With flexibility and connectivity in today’s world, many are excited by the idea of moving abroad and traveling; however, with that comes complications that you may not have considered. On this episode of Your Life Simplified, Valerie Escobar, senior wealth advisor, is joined by Raoul Rodriguez, senior wealth advisor. Here are 3 things you need to consider before moving to another country—taxes, qualified accounts and estate planning.

Transcript

Valerie Escobar: Today we are going to dive into the exciting world of international financial planning. Our topic is things that you need to know, three of them specifically, before moving abroad.

I’m Valerie Escobar, certified financial planner, and you are listening to Your Life Simplified. I am joined today by Raoul Rodriguez, certified financial planner and senior wealth advisor. Thank you so much for joining us, Raoul.

Raoul Rodriguez: Thank you for the invitation. Glad to be here.

Valerie: Absolutely. So this is such an exciting topic, I think, because the world has just shrunk, especially with COVID, I think so many people have discovered that, “You know what? We can live wherever and have so much flexibility with the connectivity that’s available nowadays.”

Before you move, though, I think a lot of people don’t realize exactly how much complication can come when it comes to their finances. Raoul, your experience is primarily from Mexico, as you had a law practice there, is that correct?

Raoul: Yes, I had a law firm, that’s correct. In Mexico, you don’t have to be an attorney to have a law firm, but I had a law firm in Mexico. That is correct.

Valerie: Wonderful. Okay, very cool. So, I mean, one thing that I think people think is easy is that, “Okay, well, international, so any country.” There is going to be very much specialties, depending on which country.

And so we’re going to talk a little bit in generalities, but I guess just give me the first thing that people should consider before making that move.

Raoul: So the first thing I think people don’t realize is that Americans are taxed on worldwide income regardless of where they live in the world. That’s not the case for most countries, but that’s the case if you’re a U.S. citizen or you have a green card.

But the other country doesn’t not tax you, they’re going to want to tax you as well. And so that’s really the crux of international financial planning, is how are you going to reconcile those two different tax systems? Because they can be very different, the calculations are different, the tax rates are different, et cetera. I mean, how do we deal with that in a way that makes sense?

And so, being aware of the fact that when you move to this other country, you’re going to be subject to not only income tax, but possibly estate taxes, and that other jurisdiction is something that you need to plan around. And a lot of people don’t. They just are just not really thinking in those terms.

And so that would be probably the number one mistake I see people do, is that they move abroad before they plan. And ideally, you would plan before you move, but oftentimes people come to me after they’ve moved, so then that makes it more complicated.

Valerie: And so to help somebody with that process, do you find that a lot of people will find a professional in the United States and in the country that they’re going to move to or is there usually one professional that can cover both?

Raoul: It’s very difficult to find somebody that can do cross-border financial planning. International financial planning really is divided into really three areas. One would be outbound planning, which is let’s say if an American is moving outside of the United States or assets are moving outside of the United States, what do the U.S. laws and regulations say about that?

Inbound planning is assets or people coming into the United States, but again, from a U.S. perspective. And cross-border financial planning, which was, to your question, how do we look at it from the point of view of both jurisdictions and what’s going to work out the best?

It is very difficult to find people that have cross-border expertise in more than one country. And the more typical thing that happens in real life is that you go to your accountant and you say, “Okay, I’m moving to France.” And your accountants or your attorney is going to say, “Well, I can help you with the U.S. side of things. I know nothing about France. You’re going to have to find somebody there.”

You get to France and you find an accountant in France and say, “Mr. Accountant, can you help me?” And the accountant says, “Well, I can help you with everything in France, but I know nothing about the United States.” And then so if you think of a Venn diagram, this intersection of both countries, that’s really where the value-add is in cross-border financial planning. And like I said, it’s really difficult to find somebody that will be able to know both sides, because that’s really what you need to coordinate it in a way that makes sense with the client.

Valerie: Yeah. And I think just having a reasonable expectation to say, “Okay, it’s not going to be that easy to find somebody that can do both.” I think the best, this is just sort of my opinion, is that you find professionals that are collaborative, and that they’re able to work with the two and perhaps have experience working with other professionals, somewhat sort of touching on those. But yeah, just thinking, “It’s just an easy fix, I go out and talk to the guy in the corner and they’ll be able to plan for everything,” that’s going to be pretty tough.

Raoul: Yeah. But you and I are both certified financial planners, and so there are certified financial planners in other countries as well. So that’s usually where I go first, simply because they are familiar with the process of financial planning, and I know that if they’re certified financial planners or CFPs, they’re going to have the ethics and they’re going to have certain education and certainly a certain framework with which to approach the situation.

