Financial Planning for the Internationally Mobile Client: Dabble or Avoid Altogether?

Rule 2.4 of the CFP® Board of Standards new Rules of Conduct states, “A certificant shall offer advice only in those areas in which he or she is competent to do so.” The key question is, Where does one’s competence begin and where does it end? Particularly when it comes to the internationally mobile client?

At the request of NAPFA, The Cross Border Planning Alliance was asked to put forth a paper with our opinion on the matter. We grant up front that this may expose a bit of the “underbelly” of the financial planning community and may be controversial, but that is the purpose of this article. We hope to stimulate conversation in this area that will allow all of us to better serve our clients.

It is important to define the cross-border client. In general terms, it is any client who has concrete financial interests in a country other than the U.S. Clients residing in the U.S. with property, a business, financial accounts, or family in another country would be included. Our definition also includes clients leaving the U.S. to live abroad (outbound planning) or those relocating to the U.S. (inbound planning) and those married to, or the children of, U.S. citizens in any of these situations. In some cases, it may include clients who have citizenship in more than one country. All of these individuals face unique financial planning issues.

In our opinion, unless an advisor practices comprehensive financial planning almost exclusively in this area on a regular, consistent basis, most U.S. practitioners should avoid doing it. The liability and practice management issues surrounding financial planning for internationally mobile, or “cross-border,” clients make this a field of landmines for the uninitiated. Of even greater importance is the necessity of NAPFA-Registered Financial Advisors to uphold a fiduciary standard for cross-border clients and to avoid violation of Rule 2.4.

What is it about cross-border financial planning that makes it so challenging? Let’s start with the financial planning process.In our experience with advisors who have contacted us for “help,” their existing financial planning process is generally not designed to ask the right questions to serve cross-border clients. They lack sufficient emphasis on areas that are not part of a domestic-only planning process.

The importance of legal and regulatory issues cannot be over-emphasized. For example, advisors need to know the client’s citizenship status and by what means they are using to enter the U.S. or the foreign jurisdiction. In Mexico, real estate law is very important; in India, simple account openings can be disastrous.

Each of the six areas of a comprehensive financial plan creates unique issues for cross-border clients: cash management, income tax, retirement planning, estate planning, risk management, and investments. Plus, immigration planning and customs planning must be handled. Understanding how a client is going to migrate to or from the U.S. legally (including the movement of their personal goods) is an area about which most advisors have little knowledge. There can be tax implications for leaving personal goods in a foreign country.

Understanding the implications of dual or tri-citizenship on the client’s financial situation, or plotting an immigration strategy that will allow the client to become a U.S. citizen (or not), is also important. Understanding the client’s goals for U.S. residency is important because new expatriation rules make relinquishing a Green Card or renouncing U.S. citizenship extremely difficult. Understanding these issues in the foreign jurisdiction is critical as well. Can most advisors provide advice on whether the client should bring their car to the U.S. or to a foreign jurisdiction? What are the Customs implications and the duties or taxes of doing so? Does an imported car meet safety or emissions standards to be eligible for registration?
The list of issues is almost endless.

Cash Management
Currency exchange is one area that we have seen trip advisors who are working with cross-border clients. If the client has a fixed pension from another country but resides in the U.S., that client is exposed if the U.S. dollar appreciates in relation to the foreign currency. If that client has investments abroad, it is important to get those investments into U.S. dollars (where possible) to reduce currency exchange risk.

Exchanging currency, particularly if it is related to moving one’s entire net worth to another country, is one area where bad advice can cost clients dearly. We often see advisors who haven’t asked whether the client has assets abroad, don’t have strategies to hedge the client’s portfolio, and don’t know where to get competitive exchange rates. Even depositing a check drawn on a foreign bank in foreign currency can cause complications. Having an understanding of foreign government insurance or deposit guarantees also is necessary. Understanding the disclosure requirements and the movement of money across borders is a requirement for any fiduciary advisor.

A specific example may help. A married couple of Indian origin migrated to Australia, but then came back to India to work on a three-year contract. They had assets in both India and Australia. However, what they didn’t realize is that the money they invested while in India, if not routed through correctly categorized accounts, would become non-repatriable to Australia. These types of complications are not uncommon.

Income Tax Planning :
If there’s a single reason that advisors should be wary about dipping their toes into cross-border planning without thorough knowledge, it would be taxes. Tax planning for the internationally mobile client requires a thorough understanding of the Internal Revenue Code (particularly those sections related to international issues), an understanding of the tax structure in the foreign country, and an understanding of any tax treaties that may override the tax code in either country. Further, planning the client’s entry into or exit from the U.S. or a foreign jurisdiction can yield much fruit.

In our experience, most planners don’t have this knowledge, so they turn to their existing network of contacts. This ends up being of little use when serving the cross-border client. The local trusted CPA most likely cannot ensure that the client’s U.S. and foreign returns are coordinated, and the client’s tax liability is mitigated using relevant provisions and treaties. What is tax-advantaged in the U.S. may not be tax-advantaged abroad, and what makes for great tax planning in the U.S. often generates a large tax liability abroad.

