care, and work are concerned. Here’s what you need to know to serve
The vacation was so good they now want to move there.
What do you do when clients decide to move to another country? How does their
new country of residence affect the management of their financial affairs? What
do they need to know before they go? How can you help them make a smooth
transition? And will you be able to continue to work with them after they’ve
made the move?
Whether or not you’ll be able to keep expatriates as clients depends on your
firm and where it is licensed to do business. So one of the first things you’ll
want to do is find out where your clients are planning to live. Do they have a
country in mind, or are they still shopping for the perfect place? Next, check
with your firm to see if you can continue to manage the account. Don’t laugh,
but some clients might even change their relocation plans if it means keeping
you as their advisor. So you might as well get this issue settled up front.
Where in the world?
If clients are still in the exploratory phase—they’re thinking about moving
outside the U.S. but aren’t sure where—talk to them about their objectives. Many
retirees move away because they’ve heard living costs are cheaper outside the
U.S. That may be true, but currency fluctuations and unpredictable inflation
rates in some foreign countries add an element of risk that clients need to
Very wealthy clients may choose to move outside the U.S. for tax-saving and
asset-protection reasons. They may have attended a seminar or visited a website
proclaiming all these benefits to offshore living, when the reality is that they
don’t have to move outside the U.S. to take advantage of asset-protection
strategies. And taxes are a fact of life no matter where they live unless they
take the drastic step of relinquishing U.S. citizenship. The United States is
the only country that taxes worldwide income on its citizens (with some
exclusions—see below), regardless of where the taxpayer lives or where the
income is earned.
Still, there is a certain allure to living in faraway lands, and clients may
have legitimate reasons for doing so. If they haven’t decided on a country yet,
give them a serious homework assignment. Tell them to set aside the travel
brochures and get the straight facts about the countries they are considering.
After all, living in a place day in and day out is quite different from visiting
it as a tourist. Here are some good resources for country information:
for Americans Residing Abroad. This online brochure from the U.S.
State Department provides a general overview of the factors clients should
- Background Notes.
These online publications include facts about the land, people,
history, government, political conditions, economy, and foreign relations of
countries all around the world.
- CIA World
Factbook. This searchable database has even more data on even more
This site has much of the same data but with more visual appeal,
including graphs and lots of maps.
Information Sheets. These briefs from the State Department are
geared more for travelers than prospective residents, but they contain essential
information about getting in and out of the country, customs, crime rates,
medical facilities, transportation, and any special conditions travelers should
know about. The sheet on Mexico, a
very popular retirement destination these days, includes a good rundown on the
rules for property ownership and warns unwary investors about the hazards of
Abroad. This website has lots of good articles about living abroad,
including information about living in specific countries.
Visas and work permits
Clients who decide to live in another country must obtain a visa before they
move. A visa is an endorsement or stamp placed in a person’s passport by a
foreign government that permits entry for a specified purpose. Clients can apply
for a visa at the embassy or
nearest consulate of the country where they plan to reside. Clients who plan to
live in another country indefinitely will likely need to seek residence status
once they get there. This will not affect their U.S. citizenship unless they
take specific actions to relinquish it.
Clients who want to work in a foreign country will need to establish
residency and obtain a work permit in the individual country. Technically,
people are not supposed to enter a foreign country for the purpose of finding
work; however, nothing can stop them from finding a job once they get there. The
process of obtaining a work permit may
be simple or complex depending on the country. Different rules may apply for
entrepreneurs or self-employed individuals, who may not need a work permit at
Naturally clients will need to decide how and where they want to live and
then do substantial research to find out how much it will cost for rent,
utilities, transportation, food, and all the other items that make up a
household budget—both in U.S. dollars and the local currency.
Clients must be especially attuned to currency fluctuations and have a plan
for dealing with them. Some advisors suggest keeping the majority of clients’
money in U.S. dollar-based assets and converting portions to the local currency
as needed. On the other hand, clients who think the dollar will weaken may want
to keep all or most of their assets in the local currency, especially if they
don’t plan to return to a dollar-based economy.
The first thing potential expatriates over 65 need to know is that they must
give up their Medicare benefits if they live outside the U.S. Medical expenses
incurred on foreign soil are not covered by Medicare. This may not be such a
terrible thing if clients move to a country with a good state-supported health
care system, if they can get health insurance at a reasonable cost, or if they
choose a country where they can afford to pay out of pocket for medical care.