Not all countries have CFPs, but a lot of them do, and that’s where I would usually start. And if I don’t have access to CFPs, maybe I look for somebody in the region that’s worked with financial planners in the past, but it can be a challenge sometimes.

Valerie: Perfect. Great advice. Okay, great. So that was our first one. I mean, that was a whole lot of different suggestions, but let’s see, what else do you have as far as suggestions of things to think about before you move?

Raoul: So, the next one is also tax-related. Just because we know that we’re going to be taxed in that other foreign country or we’re going to be taxed in the United States, we often don’t realize that how that foreign jurisdiction looks at what happens in the United States is different than we look at things in the United States.

And the best example of that is our qualified plans, let’s think 401(k)s, IRAs, Roth IRAs, they have certain tax benefits in the United States. But in that foreign country, they’re not going to often extend those same tax benefits. And so the IRA, the Roth IRA, the 401(k) might be subject to tax in that other foreign jurisdiction.

And that’s one of the reason that we need to engage these professionals, because they’re the ones that are going to tell us, “Well, maybe you wanted to maximize your contributions to a 401(k) if you’re living abroad.” I mean, that might be your thought, you’re going to continue that process. But from the perspective of another country, they might tell you, “You know what? It’s a very bad idea to continue to contribute to your 401(k). Let’s look at other ways to save for retirement.”

So being aware of the fact that your whole tax planning is going to be totally different, that’s super, super important.

Valerie: Perfect. Yeah, I remember us chatting before and just saying that what seems like a fantastic plan when we’re looking at it here in the United States can kind of really come apart when we’re looking at it from a different perspective. And so, yeah, thinking about that ahead of time and not just pulling the trigger and then saying, “Well, crap. Now what?”

Raoul: And it works the other way around also. I mean, for foreigners coming into United States, they often have their qualified plans from their countries. The United States doesn’t automatically say, “Okay, we’re not going to tax them.” United States usually actually does tax them.

And you can get into all kinds of problems from tax perspective, from a U.S. tax perspective, if you’re investing for example in mutual funds abroad, which we would consider passive foreign investments. It just becomes much, much, much more complicated. And there’s tax treaties that can address some of those issues, but that’s one of the complications that we’re talking about, for sure.

Valerie: Perfect. Yeah. Yeah. As far as complications go, it’s good to know it ahead of time.

Raoul: Yeah, absolutely.

Valerie: And so the third piece, if I remember correctly, maybe some estate planning. So let’s say we move abroad, that’s the plan for the rest of our lives and then we die abroad. How does that play into this situation?

Raoul: So there’s a couple of situations that come from that. One is possible estate taxes. So in the States now we have huge exemptions. So it’s not that big of a deal as comparative to before anyway, at least right now before the sunset.

But a lot of countries actually have estate taxes and inheritance taxes. Most countries are actually going to have inheritance taxes. And so when we’re doing our planning for a client that’s an American that has U.S. assets as well, we need to also consider that, “Hey, there might be an estate tax. Let’s at least ask the question if there’s an estate tax or an inheritance tax that we need to consider as part of our planning,” because sometimes we forget that that’s a possibility.

The other is that most countries of the world are going to have forced heirship, which basically means you cannot freely dispose of your assets. And so if you’re living in a foreign country that has forced heirship rules, and there are all kinds of different types of forced heirship rules, but just as a general concept you need to know that, because otherwise you might be under the impression that you’re going to be able, for example, when you pass away, let’s just say you’re married and you pass away and you want your spouse to receive your assets.

But in most countries, that’s not the way it works. Maybe they’ll give a percentage to your spouse and then the rest might go to your kids. If you have parents that are surviving, some percentage might go to the parents.

In some jurisdictions, if the surviving spouse has assets equal to or greater than the estate of the decedent, the spouse gets nothing. And so it can get really complicated in how you want to distribute those assets.

Obviously if everything’s in the United States or a lot of it’s in the United States, that’s not going to be an issue. But if you have significant real estate investments or accounts abroad, that can be an issue.

And so that’s something else that oftentimes we forget about, again from this perspective of, well, we think everything abroad is going to work like in the States. It doesn’t. And so this estate planning provisions are important to consider, especially these days where people, they have mixed marriages and they have very complicated estate plans. It’s going to really throw a wrench into the system if you’re not careful.

Valerie: Right. And I was thinking, too, what if you were married to a citizen of that other country?

Raoul: Mm-hmm.

Valerie: It just seems like that would make it all additionally extra difficult.

