Cross-Border Family Wealth Guide

ANDREW FISHER is widely regarded as a leading wealth advisor to cross-border families. He frequently writes and speaks to the unique financial planning and investment complexities faced by international families, particularly when an individual is a tax resident of the United States. Andrew holds the CFA and CPA designations, and serves as president and founder of Worldview Wealth Advisors, an independent wealth management firm focused on financial planning and investment advice for cross-border families.

• Foreword by Tim Kochis, JD, MBA, CFP® xviiPreface xixAcknowledgments xxiiiAbout the Author xxvPart I: Financial Challenges of a Cross-Border Life 1Chapter 1 Who Are These Cross-Border Families? 3The Growing Need for a Definitive Guide 4Who’s Who: Who This Book Is Meant to Serve 6Examples of Who Might Benefit from This Book 7Diagramming a Cross-Border Person: Residency and U.S. Income Tax Status 8How Many Cross-Border Professionals and Families Are There? 10Unique Challenges Faced by Cross-Border Families Connected to the United States 11Chapter 2 Unique Challenges and the Regulatory Landscape 12The Unequal Nature of Tax Regimes and Reach 12The Unique Worldwide Reach of the U.S. Tax System 13Complexity in Taxation and Other Regulations 14Scarcity of Professional Help and Information 15A Changing Legal, Financial, and Regulatory Landscape 17The Far Reach of the Foreign Account Tax Compliance Act (FATCA) 19Recommending Against Secretive Offshore Wealth Strategies 20Part II: Saving and Investing: Building Your Personal Net Worth 21Chapter 3 Building a Strong Foundation 23Retirement Destination Unknown: Invest Globally 23Spreading It Around 24Wealth Creation and Accumulation 25Saving from Earnings 25Real Estate Ownership 26Stock-Based Compensation 27Entrepreneurs and Businesses Ownership 27Investment Gains and Reinvestment 28Inheritance 28Diversification: Protecting and Growing Wealth 28Considering Your Entire Balance Sheet 29The Meaning of “Diversification” versus “Asset Allocation” 30Spreading Thing Around 30Asset Allocation in Investment Portfolios 30A Well-Allocated Portfolio Can Still Lack Diversification 32Allocating Your Net Worth: A Balance Sheet Approach 32Six Primary Asset Categories 33Three Additional Items of Importance 33Cash and Cash Equivalents 33Personal Residences 34Income Property 35Publicly Traded Securities: Stocks and Bonds 36Bonds and Bond Funds (Fixed Income) 36Stocks and Stock Funds (Equities) 37Downsides of Owning Stocks 38Concentrated Business Ownership 39Personal Debt 40Collectibles and Other Hard Assets 41Other Private Investment Vehicles 41Conclusion 42Chapter 4 Investing in the Markets: Stocks and Bonds 43Three Important Attributes 43Easy Diversification 43No Active Involvement 43Source of Growth and Risk Control 44Stocks and Bonds Work Better Together 44Setting a Risk Objective 45Managing Emotions While Focusing on the Long Term 45Stock Picking—Maybe Not 46Investment Advice to Live By 47Avoiding the Herd Mentality 48Staying Calm in Times of Change 49Determining Investment Goals and Objectives 49Four Common Investor Objectives Defined 50Fundamental Investment Guidelines 51Low-Cost Passive Investing 52Tax Efficiency Is Huge 53Global Diversification for All 53Risk Control Through Asset Allocation 54Regular Rebalancing Adds Value: Don’t Invest and Forget 54Strategic Versus Tactical Asset Allocation 55Strategic Asset Allocation (SAA) 55Tactical Asset Allocation (TAA) 55Take It Slow 56A Jurisdictional Review: Where to Hold Investments? 57Large Foreign Banks in Europe or Asia 58Have You Earned Your Own Private Banker? 