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Financial Planning Issues for Expats Moving to the USA

There are numerous issues that need to be addressed when moving to a new country and it seems the more “developed” your new country of residence, the more important it is to understand and follow regulations.

Individual Asset Management provides financial planning services to non-US citizens living and preparing to live in the United States, and I have identified seven topics that anyone moving to the US should consider:

1. Visa / citizenship issues
2. Reporting and taxation of non-US financial accounts
3. Obtaining loans / credit history
4. Pension transfer
5. Investment management
6. Estate tax
7. Education and retirement savings plansWe cannot delve into any great detail on these topics here – my purpose in this article is to highlight why each issue is important so that the reader can decide whether his or her specific situation warrants seeking further counsel.

1. Visa/citizenship issues: Entire books have been written on this topic and there are many legal firms in the US that specialize in the business of obtaining work visas, permanent residency (Green Card), and citizenship.

There are a number of avenues through which it is possible to obtain permission to live and work in the United States. Broadly speaking, it is possible to obtain a work visa, and ultimately permanent residency, through employer sponsorship, by completing a course of studies at a US institution of higher learning, or by investing in a business or an economic-development zone. There are also paths to residency for certain groups of individuals such as asylum-seekers, family-sponsored individuals, people with exceptional talents, and Diversity Lottery winners.

The bottom line is that if you have substantial funds to invest in the US or a valid business idea, are willing to study at an American university, have an exceptional and recognized talent, have family connections, or fall into certain specialized categories; then a good immigration attorney can likely find you a path to working and living in the United States.

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2. Reporting and taxation of non-US financial accounts: Many non-US citizens, especially if they have been working outside their country of citizenship for some time, have acquired investment accounts in offshore jurisdictions. It is important to understand that, while you are allowed to have non-US financial accounts while living in the United States, you need to report these accounts to the US Treasury department every year if the total of the accounts amounts to more than $10,000. The form used for this is Treasury Department form TDF 90-22.1 – if you do a web search for this it will come up with links to the form and instructions. The penalties for not completing this form can be steep so I highly recommend looking into this and reporting all your financial accounts, including certain non-US pension accounts.

A further issue of great importance is the taxation of non-US accounts while you are a US tax payer. The US tax code is ridiculously complex and there are numerous gray areas so you should seek the assistance of a US tax professional familiar with expatriate tax matters – most US tax advisors are not knowledgeable in this specialized area.

If you do have offshore investment accounts, I would highly recommend that you do some tax planning several months before you move to the US. For example, it may be to your great advantage to establish a higher tax basis for your offshore investments before moving to the US since you may be liable for tax on any distributions you take from these accounts while a US resident based on the total gain of the underlying investments – not the gain from the time you entered the US – the total gain from inception. Furthermore, it is possible that you may be liable for US tax on the growth in your non-US accounts, even if you don’t take distributions. A little tax planning can go a long way in such a situation.

3. Obtaining loans – credit history: One of the great challenges faced by new US residents is obtaining credit since they have no US employment or credit history. There isn’t much that can be done about this unless you are in a position to bring substantial savings or investments with you. Sometimes it is possible for lending institutions to check a foreign credit history, but to my knowledge this is usually something upon which only Canadians can rely.

There is no quick solution, but once you have a bank account you should at least get a debit card attached to Visa or MasterCard so as to start establishing a paper trail. You may need a co-signor for larger loans initially, or if you have substantial savings or investments, then these might be sufficient to back a loan. You might also consider signing up for department store charge cards in order to help build a credit history – these are often easier to obtain for the new resident than other types of credit cards.

4. Pension transfer: The US pension system makes it virtually impossible to transfer non-US pension schemes to US tax-deferred accounts. This is as a result of IRS rules that do not allow what are called “rollovers” from foreign pension schemes and that limit the amount that can be contributed to a US tax-deferred account in any given year.

In certain instances it may be possible to transfer a work-related scheme to a similar scheme in the US, but for most people the only way to transfer a non-US pension to the US is to first transfer it to a country that allows non-residents to take distributions from local schemes, and then to transfer the distributions to a regular US bank or investment account. This process is subject to a number of limitations and making a mistake can be costly – so consult with a tax or pension specialist that is familiar with both US rules and the rules in the country of your pension scheme.

5. Investment management: There are many companies in the US that are eager to help you manage your investments and the good news is that there is so much competition that fees tend to be much lower than in other countries. The breadth of investment products and possibilities is also much larger than anywhere else.

