger banks are the few that have the resources to remain FATCA compliant. It will not be unusual for these banks to require proof of residency and address, as a condition of opening an account. For this reason, it may also make sense to open an account with an international bank that has branches in the new country. These formalities can often be initiated prior to departure by setting up a bank account from the U.S. within that international bank. Americans abroad, however, should be aware that opening non-u.s. accounts may trigger additional IRS reporting requirements, such as FinCen form 114 (see box, right). Americans retiring outside of the United States should understand that it is not illegal for them to open U.S. bank accounts or maintain those accounts after they move abroad. It should not be assumed, however, that U.S. banks will maintain accounts for Americans living abroad. For various reasons, U.S. banks may choose not to open (or to close or freeze) accounts for American expats. FinCEn 114 In addition to filing U.S. taxes, American taxpayers with foreign bank accounts (this includes accounts owned by the U.S. taxpayer and accounts for which the U.S. taxpayer has signatory authority) may be required to report them to the U.S. government via Report of Foreign Bank and Financial Accounts (FBAR) form (FinCen 114). This form must be filed to report foreign bank and financial accounts if the total balance across all foreign accounts is $10,000 or greater at any time during the year. The FBAR must be filed electronically with the Department of Treasury (not the IRS) by April 15th of each year (a taxpayer can request a six-month filing extension). Fortunately, unlike much reporting regarding foreign financial assets, the FinCen is relatively painless. Thus, retirees should confirm that their bank will maintain their accounts after they move outside of the United States on a permanent basis. Fortunately, many U.S. financial institutions are still willing to maintain bank accounts for Americans abroad. Thun Financial Advisors Research

5 Unfortunately, it is often not as easy to find U.S. brokerage firms that will maintain investment accounts (including retirement accounts) for Americans abroad. American brokerage firms have been aggressively closing or freezing investment accounts (including IRAs and other retirement accounts) of American expats in recent years. The list of well-known firms excluding accounts of Americans abroad is extensive and includes: Fidelity, Merrill Lynch, Wells Fargo, JP Morgan, USAA, Vanguard, and Many lesser known institutions. Nevertheless, other institutions such as Charles Schwab, Interactive Brokers, and TIAA remain receptive to working with U.S. expats in many countries. However, restrictions may be applied even by these institutions on a country-by-country basis. In many cases, independent registered investment advisory firms (such as Thun Financial Advisors) that are regularly working with these institutional product custody providers are able to open accounts when an individual investor cannot. Next Step Practical Currency Management Financial planning guidelines indicate that households should hold a reserve of cash (the generally accepted guideline is three to six months of expenses). These funds should usually be held in the currency of the country of residence: for example, retirees in Australia should have a cash reserve held in Australian dollars at an Australian bank. In order to establish these reserves, the best practice for Americans living outside of the United States is to establish a system that will allow them to transfer money to their local bank and receive the best currency exchange rate possible. This means not only considering any fees charged, but also the difference ( spread ) between the local currency purchase price and its sale price. Consequently, in exploring their options, Americans abroad should make sure they pay attention to this total cost, as many financial institutions offer free exchanges, but extract large, hidden commissions by exchanging currency at below market exchange rates. Finally, in order to limit the costs associated with transferring money, Americans living outside of the United States should try to structure these transfers quarterly or semi-annually. Transferring funds on a fixed basis will also help average out variations in the exchange rate and will limit the effects of currency fluctuation over time. In order to build up reserves, these transfers may be quite frequent at first and then slow down over time. Next Step Open accounts with banks and brokerages that won t close them when you move abroad. Establish a currency management plan where you transfer money to your local bank account at fixed intervals. Thun Financial Advisors Research

