Raoul Rodriguez Walters seems almost predestined to have become a cross-border planner. Raised in Mexico City, with an American mother and a Mexican father, he attended college in the U.S., but landed his first job out of school as a stockbroker in Mexico City. In the years since, he and his wife Nancy (who worked for more than 12 years for the United Nations) have traveled the world, living in the Republic of Georgia, Sudan and Venezuela.
Now settled in Portland, Oregon, the CFP and president of Mexico Advisor says the American financial and legal community needs to become more multicultural in its approach. "One of my largest frustrations is seeing many professionals, not just CFPs, ignoring the fact that cross-border planning is very complex," Rodriguez Walters says. "It has the potential to cause serious damage to a client's dream if the proper planning is not carried out."
For now, he is one of a relatively small number of cross-border experts as well as being a founding member of the Cross Border Planning Alliance, a group of six financial planning firms. The potential market for cross-border specialists is huge. As of 2010, a Census Bureau survey estimated the number of foreign-born residents in the U.S. to be nearly 40million. In addition, there are 6.3 million non-military Americans residing overseas, according to the Paris-based Association of Americans Resident Overseas. And then there are intermarried couples and American couples with foreign residences.
Of course, not everyone in that group falls into the economic bracket targeted by many traditional planning firms. Rodriguez Walters says he manages assets for only about 10 clients. The rest of his business is based on hourly fees; he charges $275 an hour to help individuals and their other advisors in moving abroad (what he calls "outbound planning") or in returning home ("inbound planning").
A lot of his business develops from partnerships with CPAs, attorneys and other financial planning professionals who bring him in to tackle the knotty problems facing clients whose financial interests go beyond U.S. borders. "I don't emphasize AUM so other planners will trust me as an advisor," he says.
Rodriguez Walters started Mexico Advisor in 1998 with offices in Mexico City and Portland. The firm grew into a multidisciplinary practice with a staff of 12, but legal services became the firm's main revenue generator.
By 2011, Rodriguez Walters had sold his company's investment management and tax preparation book of business, as well as its law firm. He retained the name of the firm and returned to his roots, offering an array of financial planning services.
One reason other professionals seek Rodriguez Walters' advice is the complexity of his subject matter. For example: The dramatic tax impact of buying a home in Mexico.
CROSS-BORDER TAX BOMB
Although Mexican accountants often advise foreign clients not to file Mexican tax returns - "it's too much hassle and then you're on their radar forever," Rodriguez Walters says - many foreigners who own a home in Mexico are liable for taxes from the moment they buy. Catching some by surprise, they are subject to tax on their worldwide income - a potential tax bomb that even includes income from tax-qualified accounts in the U.S. (IRAs, Roths, etc.). Rodriguez Walters advises Americans with homes in Mexico to pay Mexican taxes. (Some tax relief is available, he notes, because the U.S. grants tax credits for every dollar paid by an American in foreign taxes.) And so-called tax residents who retain a home in the U.S. (even a room they rent from their children) and who receive more than 50% of their income from the U.S. need not file a Mexican return.
Tax residents also face other estate-planning challenges, including a 25% estate tax on all of their Mexican assets. Mexico does not recognize joint ownership with rights of survivorship, so Americans might be shocked when they transfer a home (by sale or inheritance) in Mexico due to a death and find the attorney will actually withhold 25% of the home's fair market value for the Mexican government.
Life for Mexicans moving to the U.S. can prove equally hazardous financially. Mexicans are subject to U.S. taxes on all income earned and property purchased in the U.S. Moreover, the U.S. estate-tax exemption for nonresidents living here is not $5.12 million, but a paltry $60,000 in 2013. And Americans married to foreigners do not have an unlimited marital deduction in gifting property to their foreign spouse, even if the couple lives in the U.S.
Assume a recently married American-Mexican couple buys a home in the U.S. for $500,000 and titles it jointly. The annual exclusion for noncitizen spouses in 2013 is $143,000 - so if the American spouse put up all the consideration for the purchase, he or she owes gift taxes on $357,000, Rodriguez Walters says.
Equalization of assets between spouses, a common practice among American financial advisors, can also be an absolute disaster when one spouse is foreign. Rodriguez Walters reviewed the estate plan for an American-Mexican couple living in Mexico only to discover that their plan had created an enormous tax liability - gift taxes for the American husband and potential estate taxes for the Mexican wife. "In this particular case," he says, "it would have been better for the American spouse to have his U.S. property kept separately."
He advises nonresident spouses to buy life insurance to cover potential estate taxes on any U.S. assets they inherit; unlike with U.S.-born spouses, this life insurance is not considered part of the inheritance, he says.
Many Rodriguez Walters clients tend to be American or Mexican individuals wanting to live across the border - either full- or part-time - and small American companies seeking to establish business operations in Mexico. His experience has also made him a go-to person for other professionals seeking specialized advice.
Coni Rathbone, a partner at Zupancic Rathbone Law Group in suburban Portland, says she has worked with Rodriquez for more than 14 years; he recently helped one of her clients put together an LLC that holds mortgages in the U.S. and Mexico. "Raoul understands the laws, the tax effects, the politics and procedures so well that we were able to use his knowledge to describe and disclose the risks for a U.S. securities offering," she says.
Rodriguez Walters anticipates growing demand for expertise like his. The new Foreign Account Tax Compliance Act, which requires all foreign financial institutions to enter into disclosure agreements with the U.S. Treasury, will likely complicate tax issues. And as more Americans realize they have not saved enough to retire, he says, a growing number will look to foreign shores to maintain their standard of living.
Yet for advisors intrigued by this cross-border niche, Rodriguez Walters cautions that a U.S.-Mexico cross-border planner needs to be competent in the laws and tax policies of at least four jurisdictions - U.S. federal, and state, and Mexican federal and state - and understand the U.S.-Mexico tax treaty that often trumps them. Being bilingual is pretty much essential, he adds.
"I do not think it is a coincidence that the growth of the cross-border financial planning has been so slow, given that the technical barriers to entry are so high," he says.
Jim Grote, CFP, is a Financial Planning contributing writer in Louisville, Ky.
Raoul Rodriguez Walters, CFP, Mexico Advisor, Portland, Ore.
Credentials:B.A. in economics, University of Texas; M.S. in financial planning, College of Financial Planning; CFP
Experience: Stockbroker for Acciones y Valores de MÃ©xico (Mexico City); International Business Consultant for U.N. and U.S. agencies (Khartoum, Sudan); founder/president of Mexico Advisor.
How I see it: "One of my largest frustrations is the fact that I see many professionals, not just CFPs, ignoring ... the potential to cause serious damage to a client's dream if the proper planning is not carried out."