The Cross-Border Family Wealth Guide
Advice on Taxes, Investing, Real Estate, and Retirement for Global Families in the U.S. and Abroad

Make sense of international personal finance with expat-specific expert advice

The Cross-Border Family Wealth Guide is the long-awaited financial handbook for cross border families, with expert insight from a financial advisor who specializes in expat issues. Whether you're an American living abroad, or foreign-born and living in the U.S., this book demystifies the complex issues surrounding the worldwide tax system, international information reporting, sensible investments, international real estate, and retirement planning. When your wealth crosses international borders, managing even the most mundane financial affairs can become wrought with time-consuming complexity; moving money, opening accounts, dealing with currency risks and translation, and setting up investments suddenly involves a whole new set of rules and regulations. Your 401(k), IRA, or annuity must be handled properly to retain certain tax benefits, and retirement planning takes on a brand new dimension of difficulty. This book shows you how to navigate the maze to make sure your money keeps working for you. Real world examples illustrate solutions to common problems, and real, actionable advice gives you a solid plan for your next steps.

While personal finance management is rarely simple, the recent crackdown on tax havens and increased tax collection vigilance has made things even more difficult for cross border families. This book answers your questions, and shines a light on the way forward to long-term financial security for international families.

• Navigate the complexities of international taxation
• Get specific guidance on retirement planning
• Make sense of how real estate fits into your financial picture
• Invest appropriately to maximize growth for the future
• Manage your assets and tax benefits across borders

With the right know-how, cross border professionals can make sensible investment and financial planning decisions, but credible guidance is rare and difficult to find. Simple and practical, with targeted advice, The Cross-Border Family Wealth Guide is the international family's solution for avoiding financial confusion.

Foreword by Tim Kochis, JD, MBA, CFP® xvii

Preface xix

Acknowledgments xxiii

About the Author xxv

Part I: Financial Challenges of a Cross-Border Life 1

Chapter 1 Who Are These Cross-Border Families? 3

The Growing Need for a Definitive Guide 4

Who’s Who: Who This Book Is Meant to Serve 6

Examples of Who Might Benefit from This Book 7

Diagramming a Cross-Border Person: Residency and U.S. Income Tax Status 8

How Many Cross-Border Professionals and Families Are There? 10

Unique Challenges Faced by Cross-Border Families Connected to the United States 11