6 Investment Management for American Retirees Abroad Portfolio Comparisons When Americans abroad encounter FATCA and other compliance hurdles, it often leads them to the conclusion that most income producing investment activity will be more efficiently conducted through U.S. accounts. Managing investments through U.S. accounts, however, does not require retaining a U.S.-centric investment strategy. Indeed, in planning a retirement abroad, investors need to think very differently about their investment strategy. Standard approaches offered by U.S. financial institutions are usually not optimal. An American retired abroad is wise to diversify away from excessive concentration of their portfolios in purely U.S. investments. This guide will show how this can be done, safely and compliantly, to boost investment returns and mitigate against the risk that a decline in the value of the U.S. dollar or of U.S. assets may undermine a retiree s financial security. The elements of sound portfolio management proper diversification and periodic rebalancing combined with cost and tax efficiency are equally important after retiring abroad as they are during years of wealth accumulation. However, tax and compliance circumstances change once a retiree moves abroad. Above is the asset allocation of a typically American diversified portfolio. While it has some foreign stocks, they are a small portion of the portfolio. Below is a portfolio that is globally diversified for a typical expat retiree in order to mitigate country and currency risk. The optimal selection and allocation of types of investments within a portfolio changes, if they are used to fund a retirement outside the U.S. dollar economic zone. These issues have major implications for investment portfolio management. This section and the following sections set out the principles and practices of an effective portfolio investment strategy for American retirees outside the U.S. Thun Financial Advisors Research

7 Rethinking Asset Allocation for Americans Retiring Abroad Mutual Funds, ETFs or individual stocks and bonds? Most traditional U.S. portfolio managers and investment advisors take an overly U.S.-centric approach to portfolio construction. At best, most make a modest allocation to non-u.s. stocks, and non-u.s. bond allocations are usually currency hedged. Excessive focus on U.S. investments limits an investor s ability to mitigate fully financial risk. In contrast, broad global portfolio diversification helps mitigate financial risk. This is particularly true for Americans living outside the United States, where the cost of living is less tied to U.S. economic and market cycles. On the other hand, Americans may remain more tied to the U.S. than local citizens of their country of residence. Ultimately, the optimal portfolio strategy is to diversify broadly across a range of global financial assets that will assure a steady stream of retirement income and capital appreciation without being tied to the economic fortunes of only one country, one region or one currency. An Optimal Portfolio for Americans Abroad An optimal portfolio for Americans abroad should be broadly diversified across U.S. and global stock and bond markets. Real Estate Investment Trusts (REITs) and commodities/gold are also recommended for a small portion of the portfolio because of their risk diversifying qualities and their low correlation with the U.S. dollar. These principles have been shown to achieve high returns, while limiting risk and volatility and protecting the purchasing power of retirees whose expenses are not primarily linked to the U.S. dollar. Mutual funds are generally the least desirable investment vehicles for American retiring abroad. Most U.S. mutual funds have covenants in their prospectus that prohibit their distribution to investors residing outside the United States. Furthermore, U.S. mutual funds may trigger punitive taxation in other countries (e.g., the UK, Ireland). Building a portfolio of individual stocks and bonds is an acceptable alternative to mutual funds because they are less likely to trigger punitive and complex reporting in the U.S. or other tax jurisdictions. However, designing, building and managing a portfolio of individual stocks and bonds that captures the benefits of a global, multi-asset class portfolio diversification is difficult and expensive. Investors who forego funds and invest in individual stocks and bonds are commonly overconcentrated by sector or geographical area, thereby subject unnecessarily to increased risk and volatility. Given these limitations, Americans abroad will find that U.S.-listed ETFs are usually the most effective building blocks for a modern investment portfolio, especially when the account holder resides outside the U.S. A well-chosen selection of ETFs will typically be very cost and tax efficient and is far less likely to trigger compliance problems or punitive taxation in the country of residence. Thun Financial Advisors Research

8 Managing Currency Risk Investors living and spending abroad will quickly recognize their exposure to currency risk: the incongruity between foreign currency denominated expenses and dollar denominated investments. A well-diversified portfolio not only mitigates overall investment risk but also limits currency risk. This involves diversifying the portfolio s underlying income away from purely U.S. sources. European, Asian and emerging market stocks, non- U.S. bonds and gold are all distinctly uncorrelated to the U.S. dollar and its fate. A common misunderstanding of cross-border investors is to confuse the currency used to measure an investment value with the underlying currency exposure of that investment. For example, the stock of a British company such as Glaxo Smith Kline will be listed in both London and New York. If we buy a share in New York and hold it through U.S. broker, its value will be reflected on a U.S. brokerage statement in U.S. dollars. The same investment, bought through a British broker in London, will have its value reported daily in pounds. Shares of GSK traded in New York are exactly the same as shares of GSK in London. The difference between the value of the shares measured in dollars or euros reflects the changing U.S. dollar/euro exchange rate. In other words, the value of the investment in the Glaxo shares remains exactly the same, whether purchased in London or New York, and whether calculated in dollar or pounds. Thun Financial Advisors Research

