WealthManagement Magazine

Across Borders

You're nearing the end of a meeting with a couple. You've covered retirement and estate planning with them. You know their kids, their hobbies, their values. In fact, you thought you knew them pretty well, until on the way out of the office, the husband drops this little tidbit: We just bought a house in San Miguel de Allende, Mexico. We'll probably retire down there. At this point, the conversation

You're nearing the end of a meeting with a couple. You've covered retirement and estate planning with them. You know their kids, their hobbies, their values. In fact, you thought you knew them pretty well, until on the way out of the office, the husband drops this little tidbit: “We just bought a house in San Miguel de Allende, Mexico. We'll probably retire down there.”

At this point, the conversation may turn to mole or mariachis, but in the back of your mind, you're thinking one thing: I've got a lot of rejiggering to do on this couple's financial plan.

Looking to the Horizon

A villa in Tuscany, a cottage in British Columbia, a job in the Middle East — any one of these things could throw a monkey wrench into the best laid financial plans. While it's true that international living is not as common among Americans as it might be among, say, Europeans, over four million Americans live abroad, and the number receiving Social Security checks in other countries now tops 400,000. Further, as more businesses acquire a global reach, an increasing number of U.S. citizens will be exposed to splitting their financial lives between two places.

Moving to a new country opens a Pandora's box of financial issues. Insurance, retirement income, tax planning and estate planning are all affected by a move. Ideally, a financial advisor has some time to prepare for the moment when the client moves out of the country, but this is not always the case. Regardless, the first call a financial advisor should make is to the nearest consulate of the country to which the client is moving.

Every country has rules for foreign workers and retirees and the consulates generally can get the ball rolling on information gathering.

Often there is a limited time for bringing possessions into the new country duty-free. In addition, most countries require a person to be in good health before moving, and some require having health insurance.

Availability of health insurance and quality health care is a top priority, according to advisors working with expats. Though Social Security follows a person out of the country, Medicare does not, and private insurance can be costly.

Mexico, which has the greatest number of U.S. expats, has programs for temporary and permanent residency and lets residents buy into the national health care system at a cost of merely hundreds, not thousands, per year.

“Some U.S. citizens go back to the states for medical care, some self-insure because costs are so low and some buy international coverage,” according to Raoul Rodriguez-Walters, founding partner of Mexico Advisor, a 15-person firm in San Miguel de Allende. He notes that most U.S. expats would rather not wait in line at public clinics, but adds that one of his clients recently had open-heart surgery under the national health plan in Mexico and was very pleased with the care.

“It's fairly easy to come here and live and bring your possessions,” says Rodriguez-Walters, whose city is home to several thousand expats.

The Politics of Advising

Jeffrey Hill, CFP, of LPL Financial Services in Denver, says that more than half of his clients are American executives working abroad. The majority reside in Mexico and in Latin American countries. A few are retired, and some are foreign nationals in the U.S. Bilingual in Spanish and English, he has a condo in Mexico City where he stays on frequent business trips. He says that advising in the current geopolitical climate is extremely challenging.

“It's difficult to provide high-quality service for foreign clients and Americans living abroad,” says Hill, noting, for instance, that it's harder to wire money internationally than it was a few years back.

Another new development: the rise in kidnappings of U.S. executives or their family members. This has given rise to an increased interest in kidnap insurance.

“It's not talked about very much and it can be quite costly, ” Hill says.

George Middleton, an advisor with Limoges Investment Management in Vancouver, Wash., says advisors can sometimes help clients in choosing a financially advantageous place to resettle. For instance, Panama extends generous tax incentives to business-people and retirees, making it a good alternative to Mexico. He has clients living in places like Costa Rica and Croatia, and he says people sometimes ask his advice on different countries.

“I ask them to prioritize what they want. How do they want to spend their time? Gardening? Golf? Shopping?” he says.

Middleton admits that Panama's allure is a strong one, with its affordable oceanfront homes and its dollar-based currency. Panama's pensonada (pensioner) program has a minimum age of just 18 and includes discounts on entertainment, airline tickets and much more, including a 20-year holiday from property taxes. Would he consider retiring there? “I'd go in a heartbeat, but my wife wouldn't want to be so far from Nordstrom,” he says.

Moving North

More than a few U.S. citizens bought houses in Canada, back when the exchange rate was 60 cents Canadian to the U.S. dollar, according to Robert Keats, CFP. Many U.S. residents mistakenly assume that moving there is as easy as moving to another state. Actually Canada has no residency program for foreign retirees, though many people have second homes there. People from other countries, regardless of age, can work in Canada if they qualify for employment. They also can go as entrepreneurs who commit to actively running a business. In addition, they can go as investors, but are required to turn over a sum of money — currently $400,000 — to the Canadian government at no interest for a period of five years.