Chapter 2 Unique Challenges and the Regulatory Landscape 12

The Unequal Nature of Tax Regimes and Reach 12

The Unique Worldwide Reach of the U.S. Tax System 13

Complexity in Taxation and Other Regulations 14

Scarcity of Professional Help and Information 15

A Changing Legal, Financial, and Regulatory Landscape 17

The Far Reach of the Foreign Account Tax Compliance Act (FATCA) 19

Recommending Against Secretive Offshore Wealth Strategies 20

Part II: Saving and Investing: Building Your Personal Net Worth 21

Chapter 3 Building a Strong Foundation 23

Retirement Destination Unknown: Invest Globally 23

Spreading It Around 24

Wealth Creation and Accumulation 25

Saving from Earnings 25

Real Estate Ownership 26

Stock-Based Compensation 27

Entrepreneurs and Businesses Ownership 27

Investment Gains and Reinvestment 28

Inheritance 28

Diversification: Protecting and Growing Wealth 28

Considering Your Entire Balance Sheet 29

The Meaning of “Diversification” versus “Asset Allocation” 30

Spreading Thing Around 30

Asset Allocation in Investment Portfolios 30

A Well-Allocated Portfolio Can Still Lack Diversification 32

Allocating Your Net Worth: A Balance Sheet Approach 32

Six Primary Asset Categories 33

Three Additional Items of Importance 33

Cash and Cash Equivalents 33

Personal Residences 34

Income Property 35

Publicly Traded Securities: Stocks and Bonds 36

Bonds and Bond Funds (Fixed Income) 36

Stocks and Stock Funds (Equities) 37

Downsides of Owning Stocks 38

Concentrated Business Ownership 39

Personal Debt 40

Collectibles and Other Hard Assets 41

Other Private Investment Vehicles 41

Conclusion 42

Chapter 4 Investing in the Markets: Stocks and Bonds 43

Three Important Attributes 43

Easy Diversification 43

No Active Involvement 43

Source of Growth and Risk Control 44

Stocks and Bonds Work Better Together 44

Setting a Risk Objective 45

Managing Emotions While Focusing on the Long Term 45

Stock Picking—Maybe Not 46

Investment Advice to Live By 47

Avoiding the Herd Mentality 48

Staying Calm in Times of Change 49

Determining Investment Goals and Objectives 49

Four Common Investor Objectives Defined 50

Fundamental Investment Guidelines 51

Low-Cost Passive Investing 52

Tax Efficiency Is Huge 53

Global Diversification for All 53

Risk Control Through Asset Allocation 54

Regular Rebalancing Adds Value: Don’t Invest and Forget 54

Strategic Versus Tactical Asset Allocation 55

Strategic Asset Allocation (SAA) 55

Tactical Asset Allocation (TAA) 55

Take It Slow 56

A Jurisdictional Review: Where to Hold Investments? 57

Large Foreign Banks in Europe or Asia 58

Have You Earned Your Own Private Banker? 58

Not World-Class Investments 58

Not World-Class Advice 59

Tax Reporting and FATCA 59

Large Offshore Private Banks 60

Smaller Offshore Banks and Insurance Companies 61

U.S. Brokerage Accounts 62

Problems with Maintaining Accounts in the United States 63

Foreign Residents with U.S. Accounts 64

The Best Choice for Many People 65

Part III: 401(k)s, IRAs, and Other Pensions and Savings Plans 67

Chapter 5 A Global Approach to 401(k)s and IRAs 69

Investing Your Serious Money 69

401(k) Plan Basics 70

Key Benefits of 401(k) Plans 70

Global Investing for a Global Retirement 72

The Location of Underlying Assets Is What Matters 72

401(k) Plans Lack a Global Perspective 74

Inherent Currency Risks 74

Target Date Funds: A Lot to Like and Dislike 76

IRA Rollovers 76

IRAs Offer Distinct Advantages 77

Owning Real Estate Within an IRA 78

Leave It Alone and Let It Grow 78

Chapter 6 Unique Cross-Border 401(k) Issues 80

A Lack of International Tax Agreement 81

Do the Benefits of a 401(k) Follow You? 82

International Tax Law Is Unclear 82

The 401(k) Gets Respect 82

Benefits May Travel with You, but Your Account Stays Put 83

Taking It with You 84

Must I File a U.S. Tax Return Because of a 401(k)? 84

How Are Distributions Taxed? 85

What If You Are Living Abroad When You Draw Out Money? 85

Tax Withholdings on Distributions to Nonresidents 87

Many U.S. Institutions Will Overwithhold Tax on Distributions 87

How Are Foreign Residents Recovering U.S. Withholding Tax? 87

Unreported Income Isn’t Right 88

Contributions to IRA Accounts While Living Abroad—Be Careful 89

Chapter 7 Foreign Retirement Plans, Pensions, and Other Savings Accounts 91

Foreign Retirement Plans 91

U.S. Tax Treatment of Foreign Retirement Plans Is Often Unclear 92

What Is Really Happening Now? 92

Contributions by U.S. Citizens and Residents to Foreign Plans 93

For U.S. Taxpayers: Foreign Contributions Typically Do Lower Taxes 93

It Is Likely Not Being Reported to the IRS at All 94

Best Planning of All—Save Now and Save Later 94

