Life Insurance For Expats

Life Insurance For Expats

Life insurance is one of the most important, but often least understood, tools for financial planning, especially as it relates to estate planning. However, its specific uses are often overshadowed by a marketing strategy that pitches it as a Swiss Army Knife for all financial situations– retirement, estate planning, etc. This is not the case.

While there can be many legitimate uses for whole, variable, or universal life policies for U.S.-based people (Confused? That’s partially the goal, I think, but for more information on the types of available policies, click here.), most Americans outside of the United States frequently find themselves shut out from these policies because of their address. Even if they find themselves able to buy an American life insurance policy outside of the United States, the need to schedule fitness exams, etc. may make actually buying the policy impossible or they will– upon investigation– discover that their whole life policy may run afoul of local regulations, causing major tax headaches.    

Some investors will consider buying a whole life policy in their country of residence: however, this may not be a great idea because the whole life policy’s underlying cash value is generally invested in investment funds that are tax toxic from a U.S. perspective, the dreaded PFIC.  As noted cross-border Tax specialist Phil Hodgen notes on his blog, the ownership of the underlying assets means:

  • You have to file Form 8621 to report all of the mutual funds held as part of the investment account in that insurance policy.

  • If, during the time the life insurance policy is active and you are alive, the insurance company buys and sells mutual funds, you will have actual taxable sales under the excess distribution rules.

  • When you die, your estate will be treated as having sold the PFICs inside the “insurance policy” for fair market value, again triggering tax under the excess distribution rules.

This information doesn’t include the additional reporting requirements. In his blog, Hodgen goes into more detail on the policy itself and the fact that if the insurance policy doesn’t meet IRS definitions of a life insurance policy, any estate planning benefits will be eliminated.

As we’ll discuss below– while this is annoying– not having a whole life policy is not necessarily a disadvantage for Americans (especially when one takes into account that some of the estate planning strategies embedded in Life Insurance and Life Insurance Trusts will run up against regulations in the country of residence– the dreaded PRIIPS/KIDS). In what has become a cliché, those providing independent advice about such policies for Americans who are not expats generally recommend to “buy term and invest the difference,” and the same holds true for Americans outside of the United States.

(Curious about the definition of term insurance? Click here)

In certain cases, and with a bit of legwork, Americans abroad may find themselves able to buy such a policy in the United States, and they will generally find that any “pure life insurance” product they purchase in the United States will not pose problems in their country of residence. However, Americans should confirm any purchase of such a policy with a tax and legal advisor in their country of residence as local regulations are always shifting. 

The second option is to buy such a policy in their country of residence. However, this can be a bit more complicated for several reasons. First, before purchasing, Americans should confirm the policy is a “Pure life insurance” product without additional bells and whistles. Second, it is always encouraged to verify the policy against U.S. regulations, and generally, major insurance suppliers can help with that. An additional concern is the “excise” tax the U.S. charges on Foreign Insurance Policy Premiums– this ranges from 1-4%, but is 1% on pure life policies. However, the U.S. maintains treaty agreements with 17 countries which means that insurers from these countries are generally exempt from the “excise tax,” and the United States maintains a list of foreign insurers who are also exempt from the tax requirements. Consequently, these insurers would be, accordingly, a good place to investigate term life policies. For more information on the tax-related implications of foreign life insurance, we’d recommend this article from U.S. CPA Virginia La Torre Jeker.

No life insurance purchase takes place inside a vacuum and anyone considering a purchase of life insurance should undertake to analyze such a policy in the context of their long-term plans and goals covering the amount of policy recommended (especially to analyze in terms of any public or private pensions available), long-term family goals, determinations regarding long-term residence, etc. While Walkner Condon doesn’t sell life insurance (or any insurance), such discussions and analyses are part of our long-term financial planning process.

For Americans within the United States, the conversation about life insurance can be rather involved, as a variety of options are available and all of these options can be used to solve a variety of issues.

Generally, these options are limited for Americans outside of the United States as while insurers will continue to honor whole or variable life insurance policies for Americans outside of the United States, it is generally much harder for them to write new forms of these policies for Americans living outside of the United States. This generally leads to their option in the United States being term insurance.

Likewise, Americans outside of the United States should likely not invest in more complicated insurance products in our opinion, because these will generally hold assets that are referred to as PFICs (or Passive Foreign Investment Companies) and are taxed at a higher rate.  

Keith Poniewaz

What is the Best Brokerage for Expats?

What is the Best Brokerage for Expats?

