Moving abroad can be exciting, but don’t rush into it. It’s important to first understand and plan for that country’s specific financial, health and safety considerations.
There are many reasons to contemplate relocation to a foreign jurisdiction: job or investment opportunities, family, social, political, cultural or lifestyle reasons, among others. In addition, people who migrated in the past to the U.S. may desire to return to their country of origin. Whatever the reason for moving to a foreign country, numerous issues need to be considered and planned for in advance. We divide this complicated topic into two major categories below: the tax and related considerations and the nontax considerations.
Tax, Trust and Estate Considerations
- The Exit Tax. A U.S. citizen or a long-term green card holder (someone who has held a green card for more than seven years) considering permanent relocation will need to decide if they intend to relinquish their citizenship or green card. The reasons for doing so—or not doing so—are multiple. Anyone who continues holding U.S. citizenship or a green card will continue to be taxed on their worldwide income, and in the case of a citizen, the worldwide estate will continue to be subject to the U.S. estate tax. Of course, U.S. citizens or permanent residents can continue to return to the U.S. at any moment and for any period of time, and U.S. citizens may continue voting. If you do decide to give up U.S. citizenship, you have to acquire another one. You may have more than one citizenship at a time but you cannot have none. Anyone who chooses to relinquish U.S. citizenship or a green card will lose most of the rights of being a citizen or permanent resident and may no longer be subject to U.S. taxation for income generated abroad. A citizen or long-term green card holder who wishes to expatriate—and whose wealth or income exceeds certain minimum thresholds—will be required to pay an exit tax. This is a federal tax assessed at the long-term capital gain rate (including the 3.8% ACA tax) on the gain embedded in their worldwide assets over a $744,000 threshold for 2020, valued at the time of expatriation, as if the expatriate had sold all such assets the day before departing. Because this tax can be significant in a highly appreciated estate, expatriates may choose to pay the tax and leave after a major economic downturn (like the 2007-2008 financial crisis), or after they have already realized a large gain and paid tax to the U.S. government, such as after the sale of their business.
- Covered Expatriate Status. Even after paying the exit tax and departing, a former U.S. citizen or long-term green card holder is considered a “covered expatriate.” The most important consequence of becoming a covered expatriate from a tax perspective is that any gift or bequest from the covered expatriate to a U.S. person in excess of the annual exclusion will be subject to U.S. gift and estate tax. This is relevant in particular for persons with U.S. descendants.
- Limitation of visits to the U.S. Those who renounce U.S. citizenship will need a method of returning to the U.S., and their stays in the U.S. may be limited.
- Relocating without expatriating. Those who relocate but do not renounce U.S. citizenship or relinquish permanent resident status, remain subject to U.S. income tax on their worldwide income, and will continue to be subject to U.S. federal estate tax on their worldwide estate. Consequently, a relocation will almost certainly increase tax compliance costs, in that taxes will be filed and paid in more than one jurisdiction (the U.S. plus the new country of residence). Depending on the location, an income tax treaty between the U.S. and the country of residence may mitigate these costs. Double taxation can be avoided through the use of the U.S. foreign income tax credit. Because U.S. taxes can only be calculated and paid in U.S. dollars, foreign exchange costs and currency fluctuation may become significant. For green card holders, it is important to take into consideration that in order to maintain the green card, they must maintain presence in the U.S. or obtain a permit to be outside of the U.S. for an extended term. Also, if a long-term green card holder moves to a foreign country and claims a benefit under a tax treaty between the U.S. and that country as a resident of the foreign country, then the U.S. may consider this an expatriation and the taxpayer may lose permanent-resident status. If the green card is revoked, the exit-tax rules may be applicable.
- Forced heirship. Many civil law countries (generally, most of those in Europe and Latin America) and Sharia law countries have a concept known as forced heirship. This means that despite outright ownership during life, at death, the now-deceased owner does not have complete freedom to determine who benefits from the decedent’s estate and in what proportion. Indeed, it is quite common that local law will dictate that an estate must be distributed in certain percentages to different members of the family. As an example, a husband with a wife and two adult children who own a home in France and a home in the U.S. in their own name is free to leave the U.S. home solely to their wife upon death. However, French law dictates that the French home must be left in equal shares to the spouse and two children. There are several methods of planning to avoid these rules, some more costly than others. A full discussion of those rules is beyond the scope of this article.