Existing Foreign Retirement Accounts: The Real World 95

Better International Reporting and Coordination Is Needed 96

Investing Inside a Foreign Retirement Account 96

High Fees and Poor Investments: A Headwind Against Growth 96

Roth IRAs and Roth 401(k)s 97

How to Get Money In 98

Foreign Implications of Roth IRAs and Roth 401(k)s 99

Roth Accounts Don’t Speak Foreign Languages 99

Traditional Pension Income 100

Pensions Paid Across Borders 100

U.S. Taxpayers Abroad with U.S. Pension Income 101

Not Reporting to Foreign Authorities Is Risky 101

U.S. Taxpayers Abroad with Foreign Pension Income 102

Nonresidents Living Abroad with U.S. Pension Income 102

Don’t Claim to Be a U.S. Tax Resident When You Are Not 103

Proper Tax Treatment 103

Educational Savings: 529 Plans 104

To Maximize Benefit, Start Very Young 105

Foreign Residents Beware 105

Finding Good Advice Is a Challenge 106

Part IV: Real Estate 107

Chapter 8 Renting, Owning, and Investing 109

Crazy for Real Estate 109

Real Estate Appreciation Likely to Slow in Future 109

Primary Residences and Vacation Homes 110

Advantages to Owning Your Home 110

Owning a Vacation Home 111

The Process of Buying a Home in the United States 112

Selling Expenses and Property Taxes 113

Buy or Rent upon Arrival? 113

When You Should Probably Own 115

Real Estate as an Investment 115

Before Even Considering an Investment 115

Benefits (and Some Negatives) to Investing in Real Estate 116

Property Types: Single-Family Homes Versus Commercial 117

Types of Commercial Real Estate Assets 117

Owning Property: Directly or with Other Investors 119

Real Estate Partnerships 119

To Rent Out or Sell a Former Home 120

Why Turn Your Old Home into a Rental Property? 120

Do You Like Fixing Toilets? 121

You Have Three Years to Decide 121

Cross-Border Situations Where a Home Is Left Behind 122

Americans on the Move 122

Foreign Nationals with U.S. Residency 122

Foreigners Might Sell Before Becoming a U.S. Tax Resident 123

Selling Before Entering the United States, When Gains Are Very Large 124

Sale and Lease Back 124

Chapter 9 Real Estate Taxation and Other Considerations 125

Basic Tax Treatment of Real Estate 125

Taxation of Primary Residences 125

Tax-Free Gain on Sale of a Primary Residence 126

The Treatment of Vacation Homes 127

Taxation of Rentals and Other Investment Property 127

Reducing Income Tax—A Shelter from the Tax Man 128

Selling Investment Property—Calculating Taxable Gains 129

Tax Basis and Accumulated Depreciation—Shifting Income Down 129

Foreign Properties Often Not Reported to the IRS 130

Go Ahead, It Won’t Hurt Too Much 131

It’s Not Really “Forever”—But It Might Be 131

Global Transparency Is Coming 132

Foreign Property Gifted by Family Members 132

Owning Property Inside of an IRA 133

Rules to Be Carefully Followed 133

Be Careful to Read the Fine Print 134

Other Cross-Border Considerations 135

Tax-Free Exchange of Investment Property—Doesn’t Travel Well 135

Sorry, This Only Works for U.S. Properties 136

Avoid Owning Foreign Real Estate Through a Foreign Corporation 136

Unique Currency Risk When Owning Property Abroad 137

Strange Gains and Losses on the Retirement of Debt on Personal Residence 137

Nonresident Aliens: Investing in the United States and the EB-5 Program 139

Nonresident Aliens Investing in U.S. Real Estate 139

Becoming a U.S. Resident—EB-5 Visas 140

Estate Taxes on U.S. Property Owned by Nonresidents 140

Risk of Estate Taxes with Foreign Property 140

Part V: Cross-Border Taxation 143

Chapter 10 Understanding the Three Types of Cross-Border Families 145

The Unique Complexities of Cross-Border Taxation 145

Tax Profiles: Three Types of Cross-Border Families 147

Type 1: Foreign Nationals in the United States 147

Learning the U.S. Tax System 148

Type 2: American Citizens and Permanent Residents Living Abroad 148

Foreign Citizens Leaving the United States for Short-Term Assignments 149

Expatriate Assignments and Tax-Equalized Employment Packages 150

“Localized” Employment Contracts in Another Country 151

Reducing U.S. Tax for Taxpayers Living Abroad 152

Foreign Earned Income Exclusion 152

Foreign Housing Exclusion 152

Foreign Tax Credits 153

Revoking the Foreign Earned Income Exclusion 153

Likely U.S. Tax Liabilities for U.S. Taxpayers Abroad 154

Type 3: Foreign Nationals with Assets in the United States 155

Taxation by the IRS—On Passive U.S. Investments 156

Interest Income, Dividends, and Capital Gains 157

Rental Real Estate Property In the United States 157

Overwithholding Tax on Bond Interest Inside a Fund 158

Estate Tax Exemptions for Nonresidents 159

Becoming a U.S. Resident for Tax Purposes 159