“There are a lot more Canadians coming to the U.S. than U.S. citizens moving to Canada,” says Keats, who came here himself from Calgary in the 1970s, has dual citizenship and now heads 19-person Keats, Connelly & Associates in Phoenix. His book The Border Guide (Self-Counsel Press, 2004) deals with issues involved in moves between Canada and the U.S.

Donald Reilly, president of Reilly Financial Services, a 10-person firm in San Diego, launched his international practice in the 1970s after a call from some former neighbors who had moved to Saudi Arabia to teach.

“They said they were making more money than they knew what to do with and needed my help,” he recalls. This is not an uncommon situation. Working expats have a tax exemption on the first $85,000 of earned income, and salaries of overseas jobs are often attractive with relatively few spending outlets.

Through referrals, Reilly soon was working with oil company executives and engineers, as well as with other teachers living in closely knit foreign compounds in the kingdom.

Jobs in the Middle East often mean high salaries and fewer opportunities to spend money. Teachers he has worked with retire with $2 million to $3 million, Reilly says.

Expats working in other parts of the world may find stashing away money is harder, however. Everard Taylor retired from the U.S. foreign service after 10 tours of duty to run Money Concepts in Vienna, Va. He has several foreign service colleagues as clients.

He explains that foreign service employees get a housing allowance, school expenses for their children and, in some countries, a hardship bonus of 25 percent. But when overseas clients first come to him, they're apt to have their credit cards maxed out.

“They've spent money on travel and other things,” he notes. “They need help in getting their finances straightened out.”

One of their most expensive moves involves coming back to the U.S., he says. “If they retire here, I warn them that they'll spend far more than they anticipate their first year back,” Taylor says.

A number of his clients have retired abroad — to Greece, England, Brazil, among other places — but not just because of high U.S. living costs. More than a few have married a foreign national. Taylor himself is married to a Brazilian woman.

Death and Taxes

Estate planning takes a different slant for those living outside the country. How your clients hold title to property — investments or real estate — can make a difference. For instance, spouses don't inherit automatically in some countries. If your client's spouse dies without a will in Mexico, the survivor could end up owning a house with his mother-in-law.

Some clients may need a will in the U.S. as well as in their adopted country, and the two need to be compatible. Rodriguez-Walters knows of an instance in which a Mexican will was revoked and two sets of heirs are now fighting over an estate.

Then there are taxes. U.S. expats, wherever they live, must file a return with the IRS, as well as with the state in which they resided most recently. Rodriguez-Walters recommends having an “abode” in one of the seven U.S. states with no income tax. “It could be the home of your children or other relatives,” he says. This “abode” also protects one from being a tax resident of Mexico. “Most people don't realize that Mexico takes worldwide income,” he observes, while adding that Mexican tax laws are rarely enforced.

Tax treaties between the U.S. and a number of other countries prevent double taxation, which mean U.S. citizens who pay taxes to other countries get tax credit here. Still, that does not guarantee clients can avoid owing additional taxes in a foreign country simply because of a different set of rules. Indeed, tax-advantaged investments that work in the U.S. can turn into disasters under another country's rules. For instance, income from municipal bonds that may have been suitable for an affluent client in the U.S. will trigger taxes in many foreign countries. In addition, retirement accounts that are tax-deferred in the U.S. enjoy no such status in other countries.

But for all the downside there are plenty of positives to serving international clients. The first is that referrals often come quickly from the tightly knit expat communities. The travel and long-distance client management can be a plus or minus, depending on the advisor's preferences.

In short, advising international clients is not for every advisor. It's a natural for people who, like Rodriguez-Walters and Keats, have dual citizenship. It's also a good fit for those with strong ties to other parts of the world through marriage, work experience or simply a passion for exotic locals.

“You don't prepare for this,” Taylor says. “All of a sudden, it's a part of you.”

SNAPSHOTS FROM ABROAD

  • Between three and four million American live outside the United States. If this population were to form a state, it would be the size of Kentucky or South Carolina.

  • About 400,000 Americans collect Social Security in other countries, though many more are likely having the their checks deposited in U.S. banks.

SOME COUNTRY STATISTICS:

  • 700,000 North Americans spend at least part of the year in Mexico. (Guadalajara and its environs alone account for an estimated 50,000 North Americans.)

  • 224,000 Americans live in the United Kingdom.

  • 210,000 Americans live in Germany.

  • 184,000 Americans live in Israel.

  • 105,000 Americans live in the Philippines.

Source: U.S. State Dept.

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