- Estate planning documents. Many civil law countries do not recognize trusts, or only recognize them for specific purposes. Thus, a U.S. estate plan, which might commonly employ revocable or irrevocable trusts as part of its framework, might not be enforceable in the jurisdiction in which the client chooses to live. In many cases, two sets of documents will be needed: one for the U.S. and one for the new home country. In addition, trusts may be subject to different tax rules upon funding or in operation, and applicable rates may be higher than those assessed against an individual owner/income earner.
- Inheritance tax. Many countries impose some sort of death tax, usually in the form of an inheritance tax. While an estate tax is imposed on and paid by the estate of the decedent before distribution, an inheritance tax is assessed on and paid by the recipient of the inheritance. A person intending to move to a new country will need to be familiar with these rules and plan accordingly.
- Retirement plans, 401(k)s, IRAs and the like. These U.S. tax-deferred vehicles sometimes have a corollary in other nations, but many times do not. Also, some of the main features, such as before-tax contributions or tax deferral on income, may not be recognized in foreign countries. Similarly, the U.S. may not recognize benefits of similar foreign plans.
- Investing. As described above, a person may become a tax resident in the new country and may also continue to be a tax resident for U.S. purposes. The efficiency and treatment of certain investment products may not be the same. It may be required to find a balance between the two tax systems in order to minimize the gaps and negative consequences of the discrepancies. Also, tax reporting and payment obligations are usually assessed in local currency, which may create disparities in the calculation of profit and losses, especially for capital gains. Some jurisdictions favor certain local securities with lower taxation. However, the U.S. may not provide the same treatment, and the foreign country may not exempt U.S. muni bonds from taxation.
- Marital and property laws. Concepts such as community property, joint tenancy or tenancy in common may not be recognized in the new jurisdiction. Local law may not vest any rights to certain property to a spouse (or surviving spouse) on the death of the owner. Also, pre- or post-nuptial agreements may not be valid or enforceable in the new jurisdiction. In some cases, it may be required to update existing pre- or post-nuptial agreements in order to conform to the legal framework of the new jurisdiction and maintain full enforcement.
Nontax Considerations
- Bank accounts. If U.S. citizenship is not relinquished, the U.S. person may find opening a foreign bank account difficult. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to create special reports for accounts in which U.S. persons have a direct or indirect interest. Due to the complexities of these regulations, many foreign banks refuse to service U.S. persons.
- Citizenship and visa considerations. This area is complicated. Long-term residency may be unavailable in the chosen country, requiring periodic departures. Visas may be limited in time or scope or may not authorize the noncitizen to work in the new jurisdiction. Citizenship rules in the new country may require relinquishment of U.S. citizenship as the new country may not recognize dual citizenship, thus triggering the exit tax payable to the U.S.
- Increased travel costs and potentially limited reentry to the U.S. Depending on where the client will be moving, they may find their travel costs significantly increased. This is particularly true of clients with immediate or extended family members remaining in the U.S. In addition, as noted above, clients who are covered expatriates will be allowed only limited reentry into the U.S.
- Access to quality health care. Depending on the new country of residence, the client may discover there are limited options for quality health care, or such health care may only be available at significant cost or after lengthy travel. The importance of access to quality health care is made clear during the current COVID-19 pandemic.
- Health and property insurance. U.S. persons may find their U.S. coverage is not recognized in their new home country, requiring significant out-of-pocket expenditures for care or when a property loss is experienced. They may also discover that local options for life, home, auto and health insurance are limited or nonexistent.
- Personal security. Many low-tax jurisdictions may have higher rates of crime and corruption. Employing a security service may be required for home or personal security in the new jurisdiction.
Moving abroad can be exciting. But don’t rush into it. It’s important to first understand and plan for that country’s specific financial, health and safety considerations. This can help you and your family avoid difficulties and relocate with ease.
This article appears in Insights & Outcomes, a magazine from Morgan Stanley Private Wealth Management providing in-depth reports, analysis and thinking from our Firm’s leading specialists.
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