Tom Zachystal is president of International Asset Management providing financial planning and investment advice for Americans living abroad.
Managing your wealth as a United States expat requires both a global mindset and an understanding of cross-border nuances. With shifting tax and investment regulations in both the U.S. and abroad, unpredictable politicians and increased scrutiny from the IRS on offshore accounts, affluent Americans living abroad must handle their finances carefully to minimize tax exposure and avoid unexpected headaches.
Whether you live in an island tax haven or a European capital, expats face challenges around compliance, investment diversification, estate planning and currency risk. The right wealth management strategy isn’t just about preserving capital; it’s about aligning your global investments with your personal and professional goals, while staying ahead of regulatory headwinds and market spasms. In this article, I’ll provide an overview of some of the more important issues that you should consider.
1. Establish an expat-compliant U.S. brokerage account.
Keeping a U.S.-based brokerage account is often crucial for American expats, but it’s not always straightforward. Due to strict know your client (KYC) and anti-money laundering regulations, many U.S. financial institutions are hesitant to maintain relationships with clients living overseas. That means when you move abroad, your brokerage could freeze or even close your account. To avoid disruptions, some firms may request that you maintain a U.S. residential address on file (although this can raise questions regarding state tax obligations). A better solution may be to switch to a firm that supports expats in your country of residence and does not require a U.S. address for your accounts.
Before relocating, contact your brokerage firm to confirm whether you can keep your account and access it online from abroad. Firms like Charles Schwab and Interactive Brokers often work with expats, depending on where you’re headed, and transferring accounts is usually a simple process. If you have a managed account, you need to consider not only the policy with respect to the firm that holds your assets but also with the firm that provides the investment management.
2. Avoid passive foreign investment companies (PFICs).
Investing in non-U.S. mutual funds or exchange-traded funds (ETFs) can create major tax headaches for American expats. The IRS classifies these types of investments as passive foreign investment companies (PFICs). Expats must file IRS Form 8621 to report each PFIC every year. This complex form adds cost and administrative burden. Furthermore, PFICs come with potentially high U.S. tax implications. To avoid these issues, it’s advisable to focus on either U.S.-domiciled ETFs or invest in individual stocks and bonds.
3. Diversify internationally.
Diversification is one of the core pillars of investing. By spreading investments across different asset classes, countries and currencies, you can reduce the risks inherent in asset value movements, currency fluctuations and changing economic conditions. A well-diversified international portfolio provides stability and unlocks growth opportunities across global markets. For U.S. expats, investing in foreign stocks and bonds in the country where you live can also provide income in your local currency, avoiding the costs involved with international transfers on distributions.
4. Minimize currency losses.
Currency fluctuations can significantly impact your investment returns. If you are living in France and your portfolio is in the U.S., for example, and the euro strengthens against the dollar, this could impact the relative value of your investments compared to your living costs in France. Seek advice to find out how you can best balance your international investments and exposure to both effectively diversify and meet your current and future needs.
In essence, align your investments’ currency with your expected expenses. If you plan to retire in a country that uses a currency other than the U.S. dollar, for example, invest in assets denominated in that currency. This approach helps to reduce your exposure to exchange rate volatility. Minimizing currency effects needs to be balanced against the value of having a diversified investment portfolio. Currency diversification is a useful tool, and the U.S. market makes up approximately 50% of the global investment market—so maintaining a balance between domestic and foreign investments is often the best solution even for U.S. expats.
Many domestic and international banks charge high fees and/or offer poor exchange rates for money transfers. Before transferring funds internationally, speak with a specialist international currency broker. These brokers often offer more competitive exchange rates, particularly for larger transactions. You may also consider exploring online money transfer platforms and multicurrency accounts, which can offer a more cost-effective option than traditional banks.
5. Learn about international estate planning for U.S. expats.
As an expat, it’s important to be aware that if you’re a resident in another country, that country may not recognize your U.S. will and may force you to distribute your global assets according to local laws. The solution is often to establish a will in both your country of residence and in the U.S. (assuming you have assets in the U.S.). This can help prevent legal conflicts and delays.
Many countries also don’t recognize U.S. trusts or apply higher taxes to them. Also note that some countries (like the U.S.) have estate taxes, which apply to the decedent’s estate, while others have inheritance taxes, imposed on beneficiaries. Updating your international estate plan can reduce your tax burden, help avoid double taxation and make asset transfers more efficient.
6. Seek advice from international investment and tax specialists.
Living abroad is an exciting new chapter, filled with opportunities and challenges. International wealth management is complex, though, to ensure you stay compliant with two sets of tax and investing rules as well as being diversified and tax-optimized in multiple jurisdictions. Seeking advice from cross-border investment and tax professionals who are experienced working with American expats lets you enjoy your overseas adventure with confidence—and avoid unexpected headaches. They will work with you to ensure a smooth transition and align your investments with your goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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