One of the challenges for expats that leave the United States and want to invest elsewhere is that the traditional investment options available to them in the US may not be available. (For more information on this topic, read our white paper on the topic). As a result, there are some custodians in our experience that are more “friendly” than others. Please note that not all brokerages will accept clients internationally: It is best to ask your financial advisor or contact the brokerage house directly to do some due diligence on your particular situation before moving forward with any of these options. For instance, some expats believe that they can just use a P.O. Box or a friend’s address, but in many cases, it is not that simple (and potentially not legal either!).

The following list of pros and cons originates from our perspective of financial advisors working with international clients. The tools may differ for someone that is trading on a “retail” platform rather than an institutional one. Because expat investing in many cases limits access to the use of mutual funds, often we are forced to use Exchange Traded Funds (ETFs). ETFs have grown significantly in popularity and offer in many cases a low-cost, tax-efficient, diversified manner in which to invest. Recently, regulations in the European Union have restricted access to ETFs for European Union residents.  Consequently, we use a variety of strategies in an effort to ensure our clients remain invested.

If you need help choosing a brokerage or have further questions about investing as an American abroad, schedule a no-cost, no-obligation appointment here.

TD Ameritrade

Pros: TD Ameritrade offers commission-free trading for ETFs. Their trading tools for financial advisors that custody assets with them, iRebal, is a robust rebalancing software for portfolio management. TD has rolled out a Model Market Center that helps advisors utilize model portfolios from investment managers at no cost. They also offer the ability to blend multiple models to help advisors diversify investments and customize the portfolio to meet their clients needs. TD is known for its integrations with other software programs, offering an open API that plugs in well with other tools. TD Ameritrade finished as the #3 online broker in Barron’s 2018 rankings.

Cons: TD Ameritrade tends to be a bit more stringent in who they can take on as clients internationally, especially now in Europe. TD may have a more limited selection of international individual bonds. Paperwork can sometimes take a little longer at TD, as they generally take a little more time to clear out not in good order (NIGO) items.

Interactive Brokers

Pros: Interactive Brokers (IB) is known for being a friendly platform in setting up accounts for expats. They offer a wide variety of funds across various countries as well as the ability to trade currencies at reasonable rates.  Barron’s ranked Interactive Brokers as the #1 Online Broker for 2018. IB is also known for having extremely low commissions relative to others in the industry. Additionally, IB allows multiple currencies meaning deposits can be made in many local currencies and do not need to be converted to dollars before deposit. If you have a unique situation and heard “no” from another custodian, there is a good chance that IB will get it done. IB promises a fully digital transfer process.

Cons: This platform, while robust, is difficult to navigate, as the user experience (UI) isn’t as easy to use as TD Ameritrade or Schwab. IB has a very paltry commission-free ETF list. Trades may carry ticket charges on them through their more robust trading platform, IBKR Pro, although Interactive Brokers has released a commission-free platform recently called IBKR Lite, which is currently only available to “retail” investors. (Although it isn’t a certainty that commission-free trading is actually less expensive than paying ticket charges. Read more on that here!) The impressive amount of choice and offerings they have tends to be overwhelming for new clients on the platform.


Note: We have recently published a FAQ related to Schwab no longer offering ETFs to EU retail investors. Read that here.

Pros: Schwab offers a wide menu of ETFs and no commissions on ETF trades. They are generally fairly friendly towards expat investors, although not to the level of Interactive Brokers due to some recent changes in offerings. Although they have a more closed technological interface relative to TD Ameritrade, their own technology is impressive. Schwab finished with the #4 ranking in Barron’s 2018 online broker rankings.

Cons: Although Schwab generally is a bit more friendly to opening accounts than TD Ameritrade, it still lags behind Interactive Brokers for ease of opening accounts for expats. Recently they have announced they are leaving select European markets including Italy and France. Additionally, it is a fully U.S. brokerage, which means they don’t allow deposits in foreign currencies and charge to convert assets from dollars to foreign currencies. Unlike Interactive Brokers, there is also a $25 dollar international wire fee. Moreover, like most mainstream brokerages, the list of permissible jurisdictions for account openings has shrunk in recent years.

Looking for help? Set up a no-cost, no-obligation appointment with Keith, our Director of International Advisory Services, to explore your investment and financial planning options.

Gifting and Cross-Border Estate Planning

Gifting and Cross-Border Estate Planning

One of the more complicated aspects of financial planning and wealth management for Americans outside of the United States is managing the distribution of their estates so as to minimize estate and inheritance taxes. While the United States currently has a relatively large Estate Tax exemption, many foreign countries have much smaller exemptions or apply the tax on the inheritor rather than the estate of the person who died (decedent).  