What you should be aware of is that many US firms and investment advisors are not familiar with expatriate issues and in fact may be barred from doing business with non-resident account holders. So if you might eventually leave the US again, you should seek out a firm and advisor that will still do business with you even after you leave. This is particularly important if you will be establishing retirement savings accounts in the US such as IRAs or 401ks that may not be transferred to overseas accounts. A number of people have contacted us over the years complaining that they have moved from the US and now their US advisor can’t do business with them but they have a US retirement account that can’t be moved and their local advisor doesn’t understand such accounts.

6. Estate tax: The United States does not have an inheritance tax but usually does have an estate tax. I say “usually” since in 2009 the estate tax applied to amounts over $3.5 million for US citizens and permanent residents but in 2010 there actually is no estate tax in the US as a result of our dysfunctional congress which has not managed to pass estate tax reform in time to clarify the regulations. So you should expect to be affected by the US estate tax even though at the moment we actually don’t know what the regulations may be in the future. Just to clarify: An inheritance tax is assessed against the beneficiary of an estate; an estate tax is assessed against the estate itself before the money goes to the beneficiaries.

In the case where the spouse of the decedent is a US citizen, they receive what is called the “unlimited marital deduction”; which allows property to pass to a decedent’s spouse tax-free. The situation is very different for non-US citizen spouses, even if they are US residents. In this case the unlimited marital deduction does not apply.

It is also important to be aware of US gift tax provisions if you are planning a gift to a non-US citizen spouse. Once again, a US citizen spouse receives an unlimited gift tax exclusion but the exclusion for a non-citizen spouse is $134,000 (in 2010 and indexed for inflation in future years).

To further complicate matters the gift and estate tax rules are related in the sense that gifts over a lifetime can lower your estate tax exclusion amount. So, while $3.5 million may sound like a large exclusion, you should consider that you may have large life insurance policies that would be paid upon death, you may own property here or elsewhere (a US resident’s world wide estate is taxed), you may have a considerable amount in pension or retirement plans, or perhaps your exclusion is limited as a result of previous gifts. Furthermore, you may at some point leave the US but still retain US property – which opens up another estate tax can of worms because non-residents do not get the $3.5 million exclusion.

Most US attorneys that specialize in estate tax matters can help you with such issues but you might want to ask whether the attorney is familiar with Qualified Domestic Order Trust (QDOT) provisions. Such trust provisions are one method of putting non-US citizen spouses on the same footing with respect to estate tax rules as US citizen spouses (however this has also been affected by the current uncertainty in the estate regulations since QDOT provisions have, in essence, been repealed as of 2010.

7. Education and retirement savings plans: In the United States there are a number of savings vehicles available to help you save for your children’s education or for retirement on a tax-preference basis. While these savings plans are very useful if your children will eventually attend university in the US or if you plan to retire in the US, the usefulness of such plans may be limited if you or your children establish residence abroad before you can tap these plans.

As an example, there are so-called “529 College Savings Plans” available, which allow money to be contributed on an after-tax basis but which do not tax investment growth or distributions if used for your children’s future education. The catch is that the money has to be used at an “accredited institution” otherwise you lose the tax advantages and may have to pay a penalty upon withdrawal. Almost all US institutions of higher learning are accredited but the number of non-US accredited institutions is limited.

With respect to retirement savings plans, I have already mentioned the danger that your account might be at a financial institution that will not allow non-residents to hold accounts. So if you give up US residency you may have to move the account to another institution (not easy to do once you are no longer a US resident). At the same time, such accounts cannot be cashed out before a certain age without tax penalty, and cannot be moved to non-US accounts.

This is not to say that you shouldn’t participate in US retirement plans that allow considerable tax benefits. Especially since, if you withdraw the money from your retirement accounts after you leave the US, you might reap further tax benefits as a result of the fact that you might be in a very low US tax bracket – or perhaps not even subject to US tax as a result of tax treaty benefits.

Space has only allowed me to summarize and touch upon many of the issues that non-US citizens face when moving to or living in the United States. The important takeaway from this article is that taking the time to plan around these issues can save you a considerable amount of anguish in the future. Experts are available to help you but it is important to consult with specialists, as expatriate matters are outside the knowledge base of most US tax, legal, and investment professionals.

Tom Zachystal
Individual Asset Management

Individual Asset Management (IAM) is a US financial planning and investment management firm that specializes in expatriate matters. Please click here for details of services offered.