For many of your clients, the idea of retiring abroad may seem like a ticket to paradise. It can be, but there are a number of laws, regulations, and common sense advice you need to know about when advising them on such a move.
For one thing, the Foreign Account Tax Compliance Act (FATCA) takes effect this year. There will be no tax havens to be found – anywhere.
As explained by Americansabroad.org, "The Foreign Account Tax Compliance Act, better known as FATCA, was passed in 2010 as part of the HIRE act. Starting in 2014 foreign financial institutions (FFI) will be required by the US government, under FATCA, to report financial information regarding accounts of US citizens, US persons, Green Card holders and individuals holding certain US investments to the IRS. This law requires foreign financial institutions such as your local back, stockbrokers, hedge funds, insurance companies, trusts, etc. – to report directly to the IRS all their clients who are 'US persons.' FFIs that don't become complaint will be subject to a 30% withholding on these investments, which will directly impact FFI clients."
Income tax issues are in fact one of the most important areas where your clients need your help. Attorney Felicia Seaton offers some insights on the basic tax laws for your clients retiring abroad, and what is different this year.
"I wish to start by noting that the US is the only country in the world that requires its US citizens to report all income earned worldwide, no matter where they reside. This means that no matter where they reside, they are still required by law to file US tax returns," Seaton said.
"US laws differ with regard to your reporting obligations if your clients reside abroad, and their income tax obligations may differ as well. The requirement to file an FBAR differs based on residence, for example," Seaton said. "The requirements for filing a Form 8938 with their US tax return differ. They may be eligible for foreign tax credits, and a treaty between the US and the country where they reside may apply to them when filing their income tax or other tax returns. Of course, they may also be required to file income and other tax returns with the country where they reside."
One of the un-pleasantries that your client should consider is preparing their Will before the move. Their wishes may need to be on record in two different countries.
"They may need a Will in the country in which they intend to reside," Seaton said. And "beware", it must be prepared by a professional who is licensed in that country. "They will not need such a Will until they own property (whether real or other) in that country. They will need to make sure that all of their US assets are correctly titled," she said.
Seaton also advises that your client maintain a valid, durable power of attorney prepared in their home state while they are still on US soil. This avoids the need for a guardianship.
"It will still be valid after they move. I also strongly advise clients to implement their probate avoidance estate planning prior to moving. This is because probate is a difficult process for loved ones who may also reside overseas," Seaton said.
Seaton spends her time traveling back and forth between the US and Israel, and many of her clients hold dual citizenships. This can also complicate matters.
"There are significant tax issues that impact dual citizens, which need to be addressed by US citizens residing abroad," Seaton said "For example in Israel, a US citizen's Social Security retirement payment may be reduced if that person is receiving a payment from an Israeli pension, under certain circumstances."
In addition, Social Security retirement is completely tax free under the US-Israel income tax treaty.