58Not World-Class Investments 58Not World-Class Advice 59Tax Reporting and FATCA 59Large Offshore Private Banks 60Smaller Offshore Banks and Insurance Companies 61U.S. Brokerage Accounts 62Problems with Maintaining Accounts in the United States 63Foreign Residents with U.S. Accounts 64The Best Choice for Many People 65Part III: 401(k)s, IRAs, and Other Pensions and Savings Plans 67Chapter 5 A Global Approach to 401(k)s and IRAs 69Investing Your Serious Money 69401(k) Plan Basics 70Key Benefits of 401(k) Plans 70Global Investing for a Global Retirement 72The Location of Underlying Assets Is What Matters 72401(k) Plans Lack a Global Perspective 74Inherent Currency Risks 74Target Date Funds: A Lot to Like and Dislike 76IRA Rollovers 76IRAs Offer Distinct Advantages 77Owning Real Estate Within an IRA 78Leave It Alone and Let It Grow 78Chapter 6 Unique Cross-Border 401(k) Issues 80A Lack of International Tax Agreement 81Do the Benefits of a 401(k) Follow You? 82International Tax Law Is Unclear 82The 401(k) Gets Respect 82Benefits May Travel with You, but Your Account Stays Put 83Taking It with You 84Must I File a U.S. Tax Return Because of a 401(k)? 84How Are Distributions Taxed? 85What If You Are Living Abroad When You Draw Out Money? 85Tax Withholdings on Distributions to Nonresidents 87Many U.S. Institutions Will Overwithhold Tax on Distributions 87How Are Foreign Residents Recovering U.S. Withholding Tax? 87Unreported Income Isn’t Right 88Contributions to IRA Accounts While Living Abroad—Be Careful 89Chapter 7 Foreign Retirement Plans, Pensions, and Other Savings Accounts 91Foreign Retirement Plans 91U.S. Tax Treatment of Foreign Retirement Plans Is Often Unclear 92What Is Really Happening Now? 92Contributions by U.S. Citizens and Residents to Foreign Plans 93For U.S. Taxpayers: Foreign Contributions Typically Do Lower Taxes 93It Is Likely Not Being Reported to the IRS at All 94Best Planning of All—Save Now and Save Later 94Existing Foreign Retirement Accounts: The Real World 95Better International Reporting and Coordination Is Needed 96Investing Inside a Foreign Retirement Account 96High Fees and Poor Investments: A Headwind Against Growth 96Roth IRAs and Roth 401(k)s 97How to Get Money In 98Foreign Implications of Roth IRAs and Roth 401(k)s 99Roth Accounts Don’t Speak Foreign Languages 99Traditional Pension Income 100Pensions Paid Across Borders 100U.S. Taxpayers Abroad with U.S. Pension Income 101Not Reporting to Foreign Authorities Is Risky 101U.S. Taxpayers Abroad with Foreign Pension Income 102Nonresidents Living Abroad with U.S. Pension Income 102Don’t Claim to Be a U.S. Tax Resident When You Are Not 103Proper Tax Treatment 103Educational Savings: 529 Plans 104To Maximize Benefit, Start Very Young 105Foreign Residents Beware 105Finding Good Advice Is a Challenge 106Part IV: Real Estate 107Chapter 8 Renting, Owning, and Investing 109Crazy for Real Estate 109Real Estate Appreciation Likely to Slow in Future 109Primary Residences and Vacation Homes 110Advantages to Owning Your Home 110Owning a Vacation Home 111The Process of Buying a Home in the United States 112Selling Expenses and Property Taxes 113Buy or Rent upon Arrival? 113When You Should Probably Own 115Real Estate as an Investment 115Before Even Considering an Investment 115Benefits (and Some Negatives) to Investing in Real Estate 116Property Types: Single-Family Homes Versus Commercial 117Types of Commercial Real Estate Assets 117Owning Property: Directly or with Other Investors 119Real Estate Partnerships 119To Rent Out or Sell a Former Home 120Why Turn Your Old Home into a Rental Property? 