9 The Glaxo example above refers to stocks. However, for investments in cash, currency does matter. This is because the relative value of one currency holding will rise or decline as currency values adjust and change over time. Where the retiree s country of residence also taxes distributions from IRAs or 401(k)s, the U.S. will grant credits for taxes paid in the country of residence, thereby limiting the incidence of double taxation. For a portfolio of securities held for long-term investment, cash positions should be limited. Cash, held in any currency, loses real or purchasing value by appreciating at a rate lower than inflation over time. Consequently, a well-designed portfolio strategy held for long-term investment should only hold assets that appreciate at a rate above inflation: stocks, bonds, commodities, REITs. These assets will build real wealth over time; and by, contrast, holding large amounts of cash will destroy wealth over time. Use of Retirement Accounts Most Americans who may be considering retirement abroad are likely to have accumulated a majority of their investment holdings within U.S. qualified retirement plan accounts (401(k)s, 403 (b)s) or IRAs. For U.S. tax purposes, the treatment of these accounts will be unchanged: U.S. citizens, subject to U.S. citizenship-based taxation, will continue to owe U.S. federal income taxes on all (non- Roth) qualified retirement plan account and IRA distributions (for consideration of state tax implications, see the box on p.11 on State Taxes). Special Considerations for Roth IRA Accounts Roth accounts are often excellent retirement planning tools for Americans, because they offer the opportunity for investors to accumulate wealth that is free of U.S. taxation. Unfortunately, the taxfree nature of Roth accounts is usually not recognized by the taxing authorities of other countries. (Note: there are a few exceptions to this rule, such as the UK and Canada). Typically, local tax rules will acknowledge that since the original capital contributions made to Roths were made with after-tax income deferrals, part of each distribution is in fact both a return of capital (usually not taxed) and investment gains (taxable). In this case, double taxation of the original capital contribution is avoided, but the tax -free growth benefit is lost. Therefore, if a retiree will anticipate living in a country that has higher tax rates than the U.S., it makes sense to forgo Thun Financial Advisors Research

10 Roth retirement accounts (except where recognized by treaty) in favor of traditional IRA contributions. This way, at least the tax benefit of deferring income during higher (taxable) income working years can be exploited. Furthermore, if assets have already been accumulated in a Roth account, the taxpayer must be prepared to present past tax records that demonstrate which part of the Roth account distribution is attributable to after-tax original contribution (and is therefore tax-free), and which part is taxable gain. In the absence of good records, most tax authorities will determine the whole distribution to be taxable. Next Steps Evaluate your portfolio and determine whether you are suitably diversified, not simply in terms of asset classes, but also in terms of geography and currency exposure. Determine how your various retirement accounts will be taxed in your new country of residence and adjust your withdrawal strategy accordingly. U.S. and Local Tax Interactions U.S. retirees have to consider how their retirement incomes will be taxed in their country of retirement and how local taxation will affect what they owe in U.S. taxes. In researching the tax rules of the target retirement country, some key considerations include local rules for retirees and foreign sourced income. For example, in an effort to attract retirees and professionals, many countries provide exemptions from local taxes on overseas income for foreigners (Italy, France and Portugal, for example). Sometimes, the above exemptions are permanent, and sometimes they expire after a period of years. Additionally, as in the U.S., most countries have complex tax rules that result in different tax rates being applied to different types of income. These rules are usually designed to accommodate locally sourced income. For example, U.S. mutual fund income or U.S. retirement account distributions may not fit neatly into local tax categories. This can often lead to complex, confusing and punitive local taxation of U.S. sourced retirement income. Finally, if the local tax burden is low, a residual U.S. tax payment may be due. In general, the less you pay in your country of residence the more will be due to the U.S. Therefore, low local tax burdens do not necessarily save the U.S. expat retiree on taxes. This is one reason that it may pay for Americans to err on the side of paying more local taxes to the extent the U.S. will grant a credit for foreign taxes paid. It is wise to avoid problems associated with underpaying local taxes when underpaying local taxes just results in a higher U.S. tax bill. Ultimately, the U.S. understands that Americans are likely to be paying taxes in their country of residence. So, the IRS provides ways to reduce the incidence of double taxation. The primary U.S. tax mechanisms that eliminate double taxation are the Foreign Earned Income Exclusion ( FEIE ) and Foreign Tax Credits. The FEIE is likely of little use for retirees as it only applies to earned income, which the IRS defines as wages from employment (including self-employment). Thun Financial Advisors Research