Some advisors go a step further by having a U.S.-based CPA prepare the U.S. returns and the client’s accountant in their home country prepare their home country’s returns. The general result is that items like foreign tax credits, income, and expenses (and foreign exchange rates) aren’t coordinated between the two returns, which leads to unnecessary tax liabilities and compliance issues. Foreign reporting forms for U.S. citizens or residents with foreign accounts and businesses are incredibly complex (and come with unbelievably high IRS penalties if not completed correctly). 

If an advisor and CPA have never seen these IRS forms, the client's interests aren't likely being served as well as they could be: Forms 1040NR, 1116, 2555, 3520, 3520A, 5471, 5472, 8833, 8840, 8854, 8891, 8898, and TD F 90-22.1, to name a few. To emphasize the point, the fine for not filing Form 5471 in US$10,000, and the IRS has publicly stated ahta it is going to zero-in on rampant non-compliance in international taxex, particularly Form 5471.

Further, knowledge of tat treaties between countries and their proper application to the client’s situation generally leads to huge benefits for the cross-border client. But in our experience, CPAs and advisors have never even looked at them. Tax treaties ratified by U.S. supersede both the IRC and Treasury Regulations and provide concrete tax relief for the cross-border client. For example, the Canada U.S. tax treaty states that capital gains are taxed only in the country of residence, but this does not apply to certain real estate or U.S. citizens living in Canada. In certain situations, it is possible that an overseas American might have a “closer connection” to the foreign jurisdiction due to family interest and/or intent.

Retirement Planning
Many cross-border clients are missing out on foreign government retirement benefits or US Social Security benefits because the advisor is unaware of the Totalization Agreement with that country. Not only can the client collect a foreign or U.S. government benefit, but these benefits also may be taxed at a lower rate in the U.S. than abroad. Often the benefits are declared incorrectly on the tax return, which creates excess taxes.

In numerous occasions, we have seen advisors and CPAs assume that retirement accounts abroad remain tax-deferred in the U.S. and vice versa. For example, Canadian RRSPs and RRIFs, the nation’s most common retirement vehicles, and fully taxable by the IRS and the client’s state of residence. Likewise, IRAs and 401(k) assets are fully taxable in many countries. In other situations, retirement plans established by on-US employers are considered non-qualified deferred compensation plans for US tax purposes, further complicating the client’s tax return as well as their lives. Finally, many advisors and paraplanners don’t know how to model a client’s international financial situation correctly into domestic planning software, which renders inaccurate results.

Risk Management :
Life insurance needs are often neglected or are not uncovered in cross-border situations. For example, life insurance polices bought abroad will generally be included in the deceased’s estate when they pass away. But how are U.S. life insurance proceeds taxed abroad? Is an advisor creating an estate tax liability abroad with that insurance policy? Likewise, the client may be under- or over-insured, depending on the currency of the policy at the time of death.

Even simple items like long-term care insurance need to be tailored to the cross-border client. For example, if children remain abroad and the client wants to move back home for nursing care, will the long-term care policy be payable in a foreign country? Even so, a policy in U.S. currency is subject to currency exchange risks.

Another important question to ask is, How does a client moving to the U.S. get health insurance? Clients and spouses coming to the U.S. typically are eligible for Medicare, but it takes proper planning that most advisors are ill-equipped to handle.

Estate Planning :
Most domestic estate-planning attorneys are unaware of whether a QDOT is required in the client’s estate plan and how to draft one properly. In some cases, we have seen estate-planning attorneys include a QDOT when it isn’t needed. Simple U.S. planning structures such as LLCs or living trusts can create double-tax or estate planning disasters for U.S. citizens in foreign jurisdictions. The client’s existing estate plan (such as wills and powers of attorney) may not be recognized in a foreign jurisdiction, and vise versa.

U.S. citizens or residents who have their beneficiaries living outside the U.S. may find they have to design their estate planning documents to deal with the quirks of that jurisdiction; otherwise unintended results may occur, such as additional inheritance taxes. For example, in the case of Canadians relocating to the U.S., getting a living trust in place could be a violation of Canada’s non-resident trust rules, and this could cause the entire trust to be taxable at the much higher Canadian rates (along with an annual Canadian tax filing requirement). Likewise, beneficiaries of foreign trusts living in the U.S. need to file IRS Form 3520 and 3520A, and we rarely see this done.

Understanding the implications of a death tax in a foreign country and how that integrates with the U.S. estate tax regime can lead to effective pre-entry planning strategies. For example, good planning before entering Canada can give the cross-border client a 5-year holiday from Canadian taxes.

Gift taxes in the U.S. and abroad are often ignored, at the client’s peril. Most advisors are not aware that non-residents living in the U.S. are only allowed to gift US$133,000 to each other in 2009 (and the gift exemption might change in the future). This can easily be violated when the proceeds from a home sale titled in the name of one spouse are repatriated into a joint account in the U.S.