120Do You Like Fixing Toilets? 121You Have Three Years to Decide 121Cross-Border Situations Where a Home Is Left Behind 122Americans on the Move 122Foreign Nationals with U.S. Residency 122Foreigners Might Sell Before Becoming a U.S. Tax Resident 123Selling Before Entering the United States, When Gains Are Very Large 124Sale and Lease Back 124Chapter 9 Real Estate Taxation and Other Considerations 125Basic Tax Treatment of Real Estate 125Taxation of Primary Residences 125Tax-Free Gain on Sale of a Primary Residence 126The Treatment of Vacation Homes 127Taxation of Rentals and Other Investment Property 127Reducing Income Tax—A Shelter from the Tax Man 128Selling Investment Property—Calculating Taxable Gains 129Tax Basis and Accumulated Depreciation—Shifting Income Down 129Foreign Properties Often Not Reported to the IRS 130Go Ahead, It Won’t Hurt Too Much 131It’s Not Really “Forever”—But It Might Be 131Global Transparency Is Coming 132Foreign Property Gifted by Family Members 132Owning Property Inside of an IRA 133Rules to Be Carefully Followed 133Be Careful to Read the Fine Print 134Other Cross-Border Considerations 135Tax-Free Exchange of Investment Property—Doesn’t Travel Well 135Sorry, This Only Works for U.S. Properties 136Avoid Owning Foreign Real Estate Through a Foreign Corporation 136Unique Currency Risk When Owning Property Abroad 137Strange Gains and Losses on the Retirement of Debt on Personal Residence 137Nonresident Aliens: Investing in the United States and the EB-5 Program 139Nonresident Aliens Investing in U.S. Real Estate 139Becoming a U.S. Resident—EB-5 Visas 140Estate Taxes on U.S. Property Owned by Nonresidents 140Risk of Estate Taxes with Foreign Property 140Part V: Cross-Border Taxation 143Chapter 10 Understanding the Three Types of Cross-Border Families 145The Unique Complexities of Cross-Border Taxation 145Tax Profiles: Three Types of Cross-Border Families 147Type 1: Foreign Nationals in the United States 147Learning the U.S. Tax System 148Type 2: American Citizens and Permanent Residents Living Abroad 148Foreign Citizens Leaving the United States for Short-Term Assignments 149Expatriate Assignments and Tax-Equalized Employment Packages 150“Localized” Employment Contracts in Another Country 151Reducing U.S. Tax for Taxpayers Living Abroad 152Foreign Earned Income Exclusion 152Foreign Housing Exclusion 152Foreign Tax Credits 153Revoking the Foreign Earned Income Exclusion 153Likely U.S. Tax Liabilities for U.S. Taxpayers Abroad 154Type 3: Foreign Nationals with Assets in the United States 155Taxation by the IRS—On Passive U.S. Investments 156Interest Income, Dividends, and Capital Gains 157Rental Real Estate Property In the United States 157Overwithholding Tax on Bond Interest Inside a Fund 158Estate Tax Exemptions for Nonresidents 159Becoming a U.S. Resident for Tax Purposes 159Two Tests to Determine U.S. Residency 160Lawful Permanent Resident Test (the Green Card Test) 160Substantial Presence Test 161Situations When Taxed Only on U.S.-Sourced Income 162Tax Treaty Basics 163Chapter 11 U.S. Tax Overview: Federal and State 165Taxing Worldwide Income: The IRS Is Different 165Filing Deadlines 166Income Tax Overview 166Gross Income 167Deductions from Gross Income 168Itemized or Standard Deductions from AGI 168Personal Exemptions 169Final Taxable Income 169Understanding Marginal Tax Rates 169Lower Tax Rates on Capital Gains and Dividends 170Real Estate Rental Income 171Stock-Based Compensation: Options 173Stock-Based Compensation: Stock Grants and RSUs 173Exchange Rate Issues When Taxing Foreign Income 174State Income Taxes 176State Tax Returns Often Based on Federal