11 State Taxes With proper planning based on a sound understanding of state tax rules, most U.S. expats can avoid being subject to state taxation after moving abroad. Careful attention must be paid to ensure that moving abroad terminates the retirees state domicile. Furthermore, it may be necessary to establish domicile in a state with no income tax (such as Florida) before moving abroad to ensure no continued state tax obligation. Most states distinguish between residency and domicile. Domicile is the concept of a permanent home or the place to which you will return. Residency, on the other hand can be temporary. Residency and domicile are frequently the same, but they can be different. States that collect income taxes require both domiciliaries and residents to pay tax on all income. Therefore, the only certain way to avoid ongoing state taxation is to make sure that residency and domicile are terminated. Most states define domicile by reference to where the taxpayers spend time; where they maintain a home; location of a business; voter or vehicle registration; and the location of other family members. Therefore, when moving abroad, taxpayers should take care to relinquish these indicators of domicile. Since any individual can only have one domicile, establishing a new domicile in a different state or country is usually enough to demonstrate termination of prior domicile. Be careful, however, because some states will not recognize that a U.S. citizen can be domiciled abroad (e.g. Virginia). Therefore, it may be necessary to move to another state and establish domicile there (preferably one with no state income tax such as Florida) before moving abroad. Without a convincing termination of domicile, state authorities might otherwise claim an ongoing right to impose income tax on the retiree abroad. Finally, the history of a state s caselaw can be instructive: New York, California, Virginia, Pennsylvania and Massachusetts have a history of pursuing U.S. expats aggressively for income tax collection while abroad. Where such a precedent has been established, examine the state rules regarding domicile and residency; and, then plan and act consistently with those rules to limit the possibility that the state continues taxing you as a resident even after moving abroad. Thun Financial Advisors Research

12 Retirees, generally, must rely on the system of tax credits in which the U.S. allows a credit for taxes paid to a country of residence government. Specifically, American retirees living abroad that are paying taxes overseas on their income can claim a Foreign Tax Credit to offset their U.S. tax liability. For instance, if an American paid capital gains tax in their country of residence, they could claim that as a credit against U.S. capital gains taxes due. The U.S. has entered into income tax treaties with many countries which define the specific ways in which different types of income is taxed and by which jurisdiction. Income tax treaties include many additional provisions regarding pensions, retirement accounts, capital gains, and dividends that will affect Americans (particularly retirees) living in any country that has a treaty with the U.S. The U.S. system of exemptions, credits and treaty provisions is not absolute protection against double taxation. In many cases, where the U.S. and a country of residence do not have corresponding taxes, credits may not be available and (partial) double taxation may ensue. For example, Switzerland does not tax capital gains, but does impose a wealth tax. Unfortunately, the U.S. does not permit wealth tax paid in Switzerland to be used to offset capital gains tax owed in the U.S. The result is that a U.S. taxpayer retired in Switzerland must pay both U.S. capital gains tax and Swiss wealth tax. This effectively constitutes double taxation. In many cases, a strategy that reduces taxable income in the U.S. may end up increasing taxes due in the country of residence. This is true, for example, when an American investor sells a security to realize a loss in U.S. dollar terms to offset a U.S. dollar gain elsewhere in their portfolio. However, depending on relative changes in the exchange rate since the investment was first made, a loss in U.S. dollar terms may actually be a gain in foreign currency terms and, therefore, create a taxable gain in the foreign country. Without considering the effect of currency on the transaction, the investor may succeed in reducing their U.S. taxable income while increasing their foreign tax due. These are two common examples Double Taxation and Bilateral Income Tax Treaties Key Points The United States maintains income tax treaties with approximately 70 foreign countries (see Appendix A). These treaties are designed to reduce the incidence of double taxation. Tax treaties generally do not reduce the U.S. tax burden of American retirees abroad, but may reduce double taxation. Some (but not all) bilateral tax treaties provide mutual recognition of tax preferences for retirement accounts such as IRAs, 401ks, company pension plans and their non-u.s. equivalents. They may also provide special provisions for the taxation of public pension plan benefits such as Social Security. Thun Financial Advisors Research

