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The Cross-Border Family Wealth Guide


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Table of Contents

Foreword by Tim Kochis, JD, MBA, CFP (R) 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

About the Author

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.

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