Returns 176Different Treatments of Long-Term Capital Gains and Qualified Dividends 176State Tax Residency: Requirements and Termination 177When States Come Looking for You 178U.S. Tax Residents Living Abroad with State Tax Liabilities 179Avoiding Unnecessarily Becoming a State Resident in the First Place 179Chapter 12 Additional Tax-Planning Considerations 181Investing Outside of the United States—Avoiding PFIC Rules 181Passive Foreign Investment Corporations (PFICs) Explained 181Complex Reporting and Punitive Tax Treatment 182Advice on Foreign Accounts and PFIC 184Three PFIC Scenarios to Consider 185Foreign Asset Reporting and Tax Evasion 186Foreign Bank Account Reporting (FBAR) Requirements 187FBAR Penalties 188Other Foreign Asset Reporting: Form 8938 188Additional Foreign Asset Reporting 191Voluntary Offshore Disclosure Programs (OVPD) 191Other Forms of Taxation in the United States 192Social Security Taxes 192Social Security Tax Calculation 192Totalization Agreements 192Special Taxes on High-Earners 193Additional Medicare Taxes on Ordinary Income 193Net Investment Income Tax (NIIT) 194Gift and Estate Taxes 194Gift Taxes 195Estate Taxes 196Estate Taxes for Nonresidents 197Expatriation Tax (Exit Tax) 197Prearrival Planning 198Accelerate Gift Planning 199Accelerate Income When Possible 199Distribute Deferred Income When Possible 199Consider Realizing Gains Before Moving Here 200Review Existing Asset Structures Before Arriving 201Review Immigration and Visa Alternatives 201Part VI: Retirement Planning 203Chapter 13 Planning for a Global Retirement 205Where to Retire? A Common Dilemma 205Being Near Family Is Most Important 206Plan to Retire Anywhere, to Maximize Flexibility 206Worldwide Planning Is Also Inherently More Complex 207Investing for Retirement 207Having Enough Money to Retire 208How Much Money Will You Need? 208First Question: What Will You Need to Live On? 208Second Question: What Are Your Sources of Ongoing Retirement Income? 209Third Question: Will Your Retirement Savings Make Up the Difference? 209Safe Withdrawal Rates: The 4 Percent Rule 210What Is a Successful Retirement? 211The Important Role of Financial Planning 211Longevity Risk Is Alive and Well 212Inheritance: Plan for It, But Don’t Count on It 212Organizing and Optimizing Worldwide Income and Assets 213Assessing Sources of Income in Retirement 213Organizing Your Assets 214Cash and Cash Equivalents 215Qualified Accounts: 401(k)s, IRAs, and Other U.S. and Foreign Retirement Accounts 215Nonqualified Investment Accounts—Generally Holding Stocks and Bonds 216Concentrated Stock and Stock Options 217Real Estate 217Alternative Investments 217Currency Exposure: A Real Retirement Risk 218Chapter 14 Considerations for Cross-Border Retirees 219Tax Planning for Retirement 219Taxes on Pension and Social Security Income 219Taxes on Investment Income and Gains 219Taxes on Distributions from Qualified Accounts 220Taking Retirement Accounts with You 221Cash Management and Account Administration 221FATCA Fallout: Harder to Deal with Big International Banks 222Accessing Your Money 222Foreign Exchange Costs—Minimize Translations 223Efficient Cross-Border Money Transfers 223Social Security and Foreign Government Pensions 224Social Security Benefits Earned Are Usually Yours for Life 225Possible “Windfall Elimination” Reduction to Benefits 226Long-Term Viability and Ongoing Changes 226Filing for Benefits Early, on Time, or Late? 227Foreign Government Pensions 228Drawing on Tax-Deferred Accounts 228The Ordering of Withdrawals 229Conclusion 230An Overview of Key Points 230Final Thoughts and Words of Encouragement 234Index 235