13 of the complex interaction between U.S. and foreign tax systems. Good financial planning in this complicated cross-border tax environment focusses on avoiding these common cross-border tax mistakes. Financial planners for American expatriate (retiree) clients should anticipate and calculate the net tax impact of every financial decision across both tax systems. Ultimately, the main dilemma for an American abroad is understanding and managing the complex interaction of two tax jurisdictions. Tax strategies optimal in one country may only raise taxes due in the other country and vice versa. As such, it is always wise to seek counsel from advisors with knowledge of both U.S. and foreign tax rules and how they interact. Ideally, an American moving abroad should make extensive financial plans before boarding the plane/boat/train/car. This will help avoid the pitfalls that so often arise unexpectedly and which are difficult and expensive to fix down the road. Next Step Choosing a Tax Preparer It is crucial to find a tax preparer who specializes in U.S. expat tax issues. One option is to reach out to other expats already living in the target country to find out who they deal with for advice on compliance with local taxes. Alternatively, Thun Financial Advisors has vetted and works with an extensive network of specialized U.S. expat tax preparers located in the U.S. and around the world. Social Security While Abroad If eligible, Americans retiring abroad may receive U.S. Social Security, particularly if they have worked a full career in the United States before retiring abroad. Americans retiring abroad, however, need to be aware of aspects of Social Security specific to recipients living outside the U.S.. To be eligible for U.S. Social Security benefits, ten years of covered work history is usually required (40 credits). A spouse of a covered worker, even a non-american spouse, may also qualify for spousal benefits based upon this work history. The exact amount of Social Security benefits depends on a worker s lifetime earnings and age, when they start to collect. It is possible to claim reduced Social Security benefits at age 62, but delaying Social Security payments past the full retirement age (now age 67) will increase the annual benefit by 8% each year. Americans retiring abroad will want to pay special consideration to the benefits and costs of delayed filing for benefits. The Social Security Administration will send payments directly to foreign banks. However, a better strategy for American expat retirees may be using a U.S. bank account. The Social Security Administration generally sends payments to foreign banks in U.S. dollars, which forces the foreign bank to convert the payment to a local currency for a high fee (up to 5%!). By using a U.S. bank, a retiree may use another Thun Financial Advisors Research

14 foreign pensions. (See box, right, Windfall Elimination Provision). Windfall Elimination Provision The Windfall Elimination Provision (or WEP) affects American expats, if they earned a public pension in a job where they did not pay U.S. Social Security taxes while also qualifying for U.S. Social Security benefits. Typically, for Americans retiring abroad, this would most likely mean they have earned foreign state-sponsored benefits while being eligible for U.S. Social Security. Without the WEP, the worker would effectively be double-dipping by receiving full benefits from both plans. The Social Security Administration has a website that will allow an American expat to enter their earning history into a calculator to derive The Social Security Administration (SSA) may seem like a large government bureaucracy, but, in fact, the SSA personnel are very familiar with international issues and able to provide individualized service. Do not hesitate to call them for help. It is also vital to understand the taxation of Social Security when retiring abroad. Depending on the country of residence and relevant tax treaty, U.S. Social Security payments may be taxable only in the United States or only in the foreign country. For example, U.S. citizens who are residents of Canada, Egypt, Germany, Ireland, Israel, and the United Kingdom are exempt from U.S. tax on their benefits (but can be subject to local tax when applicable.) Other tax treaties give the United States primary taxing rights, and Social Security payments are not subject to local tax. Each country will be different, so it is essential to consult a local tax professional or American expat tax specialist. the potential deduction that might occur due to the Windfall Elimination Provision. However, the resulting reduction cannot be more than 50% of your public pension based on earnings after 1956 on which you did not pay Social Security taxes. Next Steps Determine which bank account you want your social security check deposited into and how you will handle the foreign exchange provider to obtain a better exchange rate and control the timing of the currency exchange. There are Social Security field offices at American embassies and consulates that have specially trained personnel to assist expats in seeking Social Security services. These offices will help with issues such as the reduction of Social Security due to currency exchange. Open accounts with banks and brokerages that won t close them when you move abroad. Medicare and Health Insurance when Retiring Abroad Thun Financial Advisors Research