Consequently, one key strategy for management of the Estate is to gift assets to heirs. The United States Estate and Gift Tax places certain restrictions on these gifts. First, one citizen spouse may give to another citizen spouse an unlimited amount; however, if a gift is made to a non-citizen spouse in a country where the United States doesn’t have an estate tax treaty (click here for the list of countries), if such a gift exceeds $150,000 it must be reported. Likewise, gifts to non-spouses must be reported if they exceed $15,000.

These gift amounts are frequently misunderstood: these “limits” aren’t really limits. For instance, one can give more than $15,000 per year, but should they give more than $15,000, you will need to file a federal gift tax return form (Form 709). This amount would then be deducted from your total estate tax exemption. This exemption is currently quite significant: approximately $11.2 million for an individual; moreover, gifts given under current US estate tax exemptions would likely be grandfathered in should the current levels not be renewed when they are due to expire in 2025.  

Consequently, whenever possible gifting should be used to move assets out of an estate in those countries where inheritance or estate tax thresholds are much lower. This is frequently a popular technique in many countries. For instance, gifts in usufruct are often popular in Western Europe. “A Gift in Usufruct” generally involves giving heirs the ownership of a property while the original owners continue to own it. Such gifts are generally not considered “completed” gifts in the U.S. context, but for families with estates below the $11.2 million dollar exemption amount, the local considerations may take precedence over the U.S. ones. 

In all cases, however, before considering these sorts of estate management strategies, local tax and legal counsel should be consulted and such gifts should also be part of a larger estate planning strategy both to maximize their effectiveness and ensure compliance.

The preceding article is for informational purposes only and does not constitute legal or tax advice.  Estate tax rules and regulations are frequently subject to change and individuals should consult legal and tax advisors before implementing any of these strategies.

Should I Contribute to an IRA as an American Expat?

Should I Contribute to an IRA as an American Expat?

Years of advice on retirement have left many Americans convinced that the only way they can save for retirement is through an IRA or a 401(k); however, this is not the case and in many cases, particularly for Americans abroad, putting money into an IRA can actually be worse for their retirement goals as these accounts may not provide the same benefits in U.S.-terms in the country of residence.  

There are many sources of information on the internet for this decision– however, all too often they focus on the American side of the decision. The key questions here are as follows:

Do I have U.S. earned income? If an American abroad is taking advantage of the Foreign Earned Income Exclusion on their non-U.S. income, then they have no earned income and cannot contribute to an IRA.  

If you use tax credits for foreign income paid or also have a source of U.S. earned income, then you may be eligible to reduce U.S. taxes owed by contributing to an IRA.

However, there are additional considerations for Americans abroad:

If the client lives in a country where the tax rates are higher than in the United States, they will essentially be putting after-tax income into the IRA and through tax credits may not actually owe taxes in the U.S. that need reducing.  

Does the treaty with the local jurisdiction cover IRAs?  If the treaty does not cover the deferral of earnings in pension plans, then it is possible that the earnings on IRAs would be taxed in the country of residence, which would be an ongoing nightmare from an accounting perspective and eliminate the chief advantage of the retirement account from a long-term planning perspective.

This only touches on the issues facing Americans abroad and their complications in terms of the traditional IRA account– such concerns become greater when the conversation begins to involve Roth IRA accounts, which are discussed in fewer treaties and may propose complications on the U.S. side as well.

Keith Poniewaz

Investing as an Expat: The Impact of Currency

Investing as an Expat: The Impact of Currency

A very important item for cross-border investors to understand in their investing lives is currency; moreover, it is an area where a full understanding of the risks and tools to mitigate those risks can make a substantial impact on a family’s financial wellbeing. However, in our opinion, the gradually strengthening dollar over the last 8 years has left many Americans abroad complacent about this risk.  

While the shift will not happen overnight, the Fed’s recent lowering of interest rates is an important reminder of factors affecting currency rates and how that might lead to a longer-term secular weakening of the dollar.  

Like all markets, exchange rates are shaped by supply and demand and predictions about supply and demand. In the case of exchange rates, when we speak of the dollar being strong it is because it is in demand. A big cause of global demand has been the large spread between U.S. interest rates and those of other global economies. In Europe, for instance, deposits often receive zero or even negative yields. This leads to greater demand for U.S. dollar-denominated yield, particularly for banks and other businesses with cross-border cash flows as they will hold money in dollars longer before moving it to another currency. However, lower U.S. interest rates could lower demand for the U.S. dollar as there is less benefit to keeping interest-bearing deposits in the U.S. dollar.