Raoul: Yeah. And the other thing to consider is that oftentimes when you, depending on the countries, but in some of these countries if you’ve granted a will in that foreign country that says that you revoke all prior wills, you’ve revoked your estate plan, or at least your will in the United States as well.

That’s usually not a problem, but if there’s an estate conflict and the attorneys are on the ball, they will bring that foreign will that revoked the U.S. will into United States and cause a lot of havoc as well.

And then the final point with estate planning is that we use trusts very commonly in the United States. Most countries of the world do not recognize trusts. And so even though it’s an irrevocable trust, they will look through that irrevocable trust to tax the beneficiaries as if they own the trust, not only for income tax purposes, even though money is not distributed from the trust, but also for estate planning purposes.

They’ll employ an estate tax saying, “Well, you’re the beneficiary of this trust. We don’t care that it’s an irrevocable trust, we’re going to assume or we’re going to deem that you own a portion of it and we’re going to charge estate taxes.”

And so estate planning, to sum it up, is just a really big issue that we need to be aware of when people move abroad or even just own assets abroad. They don’t need to live abroad, but just have assets abroad.

Valerie: Yeah. Yeah. And so I think really the moral of the story, and I’m hoping maybe we have a little bit more time and maybe you want to share an example of maybe a kind of a hairy situation you ran into and helped them to unravel, but it sounds like really the moral of this story is that this really requires some additional planning.

I know that oftentimes, and speaking of myself personally, is that people that want to travel or live abroad, that they tend to be a little bit more free spirited and they’re just like, “I’m just going to kind of throw caution to the wind and see and experience what life is like somewhere else.”

And so maybe that intention or desire to plan is not something that comes natural, but I think for this, you’re going to just avoid a lot of surprises and be able to enjoy yourself much more if you do in fact contact the right professionals, pay some of those extra fees to get planning ahead of time before you actually move forward.

Raoul: No, absolutely. Yeah. People that plan ahead of time are way ahead of the game, they’re going to save themselves lots of headaches both from the U.S. perspective as well as the foreign perspective.

And like you say, I mean, people move abroad, they want to go be out there on the beach or they want to be climbing a mountain or something like that. They don’t want to be dealing with all the possible headaches that improper planning can cause. And most of the time, like I say, unfortunately, most people don’t plan ahead and then they’re caught and then that’s when they start seeking me out, but absolutely.

Valerie: Yeah.

Raoul: So one of the stories I think was, talking about estate planning, it was a client claim later. So when we had the law firm in Mexico, we had a couple people come in and said, “Hey, we purchased this real estate in Mexico, but now it’s starting to get into litigation.” And so I was asking, “Well, what exactly are the details?”

And what had happened is that there was a lady in San Miguel de Allende where we had an office from the state of Washington originally. She was very wealthy, she had two very expensive homes, and she spent a lot of time and gave a lot of money to local charities. And in her Mexican will she said that when she passed away, she wanted these two houses to be sold and the proceeds given to the charities.

Valerie: Mm-hmm.

Raoul: Several months later, she goes back to the state of Washington, and she drafts a will in the state of Washington. And the will in the state of Washington says that she revokes all prior wills.

She returns to Mexico, about five years later she passes away. The executor of the state of Washington gets letters testamentary, goes to Mexico, initiates an ancillary probate process in Mexico, and then sells the real estate to two families, two homes to two families that eventually were going to be our clients.

And when the Mexican charities found out about this, they were like, “Hey, wait a minute. This lady’s been working for us for years. We know. She was on our board. We know that these properties were meant for the charities. And we just found out that a U.S. executor came down to Mexico and sold them to these other two individuals.” And it started a huge lawsuit.

We actually litigated it. And so the question really was, did the U.S. will invalidate the Mexican will? And we actually litigated that all the way to the Supreme Court in Mexico, and we won. And so the answer to it is yes, the U.S. will invalidated the Mexican will because they had that revocation clause, and that’s what I was talking about earlier.

Valerie: Wow.

Raoul: And so, it’s unfortunate, because I’m sure that the intent of this lady was for the charities to get the property. I mean get the proceeds from the sale of their property. It was $2 million for the charities.

Valerie: Yeah. Yeah.

Raoul: But that’s not how it happened. And like I say, it’s unfortunate.

Valerie: Yeah, yeah. Very interesting. Yeah. Gosh, another reason, too, why we are always reviewing estate documents and making sure people realize what it is they have and what the actual consequences of their choices are. So, great reminder.

Raoul, thank you so much for joining me today. This is super fascinating. You’ve been listening to Your Life Simplified. Be sure to ‘Like’ and ‘Subscribe’ wherever you listen, and we will catch you next time.

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