15 Healthcare quality and cost are important considerations for people retiring abroad. Choices regarding healthcare (particularly Medicare) will be very different for those who may be retiring abroad temporarily versus permanently. Medicare is the U.S. government health plan for people aged 65 and over. Importantly for Americans retiring overseas, Medicare does not cover health care expenses occurring outside of the United States. Despite this, it may still make sense to pay for Medicare coverage when retiring abroad. Paying Medicare premiums preserves the option of lower cost U.S.-based medical care in the future. Medicare Part A, which covers hospital bills, is free for covered individuals age 65 and older. Medicare Part B, which covers most doctors services, may cost between $150 to $500 month (2018). If a retiree is confident they will not return to the United States, they should not pay any additional premiums for Part B coverage. However, if a retiree might return to the United States and wishes to start Medicare Part B coverage later, the premium could be 10% higher for each 12-month period that the person could have been enrolled but was not. Thus, an American retiree who might move back to the United States would likely save money by paying Medicare Part B premiums from the beginning of eligibility. Since Medicare will not cover foreign health care costs for American expat retirees, alternative forms of medical insurance may be necessary. Many countries have national health systems, but it is important to investigate eligibility, availability and quality beforehand. Private medical insurance may be the best option. Most American retirees will want health insurance to cover private medical services, dental treatment, and possibly medical evacuation to the United States. Some top companies providing American expat health insurance are GeoBlue, Cigna, and BUPA. When enrolling in private insurance, it is essential to review the policy to ensure that insurance will be adequate and affordable now and in the future. It is recommended to check that a plan does not have a maximum period of eligibility or restrictive renewal terms. This ensures that insurance will remain in place throughout retirement. Many international health insurance plans are meant for working expats, and it is common for plans to stop coverage after a certain age. With a little planning, a permanent insurance solution can be chosen to fit individual needs. Estate Planning for Expat Retirees Next Steps Evaluate the likelihood of your return to the United States and, if you are likely to return to the U.S., examine the costs of purchasing Medicare Part B. Decide whether you need private health insurance and confirm your policy covers you, even as a retiree. Thun Financial Advisors Research

16 Much like Medicare, estate planning is also affected by whether a retiree will be permanently or temporarily leaving the United States. While the specifics will be different for every case, retiring abroad generally entails leaving younger generations back in the United States (or even elsewhere around the globe). While the intentions of an American retiree s estate plan are not necessarily going to change should she move abroad, by taking up a long-term residence in a new retirement home, an estate plan is now likely to be subject to a whole new set of laws in a new country. These foreign laws were not considered or contemplated when wills were drafted, properties were titled, trusts were created, etc. retiring overseas or moving from one foreign country to another. U.S. expats need to be aware that standard U.S. estate planning techniques will likely fail to protect wealth in cross-border situations and may even produce unintended, counterproductive results. One of the more dangerous routes that an expat family may take is to rely solely upon the estate planning that was done before leaving the United States. It is generally advisable to review an existing estate plan (and the broader financial plan) when major events (divorce, remarriage, etc.) have resulted in changed circumstances. The importance of doing so is particularly acute when A will should be reviewed by local counsel in the new country of residence/domicile as well as U.S. counsel. Some overseas estate planners suggest multiple situs wills, with each will governing the distribution of property in the country for which the will is designed. Thun Financial Advisors Research 2018 These are issues that extend beyond the scope of this guide (see our more comprehensive Guide to Estate Planning), but certain issues can be discussed to illustrate the nuances involved in crossborder estate planning. Utilizing Wills in International Estate Planning 16