In these cases, moving money to, or keeping money in, dollars makes sense for these large companies particularly if one is storing cash in safe investments for the short-term. However, this is a case where strategies employed by large businesses are not necessarily the best for individuals.

In our whitepaper on portfolio management for cross-border investors, we discuss how to build a long-term investment portfolio to manage currency rates, but many investors can get themselves in trouble when dealing with short-term cash reserves. Currently, many American expats are frustrated by the low interest rates they face as they save towards shorter-term goals in their local currency and may be tempted to store interest-bearing deposits in the United States dollar. While keeping cash in dollars (particularly if the firm hedges the risk) for a few extra days can allow a global firm to earn a bit of extra interest, the risks and costs for individual investors can be significant.

By way of example, let’s examine the situation for a client holding 100,000 in Euros for a house project in one year in a completely stable currency exchange rate environment (that is the currency exchange rate never fluctuates). If they invest that at current interest rates in Europe (0%) one year from today they will still have 100,000 Euros. Instead, should they convert that same 100,000 euros to dollars at current exchange rates (1 EUR= 1.11 USD), they would start with 111,000 USD. They could then park it in a 12-month CD at current interest rates (approximately 2.35%), they would end the year with a total of 113,608.5 USD at the end of the year– earning approximately 2,608.50 USD in interest. If at that point, they then choose to return the money to Euros in 12 months at the same exchange rate as the beginning of the year (1 USD= .9 EUR) over the year, they would ultimately have 102,247.65 Euros (not including any fees) for their house projects. In a world where there is no change in exchange rates, moving money to the U.S. for its higher interest rate would make perfect sense. 

However, the world doesn’t exist in a vacuum of stable exchange rates. And while the U.S. dollar has trended up over the last eight years, it has not done so in a straight line and 2017 is an example of the significant currency rate risk that an individual investor can face. On January 1, 2017, an investor could have moved 100,000 Euros and received 105,600 dollars at the prevailing exchange rates (1 EUR: 1.056 USD). Again, if they had moved that money into a 12-month CD earning .4% (the approximate 12-month CD interest rate in 2017) they would have ended the year with 106,022 USD. However, the dollar declined during the course of the year and the investor moving money back to Euros on January 1, 2018, would have received back 88,351 Euros at the January 1, 2018 exchange rates (1 USD =.83EUR). Their “safe” investment would have lost roughly 11,500 Euros.  

In a sense, currency risk functions very differently from portfolio risk which lessens over time.  In fact, as the Fed’s announcement reminds us, thinking through the factors affecting currency can help us better understand the risks cross-border investors face and the benefits of fully understanding one’s own financial picture in order to help mitigate these risks.

In forthcoming blogs and a whitepaper, we’ll discuss additional tools investors can use to manage these various risks, so watch this space.

Disclosure: The above currency examples are made for illustrative purposes only and are not intended to encourage any investor behavior. 


What is FATCA?

What is FATCA?

FATCA is the “Foreign Account Tax Compliance Act” passed by the United States government in order to eliminate (primarily high net worth) Americans using offshore accounts to hide assets from U.S. taxation. The United States taxes all of its citizens on its worldwide income, no matter where in the world they live. FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act

While FATCA has had significant effects on individuals, it is actually a law on financial institutions and doesn’t apply to individuals directly. The law requires all financial institutions worldwide to search through their current accounts and report the accounts they have that are owned by Americans. Should they fail to do so, the American government will withhold up to 30% on payments to these Foreign Financial Institutions (FFIs) originating from within the United States.

Given the United States’ situation as a hub for a multitude of financial transactions, the harsh (some might say draconian) penalties meant that FFIs went into overtime in an attempt to comply with the law. For smaller banks and institutions, without the resources to ensure ongoing compliance, this meant they scoured their records and likely eliminated Americans who might subject them to FATCA penalties. For larger banks, this generally meant they required further paperwork, restricted the services, or may have eliminated accounts offered to Americans.

While FATCA and its consequences explain why it has been so hard for Americans to open accounts in jurisdictions outside of the United States, they don’t explain why Schwab, Merrill Lynch, TD Ameritrade, Vanguard or other companies have made it so hard to open accounts in the United States for Americans who live outside of the United States. For information on that topic, we recommend reading our whitepaper Why is it so Hard to Open Accounts for Expats? 

Keith Poniewaz