Investments :
Advisors believe they can fit their domestic investment management process to the cross-border client, and it’s tempting to do so if the client has a large investment portfolio. But doing it badly is a breach of fiduciary duty. It starts with this: Are you registered to provide investment advice in the foreign jurisdiction in which your former U.S. client resides?

Investment research has shown that the cost of an investment and its tax efficiency are two determinants of portfolio returns. Clients moving to the U.S. often have tax credits generated in the foreign jurisdiction that end up on their U.S. return. This requires an investment approach that generates foreign income for U.S. purposes to use the tax credits before they expire. Further, if the client has investment assets abroad, how are they being coordinated in a worldwide asset allocation? Are the foreign assets being managed in a tax-effective manner for U.S. tax purposes? Are the U.S. assets being managed in a tax-effective manner for foreign tax purposes?

We have seen U.S. investment managers using municipal or federal bonds that are fully taxable in the foreign jurisdiction (in addition to having lower yields). Likewise, we have seen foreign investment managers paying no attention to short-term or long-term capital gains for U.S. purposes and rebalancing portfolios based on foreign jurisdiction tax rules. We have seen others ignore the effects of a U.S.-dollar denominated portfolio on a client’s retirement expenses that are needed abroad, which leads to an over-consumption of assets and, in turn, affects the client’s long-term projections.

Join Our Team :
When domestic U.S. financial advisors become aware of the issues surrounding the cross-border prospect/client in their offices, they often ask us for an hourly engagement to assist them in a “team approach.” We are generally reluctant to extend such an engagement because the team approach is very difficult to implement. Most planners specializing in cross-border planning (which is further specialized into certain countries) require a full planning engagement with the client to ensure compliance with Rule 2.4 as well as compliance with any regulatory, code of ethics, or practice standards required by foreign CFP® boards or regulatory bodies.

Each of the firms that comprise the Cross Border Alliance has spent years designing and perfecting our unique planning processes to ensure all the complex cross-border issues are identified and addressed. Our business models focus on the planning process where rules in two or more countries are integrated with the client’s goals. Unless we put the client through our entire process, we may miss something crucial to their financial well-being or to the well-being of their beneficiaries.

In short, we believe that this is an area of practice in which what an advisor doesn’t know can hurt both him and his client. Besides, will E&O coverage apply to advice provided to someone residing in a foreign jurisdiction?

In addition, most cross-border planning clients require assistance with implementation (complex tax filings, investments, etc.) and maintenance of a plan over long periods of time (such as when moving assets to the U.S. or to a foreign jurisdiction). This simply does not lend itself to short, hourly engagements on behalf of the domestic advisor.

Our profession needs to remind itself that investment management and financial planning are not the same thing. In fact, the former is a subset of the latter. Managing U.S. investments while outsourcing cross-border issues is putting the tail before the dog; it’s like trying to fit a need to the solution.

Each of us in the Cross Border Planning Alliance has examples of prominent, well-known advisors in our community retaining clients they are not competent to serve or legally couldn’t serve due to securities regulations, but are retaining these clients because of the size of the portfolios. In several cases, advisors insisted they could retain an investment management relationship with a client who had moved abroad, despite the fact that they were not registered to provide investment advice to a resident of that foreign jurisdiction— a clear violation. In other cases, advisors wanted to transfer assets from the foreign jurisdiction to the U.S. so that the assets could be managed, but they did not consider the tax consequences in that jurisdiction, let alone whether that strategy still made sense in the context of the client’s international goals. In one specific example, a 25-percent tax would have been levied by the foreign jurisdiction on a retirement plan. Despite this fact, the advisor had recommended the client fund retirement plans in the U.S. with those funds. The tax liability in this situation amounted to over $250,000, and the client had no opportunity to recoup it through foreign tax-credit planning. Further, the advisor seemed indifferent to the impact that such a large loss of assets to the client would mean to the client’s long-term projections. In cross-border planning, the concept of suitability takes on a new level of complexity.

Unfortunately, there are no training programs or schools that teach this information. It comes from direct experience in living the cross-border lifestyle (most of the members of the Alliance are dual citizens), on-the-job training, and holding the CFP® designation in the U.S. as well as abroad. For the reasons outlined above, we recommend each of us serve the clients that we are competently able to serve. To uphold the fiduciary responsibility to internationally mobile clients, it is generally in the best interest of the client for advisors to turn down or to refer such an engagement, despite the potential revenues.

The Cross Border Planning Alliance ( has been created by the principals at five financial planning firms. They are: Transition Financial Advisors Group (U.S. and Canada) – Brian Wruk& Terry Ritchie; Patterson Partners (Bermuda) – Jennifer Patterson; Keats, Connelly & Associates (U.S.) – Robert Keats & Dale Walters; Mexico Advisor (U.S. and Mexico) – Raoul Rodriguez-Walters; and Right Returns (India) – Devang Shah. March 2009

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