17 There seems to be some risk in a strategy of multiple wills, as the traditional rule holds that the legal execution of a will extinguishes the validity of any prior will. For Americans retiring in the Eurozone, Americans may be able to take advantage of a recent development (EU Directive 850/2012) that champions the one-will policy and further allows cross-border families to select which laws will govern their probate/succession: either the EU country of residence OR the country of citizenship. Utilizing Trusts in international estate planning Retirees should exercise caution when moving overseas with trust structures. If a current estate plan includes trusts, it is particularly dangerous to move overseas with the existing domestic estate plan. This is because the trust may not operate as intended when the tax and probate laws of a new country become applicable. While trusts are recognized under U.S. law, in civil law/forced heirship regimes, a fundamental problem exists when examining distributions to heirs through such a trust. Contrary to the forced heirship concept, the beneficiary who inherits from a trust is receiving the property from a legal person, rather than a natural person lineal relative (parent, grandparent, etc.) in percentages that may differ from forced heirship requirements. As a result of this legal conflict, asset distribution schemes through trusts may either fail to be recognized by the overseas courts, or distributions may be taxed more punitively. There have been recent reforms in several civil law jurisdictions designed to better accommodate foreigners trusts, but, uncertainties and complications remain. The dangers are not limited to the expat who relocates to a civil law jurisdiction. If a U.S. citizen retiree arrives in the U.K. (a common law jurisdiction) with an existing living trust (a very common U.S. estate planning tool), she will often find out (after the fact) that this trust triggered income tax in the UK that would not have applied, had the assets been held directly by the expat retiree, and had she claimed remittance-based taxation. Later, should the expat decide to leave the U.K. or terminate the trust, even unrealized gains may be taxed upon the expat s departure or trust termination. In yet another common law country, Canada, a special capital gains tax may be periodically assessed on trusts holding Canadian real property. Conversely, expats retiring abroad should be even more cautious about setting up trusts abroad for the benefit of themselves or their American heirs. The U.S. has extremely punitive reporting and taxation rules applied to beneficiaries who receive distributions from foreign trusts. Moreover, the IRS can have a very broad definition of what constitutes a trust. It is entirely possible that a foreign business arrangement, partnership, joint venture, etc. may fall into the IRS s liberal interpretation of what constitutes a trust. As with all matters germane to cross-border taxation and estate planning, such arrangements should be reviewed by competent U.S. and local tax and legal professionals at the earliest stage possible. Gifting Strategies While Abroad Thun Financial Advisors Research

18 Include a non-u.s.-citizen Spouse. Lifetime gifting strategies are a common method for reducing a taxable estate in the United States. Gifting can be especially effective for American retirees abroad with family still in the United States. Section 529 college savings plans (see Thun Financial s research article on 529 Plans for expats) have grown more and more popular over recent years, as parents and grandparents begin to realize the tremendous long-term advantages to saving larger amounts for college in earlier years for children and grandchildren. 529 accounts allow substantial deposits via accelerated gifting (as much as $150,000 in a one-time gift from joint filers covering a five-year period) and provide Roth IRA-style tax-free growth of the investment account, provided that the 529 plan assets are ultimately withdrawn for qualified educational expenses. While U.S. expats are free to open and Many Americans retiring abroad are returning to the homeland of their non-american spouse. Unfortunately, the tax complications and challenges facing American expats amplify when applied to the circumstances of marrying a non-u.s. citizen. Moreover, substantial legal expertise in both the country of residence and within the U.S. may be needed. The couple will need to make certain decisions in terms of how they share property (or keep assets separated) and how their assets will transfer to the surviving spouse (or to others) upon death. fund 529 college savings accounts, they must be aware of the local country rules in their country of residence regarding the gains that will eventually accumulate within these accounts. They must also determine how the local gift tax rules may apply to their gifting strategies. Alternative college savings or generational gifting strategies (including having U.S.-based relatives open the 529 account) may prove far more productive for certain expats than others. It is important that these mixed-nationality couples understand the unique U.S. tax rules that will apply to their situation and the implications of those rules on these important decisions. Understanding how these rules apply will ultimately help these couples own and transfer (gift, bequest, etc.) their wealth most tax-efficiently. For a more thorough discussion of key planning issues for mixed nationality (U.S./non- U.S.) families, see our article or our Guide to International Estate Planning. Estate Planning for Families that Thun Financial Advisors Research