Two Tests to Determine U.S. Residency 160

Lawful Permanent Resident Test (the Green Card Test) 160

Substantial Presence Test 161

Situations When Taxed Only on U.S.-Sourced Income 162

Tax Treaty Basics 163

Chapter 11 U.S. Tax Overview: Federal and State 165

Taxing Worldwide Income: The IRS Is Different 165

Filing Deadlines 166

Income Tax Overview 166

Gross Income 167

Deductions from Gross Income 168

Itemized or Standard Deductions from AGI 168

Personal Exemptions 169

Final Taxable Income 169

Understanding Marginal Tax Rates 169

Lower Tax Rates on Capital Gains and Dividends 170

Real Estate Rental Income 171

Stock-Based Compensation: Options 173

Stock-Based Compensation: Stock Grants and RSUs 173

Exchange Rate Issues When Taxing Foreign Income 174

State Income Taxes 176

State Tax Returns Often Based on Federal Returns 176

Different Treatments of Long-Term Capital Gains and Qualified Dividends 176

State Tax Residency: Requirements and Termination 177

When States Come Looking for You 178

U.S. Tax Residents Living Abroad with State Tax Liabilities 179

Avoiding Unnecessarily Becoming a State Resident in the First Place 179

Chapter 12 Additional Tax-Planning Considerations 181

Investing Outside of the United States—Avoiding PFIC Rules 181

Passive Foreign Investment Corporations (PFICs) Explained 181

Complex Reporting and Punitive Tax Treatment 182

Advice on Foreign Accounts and PFIC 184

Three PFIC Scenarios to Consider 185

Foreign Asset Reporting and Tax Evasion 186

Foreign Bank Account Reporting (FBAR) Requirements 187

FBAR Penalties 188

Other Foreign Asset Reporting: Form 8938 188

Additional Foreign Asset Reporting 191

Voluntary Offshore Disclosure Programs (OVPD) 191

Other Forms of Taxation in the United States 192

Social Security Taxes 192

Social Security Tax Calculation 192

Totalization Agreements 192

Special Taxes on High-Earners 193

Additional Medicare Taxes on Ordinary Income 193

Net Investment Income Tax (NIIT) 194

Gift and Estate Taxes 194

Gift Taxes 195

Estate Taxes 196

Estate Taxes for Nonresidents 197

Expatriation Tax (Exit Tax) 197

Prearrival Planning 198

Accelerate Gift Planning 199

Accelerate Income When Possible 199

Distribute Deferred Income When Possible 199

Consider Realizing Gains Before Moving Here 200

Review Existing Asset Structures Before Arriving 201

Review Immigration and Visa Alternatives 201

Part VI: Retirement Planning 203

Chapter 13 Planning for a Global Retirement 205

Where to Retire? A Common Dilemma 205

Being Near Family Is Most Important 206

Plan to Retire Anywhere, to Maximize Flexibility 206

Worldwide Planning Is Also Inherently More Complex 207

Investing for Retirement 207

Having Enough Money to Retire 208

How Much Money Will You Need? 208

First Question: What Will You Need to Live On? 208

Second Question: What Are Your Sources of Ongoing Retirement Income? 209

Third Question: Will Your Retirement Savings Make Up the Difference? 209

Safe Withdrawal Rates: The 4 Percent Rule 210

What Is a Successful Retirement? 211

The Important Role of Financial Planning 211

Longevity Risk Is Alive and Well 212

Inheritance: Plan for It, But Don’t Count on It 212

Organizing and Optimizing Worldwide Income and Assets 213

Assessing Sources of Income in Retirement 213

Organizing Your Assets 214

Cash and Cash Equivalents 215

Qualified Accounts: 401(k)s, IRAs, and Other U.S. and Foreign Retirement Accounts 215

Nonqualified Investment Accounts—Generally Holding Stocks and Bonds 216

Concentrated Stock and Stock Options 217

Real Estate 217

Alternative Investments 217

Currency Exposure: A Real Retirement Risk 218

Chapter 14 Considerations for Cross-Border Retirees 219

Tax Planning for Retirement 219

Taxes on Pension and Social Security Income 219

Taxes on Investment Income and Gains 219

Taxes on Distributions from Qualified Accounts 220

Taking Retirement Accounts with You 221

Cash Management and Account Administration 221

FATCA Fallout: Harder to Deal with Big International Banks 222

Accessing Your Money 222

Foreign Exchange Costs—Minimize Translations 223

Efficient Cross-Border Money Transfers 223

Social Security and Foreign Government Pensions 224

Social Security Benefits Earned Are Usually Yours for Life 225

Possible “Windfall Elimination” Reduction to Benefits 226

Long-Term Viability and Ongoing Changes 226

Filing for Benefits Early, on Time, or Late? 227

Foreign Government Pensions 228

Drawing on Tax-Deferred Accounts 228

The Ordering of Withdrawals 229

Conclusion 230

An Overview of Key Points 230

Final Thoughts and Words of Encouragement 234

Index 235

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.