Before you move overseas, there are certain steps you can take to protect your assets and—in some cases—minimize your worldwide tax obligations. Best first step is to consult a tax accountant or attorney—one who specializes in helping Americans organize their affairs before moving overseas.
He or she will likely have some smart advice about the best way to structure your financial affairs so that you don’t end up paying unnecessary taxes.
Multiple Bank Accounts
When relocating overseas, it is usually a good idea to maintain a checking account in the U.S. if for no other reason than convenience. Unless you are severing all ties with the U.S. you will have some need to write U.S. dollar checks or make online electronic bank transfers while overseas. The funds would also be available to you either through wire transfers to a foreign bank account or an ATM card.
In limited circumstances, foreign countries do not tax certain kinds of income unless the funds are actually transferred to that country. Maintaining one or more accounts elsewhere would in this case be a tax savings device as well as being a convenience. Here again, the need for information on local tax rules is very important.
Transfer Title of Accounts to one Spouse
There may be situations in which spouses should transfer title to certain assets before relocating overseas. This can be easily accomplished with financial assets such as savings accounts and investment accounts. Such transfers would be beneficial where one spouse will have a special exemption from foreign taxes on the earnings of the accounts.
Transferring title to jointly owned U.S. real estate, rented while you are overseas, may also provide a tax savings. Keep in mind that the transfers are reversible once you move back to the U.S.
However, such transfers may have a downside, particularly if the marital status is less than solid. The spouse with full title may not be willing to transfer half interest back to the other spouse. Don’t take the decision to transfer assets lightly.
Form a Discretionary Trust
Although principally considered an estate-planning device, a trust can also serve as a tax savings device. One such trust is a discretionary trust that requires payments to beneficiaries under stated conditions in the trust instrument, such as financial need or education. The important thing to keep in mind, to avoid payment of foreign taxes on payouts, is that the conditions should prevent payments to beneficiaries while they are overseas. Under the right circumstances, trusts can save on foreign taxes.
However, you should only set one up with the help of a tax professional.
If you decide to abandon your U.S. residency and domicile, there is an important catch. While you may avoid any liability for the income taxes of a U.S. state, abandoning your domicile in a U.S. state may cause some real estate and probate issues.
In other words, if you or a family member passes away while living overseas, real or personal property that you would have expected to be either distributed under a previous will (or in the absence of a will, be distributed under a U.S. state’s intestacy laws) may be subject to distribution under the laws of the foreign country in which you are currently living. And these foreign rules may cause property to be distributed in a completely unintended way in a costly probate process. France, for example, has a complex set of inheritance laws that date back to Napoleonic times and guarantee children (and sometimes parents) a share of the estate. In such a situation, a spouse has no automatic right of inheritance.
While we won’t explore estate-planning strategies in this guide, you should be aware that estate succession is an important consideration in your planning process.
There are many simple and convenient tools to assure the orderly and least costly succession of your property while living overseas such as use of a trust, naming a beneficiary on a financial account where permitted, or a transfer of assets. You should consult a competent tax expert who can guide you through all aspects of avoiding state, federal, and possibly even foreign income taxes and assist you with some effective estate-planning strategies. You owe it to yourself and your loved ones.