For Americans relocating overseas, the financial transition is complex, necessitating careful planning to manage banking relationships, currency movement, and significant tax liabilities, a process detailed by International Asset Management. Proactive cross-border financial planning is essential to ensure a smooth move from U.S. resident to global expat.
The first financial steps involve ensuring continuity with U.S. institutions, as many U.S. brokerage firms and banks will cease dealing with clients once they leave the United States. Expats must also verify they can log into their accounts, as two-factor authentication can sometimes pose a problem from abroad. For international money transfers, International Asset Management advises against using banks, which can charge very high fees and provide poor exchange rates, potentially causing a loss of up to 7%. Instead, currency transfer services like Wise (formerly TransferWise), Money Corp, or OFX are recommended. These services, along with brokerage accounts like Schwab or Interactive Brokers (in taxable accounts), offer reasonable exchange rates and the capability to wire money out in local currency, even if the account is held in dollars.
Tax planning is paramount, beginning with major assets like U.S. housing. International Asset Management notes that it is often better to sell a house before leaving while still a U.S. tax resident, as the U.S. provides a capital gains tax exemption. Selling after becoming a tax resident in the new country might create a tax gain issue. While tax treaties between the U.S. and the host country are intended to eliminate double taxation, nuances exist. A major issue involves U.S. tax-deferred accounts, specifically Roth accounts, which are generally not mentioned in tax treaties and may be considered a taxable account in the new country, potentially causing a "rude awakening" for the expat. Conversely, an ISA account in the UK is not considered tax-deferred for U.S. tax reporting purposes. The single most important step is securing a tax advisor who fully understands the applicable tax treaty, as having separate advisors in the U.S. and locally is typically insufficient. Finding such experts can be done through U.S. embassy websites, organizations like the Association of American Residents Overseas (AARO), American Citizens Abroad (ACA), the American Chamber of Commerce (AmCham), or a cross-border financial advisor.
Cross-Border Financial Planning Considerations for Americans Moving or Living Abroad
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Living abroad triggers specific U.S. reporting requirements. The Foreign Bank Account Report (FBAR) mandates reporting to the U.S. Treasury Department for aggregate amounts exceeding $10,000 held in foreign financial accounts. Furthermore, reporting may be required to the IRS on Form 8938 for "specified foreign assets" over $200,000 by the end of the year, or $300,000 maximum over the course of the year for single filers (with double those amounts for married filing jointly). The Foreign Account Tax Compliance Act (FATCA) also affects financial firms, requiring foreign banks or brokerage firms to report to the IRS if they know the account holder is a U.S. citizen or U.S. person.
For emergency liquidity, International Asset Management advises keeping between six months and one year's worth of expenses liquid and in local currency. It is crucial to avoid Passive Foreign Investment Companies (PIFCs), such as non-U.S. mutual funds or exchange-traded funds, for local savings. Instead, local currency should be kept in cash products like savings or term deposits.
Health coverage also requires consideration. While expats may gain access to the national health care system, private insurance is often sought as a supplement because national health systems can sometimes be slow. It may also be worthwhile to maintain Medicare payments for those over 65, despite its lack of international utility, to avoid penalties or ineligibility upon returning to the U.S. Health savings accounts (HSAs), though potentially less useful outside the U.S., can be retained as investment accounts and used for prescriptions.
Finally, estate planning demands an update. While a U.S. Will is standard, a local Will should be the minimum estate planning measure. U.S. trusts, such as grantor and revocable trusts, may not function as intended overseas; for example, France may not recognize trusts, leading to taxation at a higher rate. Transfer on death (TOD) arrangements, which designate beneficiaries on individual brokerage accounts under state law, often cannot be used when the account holder has a foreign address. In this situation, an expat might consider establishing a joint account to avoid the asset having to transfer via a will. As expats age, establishing a power of attorney on accounts is useful for oversight of financial affairs.
