At the outset, Kathy and John look like the average young family. They both work full time while raising their two children, ages five and six. Kathy worries about having enough life insurance in place, funding their children’s education, saving for retirement, and taking care of her aging mom in New Jersey. They own rental property in Florida and want to buy another home in New York.
However, Kathy and John’s world is more complicated than that. They are expatriates from different countries: John is from Ireland and Kathy is from the U.S. They have lived and worked abroad for over 12 years. Kathy hasn’t filed her U.S. tax return in a couple of years because the tax professional she used closed the practice. They have bank accounts in U.S. dollars, Euros, and Dhs. Kathy’s career changed this year when she moved from the non-profit sector into the corporate world, increasing her income three-fold. Neither of their employers sponsors a pension or retirement savings plan.
1. Taxes. For U.S. Expats, it always starts with taxes. Even though Kathy earned less than the Foreign Earned Income Exclusion during the previous two years, she still must file her returns in order to receive the exclusion. Kathy needs to bring her U.S. tax filings up-to-date as soon as possible. This is a critical year for Kathy because she will earn more than the Foreign Earned Income Exclusion amount. She will need to have a detailed tax projection calculated before year-end to evaluate ways that she can legally reduce her tax liability. The other tax landmine for Kathy is U.S. Social Security taxes. While she was working for the non-profit organizations, they handled the U.S. Social Security taxes associated with her wages. This year, Kathy will be completely responsible for them, and may owe as much as $15,000 in unavoidable U.S. Social Security taxes. Kathy needs to find a tax professional knowledgable in U.S. expatriate tax regulations to help her manage these issues.
2. Future Planning. Kathy and John are conscientious savers and planners. They live well within their means and have some very good goals for the future. However, because their funds are scattered across several bank accounts worldwide, they do not have one place that they can monitor their entire financial world. We talked about ways that they can simplify this process by utilizing a secure, online financial platform that would allow them to connect and track all their account information in one place.
Kathy and John need to establish an organized savings schedule to effectively meet their goals. They need to:
a. Calculate their monthly expenses and set aside at least six months’ expenses in a local savings account.
b. Research the price of homes in New York and begin to set aside a calculated amount that will allow them to purchase property in 12 months.
c. Establish college savings plans for each of their children and begin contributing the maximum annual amounts to each plan.
d. Research the associated travel, shipping and other expenses that will be associated with their return to the States in five years, adding at least 20%. Then they will understand how much they need to save annually to fund their return without worry.
e. Start saving now for retirement. Since their employers do not sponsor a retirement savings plan, they should take advantage of the tax benefits of investing in individual IRA accounts. If they still have excess cash after maximizing these contributions, they should consider other investment products specifically designed to build a strong asset base for retirement, investments with special features and no surrender charges.
3. Protection. Like many stateside Americans, Kathy has legal concerns about her family. Her first concern is that their personal desires for their children and affairs will be honored in the country they live in. While I am not an attorney, we did discuss their desire to change the executors of their wills. I suggested they consider speaking with an attorney about creating a living trust for their assets. With a living trust, they can separate the duties of the trustees between who will be the fiduciary of the money and who will be the guardian of the children.
Kathy is smart to realize that they need life insurance to protect her children’s future should anything happen to her or John. Her employer provides a modest life insurance policy, but we determined that it is not enough to protect her family. John does not have any life insurance at this time. Where an insured lives and works affects amounts and costs of a policy. It is very expensive to use a U.S.-based insurance company to insure someone living and working abroad. When Kathy mentioned that she has personal contacts at Zurich Life, I recommended that she pursue placing policies with them: a 15-year term policy on her husband for $1 million, and another one for $350,000 on herself. The recommendations were based on the age of their youngest child, who will be substantially raised in 15 years when the policies terminate.
In conclusion, it’s hard for expatriates to find their tax and planning answers in one place, even though they need someone that can advise them on their entire financial picture. Kathy and John need an advisor that understands how to help them properly file their expatriate tax returns and keep them on-track with their goals for the next five and ten years. However, please consider your own risk tolerance and investments objectives and goals before deciding your financial affairs.