The cost—and quality—of care varies widely among countries. Before moving,
clients should do a thorough analysis of their current and anticipated health
care needs, determining how they will obtain and pay for health care while they
are living abroad. Some countries allow all residents, including expatriates, to
take advantage of their state-run health care system—others don’t.
When buying health insurance or evaluating the quality of care offered in a
foreign country, insist that clients do rigorous due diligence by talking to
other expats and reading the fine print on policies and other documents. Here is
a list of health care resources
for Americans traveling abroad.
Social Security beneficiaries will most likely be able to continue receiving
benefits while they are outside the U.S.; their checks can be mailed to them,
deposited in a foreign bank account, or deposited in a U.S. account. This online brochure (SSA Publication
No. 05-10137, “Your Payments While You Are Outside The United States”) explains
what clients need to know about receiving Social Security while living outside
the country. If clients plan to work, they should pay attention to the rules for
the foreign work
As noted earlier, U.S. citizens do not escape U.S. taxation by living in a
foreign country. They still must file a U.S. tax return (although they do get an
automatic extension to June 15) and must report all taxable income and pay the
required taxes by April 15. The downside is that they may also be taxed by the
foreign country. Before moving, clients should check the tax rules of their
potential destination country to see if their income will be taxed. To reduce or
eliminate double taxation, the U.S. tax code provides for an exclusion on income
earned by U.S. citizens in foreign countries.
There have been some recent tax law changes, so make sure your clients have
the latest information. First, the foreign earned-income exclusion, formerly
$80,000, has been adjusted for inflation to $85,700 for 2007.
Second, income in excess of the exclusion amount is taxed as if the $85,700
had also been taxed—that is, at the higher tax bracket. (Previously, excess
income was taxed as if it were the first dollar of income, starting at the
lowest bracket.) Note that the earned-income exclusion applies only to earned
income, including self-employment income or business profits, not investment
income. Note also that the foreign earned-income exclusion is not to be confused
with the foreign tax credit, which applies to income received from foreign
To qualify for the foreign earned-income exclusion, the clients’ tax home
(where they work) must be in a foreign country and they must meet either the
foreign residence test or the foreign physical presence test.
- Foreign residence test. Clients must show they are bona fide
residents of a foreign country for an uninterrupted period that includes one
full tax year (Jan. 1-Dec. 31). Evidence of foreign residency includes such
things as taking the whole family or buying or renting a house or apartment
rather than a hotel room. Vacations or business trips to the U.S. do not
disqualify the client from satisfying the foreign residence test.
- Physical presence test. To pass muster here, clients must
show they were on foreign soil 330 days (about 11 months) during any 12-month
period. The 330 days do not have to be consecutive, and the 12-month period can
begin on any day.
In addition, clients working and living abroad also get a housing exclusion.
Employees may exclude from income all or a portion of employer-financed housing
costs; self-employed individuals may take a deduction from taxable
foreign-earned income. The foreign-earned income and housing exclusions are
claimed on Form 2555 and attached to Form 1040. For details, see IRS Publication 54, “Tax
Guide for U.S. Citizens and Resident Aliens Abroad.”
Clients who are planning to relocate abroad should have a planning session
with their tax advisors. Once they know where they will be living and whether or
not they will be working, they’ll need more specific advice relating to the
country and job in question.
Also, clients who are thinking about relinquishing their U.S. citizenship
will need to understand the new rules associated with expatriation. If they fail
to notify the Department of Homeland Security or file Form 8854, they will
continue to be considered U.S. citizens for tax purposes, subject to the usual
filing and payment requirements. Even so, they may be subject to the expatriation
tax, which taxes their worldwide income for any of the 10 years following
expatriation in which they are present in the U.S. for more than 30 days.
Relinquishment of U.S. citizenship is serious business and should not be
attempted without expert tax and legal guidance.
Estate planning for U.S. citizens living abroad can be extremely complex
because the laws of the two countries may conflict. The State Department
recommends having two wills drawn up, one prepared according to the legal system
of the adopted country, and the other according to the legal system of the U.S.
Each should mention the other. Durable powers of attorney and health care
proxies should also be reviewed to ensure that client wishes can be carried out
in the country of residency.
A larger issue for wealthy clients may be how to escape estate taxes on the
transfer of assets at death. Some wealth holders relinquish U.S. citizenship for
this purpose, and that may be the only way to do it. Consultation with
estate-planning attorneys in both countries is essential. If you plan to work
with many clients in a particular country, it may be wise to develop a network
of professional advisors there who can also work with your advisors here. The
embassy of your clients’ country of residence can help you with contact