Retirees who have fallen for the allure of a far-away land may be in for a surprise.
When clients mention their intentions to reside permanently in a foreign country, advisors should be prepared at the outset with some gut-check responses and questions, according to Dean Duetz, wealth solutions initiatives senior manager at RBC Wealth Management.
“For wealthy people with property and business interests, it’s more difficult,” Deutz, who consults high-net-worth clients with over assets over $5 million on these issues, said. “What we see, especially with wealthy people, is that they go through an analysis and realize they could maybe move to a different country and save some tax money, but now they have all this complexity and see their family less.”
One difficult decision is determining whether clients will keep their U.S. residency, especially if they are keeping their U.S. citizenship. Some clients may not want to give up ownership of their home, and so they will have to continue paying state taxes. Others may want to remain a U.S. citizen but move their primary residence abroad to try and leave the state income tax system. That can often save money in the long term, but often it is not as simple as just packing up and moving far away.
“One of the things we find with Minnesota residents- and this is the same in New York and California and a lot of other states that have a state income tax- is that they don’t let you go easily,” Deutz said.
In Minnesota, for example, you can give up your house, but you are not allowed to spend more than 183 days in the state unless you are paying income tax. Often, the state will audit those who change their residency by checking airline tickets, credit card records, hunting licenses and other documentation. In one case, which did not occur at RBC, a client was brought back into the U.S. tax system because he applied for a resident hunting license instead of shelling out a few more dollars for an out-of-state license.
“It highlights the point that there are black and white things around residency and moving somewhere else and extracting yourself from one tax system that you have to deal with,” Deutz said. “And then there are grey areas.”
A number of those grey areas crop up when dealing with business ownership.
“The other thing that we see complicate moving out of the U.S. or state tax system is business ownership,” Deutz said. “For some people, everything can line up, but they have a business they are a partial owner in and that brings them back into the state system.”
Exiting those business interests can be costly in the short term, he said. Not only will a client need to pay more to bring on a tax attorney, but they will also have to relinquish or restructure their assets or businesses in the U.S.
One client Deutz is working with is considering moving his tax home to Costa Rica, which could save him $50,000 a year on taxes, but it will cost $10,000 just to the state up front. He has to organize his income from the business in a way that it can be included in a different tax structure and will not tie him down as a resident. And then Minnesota has to approve that restructuring.
“We’re still waiting to see if that’s going to work for him or not,” Deutz said. “He’s making a $10,000 bet to win $50,000.”
The decision goes beyond finances.
The client’s leading advisor should be prepared to take a big picture look at what the move would mean for his or her client’s personal life and prepare them for seeing their family less.
“In our business, most of them end up deciding that the lifestyle, the family trumps the tax answer,” Deutz said.
Clients will also likely have to drop their current advisor if they are living abroad.
The Securities and Exchange Commission, the Financial Industry Regulatory Authority and the advisor’s firm all have rules restricting trading on behalf of clients outside the United States. Even for RBC Wealth Management, which has its parent company in Canada, an advisor based in the United States would not be allowed to continue serving a client who moved to Canada without additional and expensive registration.
For clients who are just looking for the luxury or relaxation options abroad, there are alternatives that advisors can bring up. The most common solution is to become what Deutz calls a “global retiree.”
The Global Retiree retains their residency and U.S. citizenship, but spends time in other countries. “That’s what we see most often,” Deutz said. “It’s, ‘I have enough money to live where they want. I’m going to do what I want rather than being driven by saving some dollars on taxes.’”
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