19 Next Steps Examine your financial plan and your existing estate plan (if you have one) with your existing trusted advisors; Leverage those trusted advisors resources to help you find an estate planner (with international expertise, if possible) that has expertise in your new country of residence; and, see if she is able to review your existing estate plan and/or assist with a new estate plan; Have a trusted legal advisor/estate planner in the U.S. review or collaborate on the new/revised plan. Thun Financial Advisors Research

20 Appendix A: List of U.S. Bilateral Tax Treaties Armenia Australia* Austria* Azerbaijan Bangladesh Barbados Belarus Belgium Bulgaria Canada* China Cyprus Czech Republic Denmark* Egypt Estonia Finland* France* Georgia Germany* Greece* Hungary Iceland India Indonesia Ireland* Israel Italy* Jamaica Japan* Kazakhstan Korea Kyrgyzstan Latvia Lithuania Luxembourg Malta Mexico Moldova Morocco Netherlands* New Zealand Norway* Pakistan Philippines Poland Portugal Romania Russia Slovak Republic Slovenia South Africa* Spain Sri Lanka Sweden Switzerland* Tajikistan Thailand Trinidad Tunisia Turkey Turkmenistan Ukraine Union of Soviet Socialist Republics (USSR) United Kingdom* Uzbekistan Venezuela *Indicates a bilateral estate and/or gift tax treaty or protocol As of the 2018 edition of this report, this was the most current information available on the irs.gov website. Visit the IRS s website for the most current and up-to-date official information available. Thun Financial Advisors Research

21 For further reading from Thun Research, please sign up for our mailing list and consult: American Expats Tax Nightmare by David Kuenzi in Wall Street Journal On FATCA: FATCA: What US Expats Need to Know by David Kuenzi Estate Planning for Cross-border families: International Estate Planning for Cross-Border Families By R. Stanton Farmer Contact Us Thun Financial Advisors 3330 University Ave Madison, WI Visit us on the web at skype: thunfinancial Financial Planning for Mixed Nationality Couples: Special Planning Considerations for Mixed (U.S./Non-U.S.) Couples by R. Stanton Farmer Cross-border investment strategies: ETFs as an Investment Planning Tool for Americans Abroad by Keith Poniewaz Social Security while abroad: Social Security for American Expats and Retirement Abroad by Thun Research Retirement Accounts Abroad: IRAs, Roth IRAs and the Conversion Decision for Americans Living Abroad by David Kuenzi and Keith Poniewaz Tax and Legal implications of investing in non-us funds PFICS by David Kuenzi We also frequently host webinars. View archived webinars here. Thun Financial Advisors is the leading provider of financial planning research for cross-border and American expatriate investors. Based in Madison, Wisconsin, Thun Financial Advisors research has been featured in the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth Management among many other publications. Thun Financial Advisors Research

22 Thun Financial Advisors, LLC University Avenue, Madison, WI ; Skype: thunfinancial DISCLAIMER FOR THUN FINANCIAL ADVISORS, L.L.C., INVESTMENT ADVISOR Thun Financial Advisors L.L.C. (the Advisor ) is an investment advisor registered with the United States Securities and Exchange Commission (SEC). Such registration does not imply that the SEC has sponsored, recommended or approved of the Advisor. Information contained in this document is for informational purposes only, does not constitute investment advice, and is not an advertisement or an offer of investment advisory services or a solicitation to become a client of the Advisor. The information is obtained from sources believed to be reliable, however, accuracy and completeness are not guaranteed by the advisor. Thun Financial Advisors does not provide tax, legal or accounting services. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Copyright 2018 Thun Financial Advisors, LLC